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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
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
YDI WIRELESS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2751645
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
8000 LEE HIGHWAY
FALLS CHURCH, VA 22042
(Address of principal executive offices)
(703) 205-0600
(Registrant's telephone number, including area code)
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
registrant 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of October 31, 2004, there were 22,841,063 shares of the registrant's
common stock outstanding.
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YDI WIRELESS, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ....................................................... 3
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 ..................................................... 4
Consolidated Statements of Operations for the three and nine
months ended September 30, 2004 and 2003 .............................. 5
Consolidated Statement of Changes in Stockholders' Equity for
the nine months ended September 30, 2004 .............................. 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003 ..................................... 7
Notes to Consolidated Financial Statements .............................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................. 24
Item 4. Controls and Procedures .................................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................................... 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ................ 27
Item 4. Submission of Matters to a Vote of Securities Holders ...................... 28
Item 6. Exhibits ................................................................... 28
SIGNATURE ................................................................................. 28
2
PART I - FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q 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-Q, including Part I, Item 2 -- 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-Q or to reflect the occurrence of
unanticipated or any other subsequent events.
Item 1. Financial Statements.
3
YDI WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
September 30, December 31,
-----------------------------
2004 2003
------------- ------------
Assets
Current assets:
Cash and cash equivalents ............................................................... $ 22,995 $ 8,990
Restricted cash ......................................................................... 5,176 --
Investment securities - available-for-sale .............................................. 18,157 --
Accounts receivable, net ................................................................ 3,213 2,511
Refundable income taxes ................................................................. 151 226
Inventory ............................................................................... 6,502 3,134
Assets held for sale .................................................................... -- 790
Prepaid expenses ........................................................................ 302 162
---------- ----------
Total current assets ................................................................ 56,496 15,813
Property and equipment, net ................................................................ 2,617 1,747
Other assets:
Investment securities - available-for-sale ............................................... 1,053 2,316
Investment securities at cost ............................................................ 311 311
Goodwill ................................................................................. 15,207 --
Intangible assets, net ................................................................... 4,457 483
Deposits ................................................................................. 91 49
---------- ----------
Total other assets .................................................................. 21,119 3,159
---------- ----------
Total assets ........................................................................ $ 80,232 $ 20,719
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ................................................... $ 10,469 $ 3,023
Deferred revenue ........................................................................ 167 --
Current maturities of notes payable ..................................................... 2,781 213
---------- ----------
Total current liabilities ........................................................... 13,417 3,236
Notes payable, net of current maturities ................................................... 1,494 1,298
---------- ----------
Total liabilities ................................................................... 14,911 4,534
Commitments and contingencies -- --
Stockholders' Equity
Preferred stock, $0.01 par value; authorized 4,500,000, none issued at
September 30, 2004 and December 31, 2003 .............................................. -- --
Common stock, $0.01 par value, 100,000,000 shares authorized, 27,018,855 issued
and 22,835,672 outstanding at September 30, 2004; 14,179,882 issued and
outstanding at December 31, 2003 ...................................................... 270 142
Additional paid-in capital .............................................................. 66,079 6,173
Retained earnings ....................................................................... 4,970 8,673
Treasury stock .......................................................................... (6,500) --
Accumulated other comprehensive income:
Net unrealized gain on available-for-sale securities .................................. 502 1,197
---------- ----------
Total stockholders' equity .......................................................... 65,321 16,185
---------- ----------
Total liabilities and stockholders' equity .......................................... $ 80,232 $ 20,719
========== ==========
The accompanying notes are an integral part of these financial statements.
4
YDI WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenues ....................................................... $ 6,370 $ 8,029 $ 17,120 $ 21,694
Cost of goods sold ............................................. 3,682 3,741 10,426 13,140
---------- ---------- ---------- ----------
Gross profit ............................................... 2,688 4,288 6,694 8,554
Operating expenses:
Selling costs .............................................. 879 698 1,799 1,701
General and administrative ................................. 3,381 1,470 7,288 5,023
Research and development ................................... 1,069 706 2,038 1,280
---------- ---------- ---------- ----------
Total operating expenses ............................... 5,329 2,874 11,125 8,004
---------- ---------- ---------- ----------
Operating income (loss) ........................................ (2,641) 1,414 (4,431) 550
Other income (expenses):
Interest income ............................................ 360 81 410 112
Interest expense ........................................... (76) (32) (139) (94)
Other income ............................................... 6 -- 509 10
---------- ---------- ---------- ----------
Total other income ..................................... 290 49 780 28
---------- ---------- ---------- ----------
Income (loss) before income taxes and extraordinary gain ....... (2,351) 1,463 (3,651) 578
Provision for income taxes ................................. -- 410 2 233
---------- ---------- ---------- ----------
Income (loss) before extraordinary gain ........................ (2,351) 1,053 (3,653) 345
Extraordinary gain ........................................ -- -- -- 4,347
---------- ---------- ---------- ----------
Net income (loss) .............................................. $ (2,351) $ 1,053 $ (3,653) $ 4,692
========== ========== ========== ==========
Weighted average shares - basic ................................ 26,218 13,576 18,788 12,168
========== ========== ========== ==========
EPS, basic ................................................. $ (0.09) $ 0.08 $ (0.19) $ 0.39
========== ========== ========== ==========
Weighted average shares - diluted .............................. 26,218 14,071 18,788 12,288
========== ========== ========== ==========
EPS, diluted ............................................... $ (0.09) $ 0.07 $ (0.19) $ 0.38
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
5
YDI WIRELESS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(in thousands, except share data)
(unaudited)
Accumulated
Common Stock Additional Other
----------------------- Paid-in Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock (Loss) Income Total
---------- --------- ---------- --------- --------- ------------- ---------
Balances, January 1, 2004 ......... 14,179,882 $ 142 $ 6,173 $ 8,673 $ -- $ 1,197 $ 16,185
Exercise of stock options and
warrants ........................ 229,736 2 354 -- -- -- 356
Common stock and warrants issued
in acquisitions ................ 12,609,237 126 59,552 -- -- -- 59,678
Treasury stock purchased .......... (4,183,183) -- -- -- (6,500) -- (6,500)
Distribution to Merry Fields
members ........................ -- -- -- (50) -- -- (50)
Comprehensive income
Net loss ....................... -- -- -- (3,653) -- -- (3,653)
Unrealized loss on
investments ................... -- -- -- -- -- (695) (695)
---------- --------- --------- --------- --------- --------- ---------
Total comprehensive loss ..... -- -- (3,653) -- (695) (4,348)
---------- --------- --------- --------- --------- --------- ---------
Balances, September 30, 2004 ...... 22,835,672 $ 270 $ 66,079 $ 4,970 $ (6,500) $ 502 $ 65,321
========== ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
6
YDI WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(in thousands)
(unaudited)
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) ....................................................................... $ (3,653) $ 4,692
Gain on disposal of securities ........................................................ (10) (40)
Loss on disposal of property and equipment ............................................ 6 34
Loss on write-down of investment in unconsolidated subsidiary ......................... -- 36
Depreciation and amortization ......................................................... 645 115
Extraordinary gain .................................................................... -- (4,347)
Deferred tax asset .................................................................... -- 387
Bad debts ............................................................................. 296 --
Inventory allowance ................................................................... 300 --
Changes in assets and liabilities affecting operations (net of assets
acquired and liabilities assumed in acquisitions):
Restricted cash ..................................................................... 700 (141)
Accounts receivable ................................................................. 115 (734)
Other receivables ................................................................... -- (166)
Refundable income taxes ............................................................. 75 (275)
Inventory ........................................................................... (708) (483)
Deposit ............................................................................. 2 (21)
Prepaid expenses .................................................................... 95 686
Accounts payable and accrued expenses ............................................... (380) 317
Deferred revenue .................................................................... 167 --
Customer order deposits ............................................................. -- (9)
-------- --------
Net cash provided by (used in) operating activities ............................ (2,350) 51
-------- --------
Cash flows from investing activities:
Cash received from acquisitions ......................................................... 10,252 7,421
Cash used in acquisitions ............................................................... (4,800) --
Sale of securities ...................................................................... 17,065 487
Purchase of securities .................................................................. (415) (1,641)
Purchase of intangible asset ............................................................ -- (544)
Proceeds on disposal of assets held for sale ............................................ 915 106
Purchase of property and equipment ...................................................... (28) (5)
Investment in capitalized software ...................................................... (322) --
-------- --------
Net cash provided by (used in) investing activities ................................. 22,667 5,824
-------- --------
Cash flows from financing activities:
Distributions to Merry Fields members ................................................... (50) (40)
Exercise of stock options and warrants .................................................. 356 40
Purchase of treasury stock .............................................................. (6,500) --
Issuance of notes payable ............................................................... -- 500
Repayment of notes payable .............................................................. (118) (1,045)
-------- --------
Net cash provided by (used in) financing activities ................................. (6,312) (545)
-------- --------
Net increase (decrease) in cash ............................................................ 14,005 5,330
Cash and cash equivalents, beginning of period ............................................. 8,990 939
-------- --------
Cash and cash equivalents, end of period ................................................... $ 22,995 $ 6,269
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................................. $ 123 $ 94
======== ========
Income taxes paid ....................................................................... $ 2 $ 84
======== ========
Stock issued for acquisitions ........................................................... $ 59,678 $ 3,739
======== ========
The accompanying notes are an integral part of these financial statements.
7
YDI WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of Presentation
On April 1, 2003, Young Design, Inc. completed a strategic combination
transaction (the "combination") with Telaxis Communications Corporation
("Telaxis"). In that transaction, Young Design became a wholly-owned subsidiary
of Telaxis. On July 9, 2003, Telaxis reincorporated into Delaware and changed
its name to YDI Wireless, Inc. ("YDI Wireless" or the "Company").
For financial reporting purposes, Young Design was treated as the
acquiring company and the transaction was accounted for as a reverse merger.
Young Design had voting control and majority representation on the Board of
Directors after the merger with Telaxis. The financial statements contained
herein are those of Young Design carried forward at historical cost.
The consolidated financial statements of the Company for the three- and
nine-month periods ended September 30, 2004 and 2003 are unaudited and include
all adjustments which, in the opinion of management, are necessary to present
fairly the financial position and results of operations for the periods then
ended. All such adjustments are of a normal recurring nature. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K, as amended, for the year ended December 31, 2003 filed with the Securities
and Exchange Commission.
Effective May 13, 2004, the Company acquired KarlNet, Inc., a wireless
software development company. Effective June 22, 2004, the Company acquired
Terabeam Corporation, a wireless telecommunications company. Effective June 25,
2004, the Company acquired Ricochet Networks, Inc., a wireless service provider.
The financial results of these companies from and after the dates of acquisition
are included in the financial results reported for the Company.
The results of operations for any interim period are not necessarily
indicative of the results of operations for any other interim period or for a
full fiscal year.
2 Stock Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), but applied the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25, for employee stock based
compensation. No compensation expense has been recognized in connection with
options, as all options have been granted with an exercise price equal to the
fair value of the Company's common stock on the date of grant. The fair value of
each option grant has been estimated as of the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions for 2004 and 2003: risk-free interest rate of 3.67% and 2.37%,
expected life of 5 years and 5 years, volatility 205% and 284% and dividend rate
of zero percent, respectively. Using these assumptions, the company has
calculated the fair value of each stock option granted in 2004 and 2003 to range
from $2.45 to $5.34 and $0.96 to $5.29, respectively, which would be amortized
as compensation expense over the vesting period of the options.
If the Company had elected to recognize compensation expense based on the
fair value at the grant dates, consistent with the method prescribed by SFAS No.
123, net income per share would have been changed to the pro forma amount
indicated below:
8
(in thousands, except per share amounts) (unaudited)
September 30,
---------------------------------
2004 2003
------------- --------------
Net income (loss) attributable to common stockholders, as
reported: .................................................... $ (3,653) $ 4,692
Less: Total stock based employee compensation expense
determined under the fair value based method for all
awards ....................................................... 298 1,008
------------- --------------
Pro forma net income (loss) attributable to common
stockholders ................................................. $ (3,951) $ 3,684
============= ==============
Basic net income per common share, as reported $ (0.19) $ 0.39
============= ==============
Basic net income per common share, pro forma $ (0.21) $ 0.30
============= ==============
Diluted net income per common share, as reported $ (0.19) $ 0.38
============= ==============
Diluted net income per common share, pro forma $ (0.21) $ 0.30
============= ==============
3 Comprehensive Income
The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." During the nine months ended September 30,
2004 and 2003, the Company had comprehensive income (loss) of $(4,348,000) and
$5,197,000, respectively, including approximately $(695,000) and $505,000,
respectively, of unrealized gains (losses) on available-for-sale investments,
net of income taxes of $0 and $0.
4 Inventory
(in thousands) (unaudited)
September 30, December 31,
---------------------------------
2004 2003
------------- --------------
Raw materials $ 710 $ 574
Work in process 355 26
Finished goods 6,037 2,734
------------- --------------
7,102 3,334
Allowance for excess and obsolescence (600) (200)
------------- --------------
Net inventory $ 6,502 $ 3,134
============= ==============
5 Earnings per share
The following table presents the calculation of basic and diluted net income
(loss) per share:
9
(in thousands, except per share amounts) (unaudited) (unaudited)
------------------------------ ------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator
Income (loss) before extraordinary gain ................. $ (2,351) $ 1,053 $ (3,653) $ 345
============ ============ ============ ============
Extraordinary gain ...................................... -- -- -- 4,347
============ ============ ============ ============
Net income (loss) ....................................... $ (2,351) $ 1,053 $ (3,653) $ 4,692
============ ============ ============ ============
Denominator - weighted average shares
Denominator for basic earnings per share ................ 26,218 13,576 18,788 12,168
============ ============ ============ ============
Dilutive effect of stock options ........................ -- 495 -- 120
------------ ------------ ------------ ------------
Denominator for diluted earnings per share .............. 26,218 14,071 18,788 12,288
============ ============ ============ ============
Basic earnings per share before
extraordinary gain ...................................... $ (0.09) $ 0.08 $ (0.19) $ 0.03
============ ============ ============ ============
Extraordinary gain - basic .............................. -- -- -- 0.36
============ ============ ============ ============
Basic earnings per share ................................ $ (0.09) $ 0.08 $ (0.19) $ 0.39
============ ============ ============ ============
Dilutive earnings per share before
extraordinary gain ...................................... $ (0.09) $ 0.07 $ (0.19) $ 0.03
============ ============ ============ ============
Extraordinary gain - diluted ............................ -- -- -- 0.35
============ ============ ============ ============
Diluted earnings per share .............................. $ (0.09) $ 0.07 $ (0.19) $ 0.38
============ ============ ============ ============
For the nine-month period ended September 30, 2004 and 2003, stock options
and warrants to purchase approximately 528,000 and 298,000, respectively, shares
of common stock were outstanding, but were not included in the computation of
diluted net income per share because the exercise price of the stock options was
greater than the average share price of the Company's stock for the applicable
period so the effect would have been anti-dilutive.
For the three-month periods ended September 30, 2004 and 2003, stock
options and warrants to purchase approximately 640,000 and 279,000,
respectively, shares of common stock were outstanding, but were not included in
the computation of diluted net income per share because the exercise price of
the stock options was greater than the average share price of the Company's
stock for the applicable period so the effect would have been anti-dilutive.
6 Acquisitions
Telaxis
-------
On April 1, 2003, Young Design merged with Telaxis. For financial
reporting purposes, Young Design was treated as the acquiring company and the
transaction was accounted for as a reverse merger. Young Design had voting
control and majority representation on the Board of Directors after the merger
with Telaxis. Young Design merged with Telaxis for various strategic reasons
including the fact that Telaxis was a publicly traded vehicle providing a
potential source of capital and liquidity.
10
The cost of the April 1, 2003 acquisition consisted of 4,177,078 shares of
common stock and 695,976 options valued at $3.7 million and acquisition costs of
approximately $0.1 million. On April 1, 2003, Telaxis had net assets with a fair
market value of $8.1 million. Accounting for the transaction as a reverse merger
resulted in an excess of net assets over book value of $4.3 million. The assets
and liabilities of Telaxis were recorded at fair value under the purchase method
of accounting. As the fair value of the assets acquired exceeded the purchase
price, the long-lived assets were reduced to zero and negative goodwill was
recorded as an extraordinary item in the second quarter of 2003. The valuation
of the stock was based on the average closing price for the five days preceding
the announcement of the acquisition.
Following is Telaxis' condensed balance sheet at fair market value:
(in thousands) April 1, 2003
-------------
Cash and cash equivalents .................... $ 7,421
Property and equipment (held for sale) ....... 1,405
Other assets ................................. 426
Liabilities .................................. (1,166)
----------
Net assets acquired .......................... $ 8,086
==========
KarlNet
-------
On May 13, 2004, YDI Wireless acquired KarlNet, a private software
company. YDI Wireless acquired KarlNet for various strategic reasons including
the fact that KarlNet was a key supplier to YDI Wireless.
The cost of the May 13, 2004 acquisition consisted of 1,000,000 shares of
common stock valued at $4.3 million and $1.8 million in cash. On May 13, 2004,
KarlNet had net assets with a fair market value of $3.6 million. The KarlNet
assets and liabilities were recorded at fair value under the purchase method of
accounting. As the cost of the acquisition exceeded the fair value of the assets
acquired, goodwill was recorded in the amount of $2.5 million. The valuation of
the stock was based on the closing price of the stock on May 13, 2004 which was
the day the definitive agreement was signed and the deal closed.
Following is KarlNet's condensed balance sheet at fair market value:
(in thousands) May 13, 2004
------------
Cash and cash equivalents .................... $ 99
Accounts receivable .......................... 750
Inventory .................................... 650
Property and equipment ....................... 99
Intangible assets ............................ 2,305
Goodwill ..................................... 2,490
Other assets ................................. 50
Liabilities .................................. (373)
----------
Net assets acquired .......................... $ 6,070
==========
The table includes the final value of intangibles. The value was
determined by an unrelated party.
In addition, the definitive agreement for the acquisition of KarlNet
sprovided for various contingent consideration. YDI will pay up to an additional
$2.5 million over the two years following closing based on achievement of
certain milestones and compliance with other conditions. As of September, 30,
2004, no events have occurred that have triggered the obligation to pay any of
the contingent consideration. Pursuant to the provisions of Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), the
Company believes the payment of any contingent consideration will be treated as
additional cost of the acquisition as the contingencies are resolved.
11
Terabeam
--------
On June 22, 2004, YDI Wireless acquired Terabeam, a private
telecommunications equipment manufacturer. YDI Wireless acquired Terabeam for
various strategic reasons including the fact that Terabeam had significant
liquid assets.
The cost of the June 22, 2004 acquisition consisted of 11.6 million shares
of common stock valued at $55.1 million and 574,406 warrants valued at $132,000.
On June 22, 2004, Terabeam had net assets with a fair market value of $42.2
million. The Terabeam assets and liabilities were recorded at fair value under
the purchase method of accounting. The Company has recorded some estimated
liabilities connected with the Terabeam acquisition which may change over the
next twelve months. As the cost of the acquisition exceeded the fair value of
the assets, acquired goodwill was recorded in the amount of $13.0 million. The
valuation of the stock was based on the average closing price of the stock 5
days before and after April 13, 2004 which was the day the definitive agreement
was signed.
Following is Terabeam's condensed balance sheet at fair market value:
(in thousands) June 22, 2004
-------------
Cash and cash equivalents .................. $ 10,085
Restricted cash ............................ 5,876
Marketable securities - trading ............ 34,229
Accounts receivable ........................ 300
Inventory .................................. 1,310
Property and equipment ..................... 101
Goodwill ................................... 12,963
Other assets ............................... 327
Liabilities ................................ (10,000)
----------
Net assets acquired ........................ $ 55,191
==========
Ricochet Networks
-----------------
On June 25, 2004, YDI Wireless acquired Ricochet Networks, Inc.
("Ricochet"), a private wireless internet service provider. YDI Wireless
acquired Ricochet for various strategic including the fact that it allows YDI to
enter the wireless internet service business.
The cost of the June 25, 2004 acquisition consisted of approximately
42,000 shares of common stock valued at approximately $217,000, $3 million in
cash, and a $300,000 note payable over 3 years. On June 25, 2004, Ricochet had
net assets with a fair market value of $3.5 million. The Ricochet assets and
liabilities were recorded at fair value under the purchase method of accounting.
The valuation of the stock was based on the closing price of the stock on June
25, 2004 which was the day the definitive agreement was signed and the
acquisition closed.
Following is Ricochet's condensed balance sheet at fair market value:
(in thousands) June 25, 2004
-------------
Cash and cash equivalents .................. $ 70
Inventory .................................. 1,000
Intangible property ........................ 1,850
Property and equipment ..................... 785
Other assets ............................... 87
Liabilities ................................ (275)
----------
Net assets acquired ........................ $ 3,517
==========
The table includes the final value of intangibles. The value was
determined by an unrelated party.
12
Pro-forma Combined Statement of Operations
For the nine months ended September 30, 2004
(in thousands, except for per share data)
YDI KarlNet Terabeam Ricochet
--- ------- -------- --------
For the nine For the For the For the
------------ ------- ------- -------
months period from period from period from
------ ----------- ----------- -----------
ended January 1, January 1, January 1,
----- ---------- ---------- ----------
September 2004 to May 2004 to June 2004 to June
--------- ----------- ------------ ------------
30, 2004 13, 2004 22, 2004 25, 2004 Adjustments Pro Forma
------------ ----------- ------------ ------------ ----------- ---------
Revenue ............................. $ 17,120 $ 2,103 $ 1,408 $ 1,424 $ (100) (1) $ 21,955
Cost of goods sold .................. 10,426 837 1,895 843 (100) (2) 14,101
200 (3)
--------------------------------------------------------------------- --------
Gross profit (loss) ................. 6,694 1,266 (487) 581 (200) 7,854
--------------------------------------------------------------------- --------
Operating expense:
Selling expense .................. 1,799 145 1,664 180 150 (4) 3,938
General and administrative ....... 7,288 741 11,574 1,546 185 (5) 21,334
Research and development ......... 2,038 725 4,024 -- -- 6,787
--------------------------------------------------------------------- --------
Total operating expenses ...... 11,125 1,611 17,262 1,726 335 32,059
--------------------------------------------------------------------- --------
Operating loss ...................... (4,431) (345) (17,749) (1,145) (535) (24,205)
--------------------------------------------------------------------- --------
Other income (expenses):
Interest income .................. 410 4 205 -- -- 619
Interest expense ................. (139) -- (72) -- -- (211)
Other income ..................... 509 1 -- 542 -- 1,052
--------------------------------------------------------------------- --------
Total other income ............ 780 5 133 542 -- 1,460
--------------------------------------------------------------------- --------
Loss before discontinued
operations and income tax ........ (3,651) (340) (17,616) (603) (535) (22,745)
--------------------------------------------------------------------- --------
Discontinued operations ............. -- -- 171 -- -- 171
--------------------------------------------------------------------- --------
Loss before income tax .............. (3,651) (340) (17,445) (603) (535) (22,574)
Income tax .......................... 2 -- -- -- -- 2
--------------------------------------------------------------------- --------
Net loss ............................ $ (3,653) $ (340) $(17,445) $ (603) (535) $(22,576)
===================================================================== ========
Loss per share ...................... $ (0.19) $ (0.85)
======== ========
Weighted average shares ............. 18,788 1,000 11,567 42 (4,747) (6) 26,650
Adjustments
-----------
KarlNet
- -------
(1) Revenue (eliminating intercompany sales)............................................. $ (100)
(2) Cost of goods sold (eliminating intercompany purchases).............................. (100)
(3) Cost of goods sold (amortization on intangible assets acquired) ..................... 200
(4) Selling expense (amortization on intangible assets acquired)......................... 150
Ricochet
- --------
(5) Amortization on intangible intellectual property acquired............................. $ 185
Weighted average shares
- -----------------------
(6) To remove the effect of issuing the shares mid-year........................... (4,747)
13
7 Convertible debt
The Company assumed convertible notes as part of the Terabeam acquisition.
The convertible notes' aggregate principal amount totals $2.5 million. The notes
mature in July 2005, with interest only payments at an annual rate of 6.75% in
quarterly installments, with the principal balance maturing July 12, 2005. At
the discretion of holders of the notes, the notes are convertible into shares of
the Company's common stock beginning in July 2004, based on a value of $27.27
per share of common stock or 91,675 shares. If the conversion option is not
elected prior to July 12, 2005, the holders will receive the principal of $2.5
million in cash on the maturity date. The Company has classified the convertible
notes as a short-term liability on the accompanying balance sheet as of
September 30, 2004.
8 Proposed Merger
On October 31, 2003, YDI Wireless signed a definitive merger agreement to
acquire Phazar Corp (Nasdaq:ANTP). Under the terms of the agreement, Phazar
stockholders would receive 1.2 shares of YDI Wireless common stock for each
share of Phazar common stock. This exchange ratio will not be adjusted for
changes in the price of either YDI Wireless common stock or Phazar common stock.
Based on shares outstanding as of September 30, 2004, YDI Wireless stockholders
would own approximately 91% of the combined entity and Phazar stockholders would
own approximately 9%. One member of Phazar's board of directors would join YDI
Wireless' board of directors. The agreement is subject to the approval of Phazar
shareholders and other conditions set forth in the merger agreement. There can
be no assurance that this transaction will be completed at all or on the terms
described above.
9 Restricted Cash
As part of the Terabeam acquisition, YDI Wireless acquired $5.9 million in
restricted cash. During the second quarter of 2004, $0.7 million was release as
a result of a contract payment. As of September 30, 2004, the restricted cash
consists of $0.2 as collateral for letters of credit relating to lease
obligations and $5.0 million held in an indemnification trust for the benefit of
former Terabeam directors and officers. This trust was established by Terabeam
in January 2002, and the funds are managed by an unrelated trustee. To date, no
claims have been asserted against the trust funds. The trust expires in 2007 and
any remaining funds will be distributed to the company.
10 Marketable securities
As part of the Terabeam acquisition, YDI Wireless acquired approximately
$34.2 million in marketable securities. These securities are fixed income bonds
from corporate and United States government sponsored entities (GSEs). It is the
Company's intention to use these securities to meet our cash needs. These bonds
mature within the next year. As of September 30, 2004, YDI owns $18.1 million in
marketable securities excluding any Phazar stock.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
We are a designer and manufacturer of broadband wireless equipment and
systems in the license-free wireless communications industry. These
point-to-point (PTP) and point-to-multipoint (PTM) systems are primarily used by
wireless operators to connect their base stations to other base stations and to
existing wire line networks. We continually invest in the development and
introduction of wireless products in the marketplace in an effort to provide
customers with the best price/performance ratio for license-free wireless
communications. We believe that our diverse and expanding customer base as well
as our market and industry experience makes us a strong competitor in the
wireless communications market. In addition, we are an experienced designer of
turnkey long distance wireless systems for applications such as wireless
Internet, wireless video, wireless local area networks (LANs), wireless wide
area networks (WANs), and wireless virtual private networks (VPNs).
On April 1, 2003, Telaxis Communications Corporation ("Telaxis") closed a
strategic combination transaction with Young Design, Inc., a privately-held
Virginia corporation ("Young Design"). In that transaction, Telaxis formed a
subsidiary that merged with and into Young Design and each outstanding share of
Young Design common stock was converted into the right to receive 2.5 shares of
Telaxis common stock. Telaxis was the continuing corporation, Telaxis
stockholders continued to hold Telaxis common stock following the transaction,
and Young Design became a wholly owned subsidiary of Telaxis. On July 9, 2003,
Telaxis reincorporated into Delaware and changed its name to YDI Wireless, Inc.
("YDI Wireless" or the "Company").
For accounting purposes, Young Design is treated as the acquirer since it
had voting control and majority representation on the Board of Directors after
the merger with Telaxis. The financial statements presented are those of Young
Design carried at historical cost. The assets and liabilities of Telaxis had a
fair value of $8.1 million as of April 1, 2003. The cost of the acquisition
consisted of 4,177,078 shares of common stock and 695,976 options valued at $3.7
million and acquisition costs of approximately $0.1 million. Accounting for the
transaction as a reverse merger resulted in an excess of net assets over book
value of $4.3 million in the second quarter of 2003. The valuation of the stock
was based on the average closing price for the five days preceding the
acquisition.
Effective May 13, 2004, the Company acquired KarlNet, Inc., a wireless
software development company. Effective June 22, 2004, the Company acquired
Terabeam Corporation, a wireless telecommunications company. Effective June 25,
2004, the Company acquired Ricochet Networks, Inc., a wireless service provider.
The financial results of these companies from and after the dates of acquisition
are included in the financial results reported for the Company.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires us 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 periods. We are required to make judgments and
estimates about the effect of matters that are inherently uncertain. Actual
results could differ from our estimates. The most significant areas involving
our judgments and estimates are described below.
Intangible Assets
Our intangible assets are comprised of 4 categories. (1) Capitalized
software includes costs for software that has been determined to be
technologically feasible but not yet salable. (2) Intangible assets acquired
with an acquisition of a company. All assets in this category have been valued
by an unrelated third party and are being amortized straight-line over their
estimated lives. We periodically review each asset to determine if the estimated
discounted cash flows are greater than or equal to the remaining book value. (3)
Intangible assets purchased at arms-length. These assets are amortized over the
estimated life of the product. (4) Goodwill. We periodically review all
intangible assets for impairment to determine if the current capitalized cost
exceeds the future estimated gross revenue.
15
Purchase Price Accounting
We have grown considerably through combining with other businesses. We
acquired Telaxis in 2003 and KarlNet, Terabeam and Ricochet Networks in 2004.
These transactions were accounted for using the purchase method. Under the
purchase method, the acquiring company includes the fair value of the assets of
the acquired entity on its balance sheet. The determination of fair value
necessarily involves many assumptions. Occasionally, we will engage a third
party to value the assets. If we make incorrect assumptions in initially valuing
the assets, we may need to impair these assets at a later date which may have a
material impact to the financial statements.
Capitalized Software
We have capitalized software costs of approximately $1.6 million, net of
amortization, related to software products available for sale and we are
amortizing those costs over the expected lives of the products. The annual
amortization will be the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total current and anticipated
future gross revenues for that product or (b) the straight-line method over the
remaining estimated economic life of the product including the period being
reported on. In addition, we capitalize software costs for projects from the
time the project is determined to be technologically feasible until the project
is salable. When the project becomes salable, we will cease capitalizing costs
and begin amortizing costs previously capitalized over the expected salable life
of the project. Approximately $400,000 of software related costs are not being
amortized since the software has not been placed in service as of the September
30, 2004. Approximately $200,000 was capitalized in software costs this quarter.
Inventory Valuation
Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out basis. Provisions are made to reduce excess or obsolete
inventory to its estimated net realizable value. The process for evaluating the
value of excess and obsolete inventory often requires us to make subjective
judgments and estimates concerning future sales levels, quantities and prices at
which such inventory will be able to be sold in the normal course of business.
Accelerating the disposal process or incorrect estimates of future sales may
necessitate future adjustments to these provisions.
Accounts Receivable Valuation
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability or unwillingness of our customers to make required
payments. If the financial condition of our customers were to deteriorate
resulting in an impairment of their ability to make payments, additional
allowances may be required.
16
Results of Operations
For the three months ended September 30, 2004 and 2003
The following table provides statement of operations data as a percentage
of sales for the periods presented.
2004 2003
----- -----
Sales ................................ 100% 100%
Cost of goods sold ................... 58 47
----- -----
Gross profit ......................... 42 53
Operating expenses
Selling costs .................... 14 9
General and administrative ....... 53 18
Research and development ......... 17 9
----- -----
Total operating expenses ...... 84 36
----- -----
Operating (loss) income .............. (42) 17
Other income (expenses) .............. 5 1
Income tax (expense) benefit ......... -- (5)
Extraordinary gain ................... -- --
----- -----
Net income (loss) .................... (37)% 13%
===== =====
Sales
Sales for the three months ended September 30, 2004 were $6.4 million as
compared to $8.0 million for the same period in 2003 for a decrease of $1.6
million or 21%. There were several factors that when combined resulted in the
revenue decline. First was the receipt of significant orders in 2003 from a
major telecommunications carrier for their "Hot Spot" trial build-out in a major
metropolitan area, which were not replicated in 2004. Second, increased
competition and pricing pressures continued to escalate during the third quarter
of 2004 as compared to 2003. Third, we believe the overall United States
wireless market (where we currently sell most of our products) was generally
soft, and continues to remain so in 2004. Offsetting these declines was the
realization of a full quarter of revenue from the three strategic acquisitions
we made during the second quarter of 2004. Also, we realigned and enhanced our
sales and marketing departments to focus on selling larger system-based
communications solutions in addition to our historical equipment sales efforts.
For the quarters ending September 30, 2004 and 2003, international sales,
excluding Canada, approximated 14% and 15%, respectively, of total sales.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the three months ended September
30, 2004 were $3.7 million and $2.7 million, respectively. For the same period
in 2003, costs of goods sold and gross profit were $3.7 million and $4.3
million, respectively. Gross profit margin, as a percentage of sales, for the
three months ended September 30, 2004 and 2003 was 42% and 53%, respectively.
The 11% decline in margin for the 2004 period as compared to 2003 is due
to two major factors. First, the significant orders we received in 2003 from a
major telco were not replicated. Second, increased competition in 2004 required
us to adjust our prices to meet or beat these competitive pressures. This
decline was partially offset by improved margins relating to software sales that
resulted from our acquistion of KarlNet. We expect that higher software margins
will continue to have a positive impact on overall gross profit margin.
17
We expect that the introduction of new products will help us maintain and
hopefully increase our weighted average gross margins even as we respond
to the pricing pressures within the wireless industry for products that are
later in their product life cycle.
In addition to the development of new products, we continuously review our
existing products to try to reduce their costs while trying to enhance their
features to help counter the downward price pressures from our competitors. On
the manufacturing side, we use a number of different contract manufacturers to
get the benefits of reduced costs resulting from volume production. We have
started sourcing a few products off-shore and continue to explore the
possibility of significant off-shore manufacturing that has the potential of
additional savings.
Selling Costs
Selling costs consist primarily of employee salaries and associated costs
for selling, marketing, and customer support. Selling and marketing expenses for
the three months ended September 30, 2004 and 2003 were $0.9 million and $0.7
million, respectively. The additional costs of $0.2 million were mostly due to
increased travel by sales personnel and the addition of several experienced
sales and marketing personnel.
During the quarter, we made changes to our sales and marketing efforts to
focus on solutions for large communications systems. We also continued our
efforts to enhance our international sales department in order to strengthen our
presence in the international arena. We plan to grow our international sales,
which typically have not constituted a large part of our overall sales. In
conjunction with our increased international focus, we are continuing to have
more of our products certified by selected in-country regulatory authorities to
improve our products' acceptance in these regions.
General and Administrative Expenses
General and administrative expenses consist primarily of employee
salaries, benefits and associated costs for information systems, finance, legal,
and administration of a public company. General and administrative expenses were
$3.4 million for the three months ended September 30, 2004, an increase of
approximately $1.9 million from $1.5 million for the three months ended
September 30, 2003. The nearly $2.0 million increase was due to several
significant factors comprised of increased headcount by approximately 27 in this
expense category, increased general and administration support costs relating to
more personnel, facilities, communications, increased professional fees as well
as increased depreciation and amortization of the various assets acquired in the
three acquisitions in 2004.
Research and Development Expenses
Research and development expenses consist primarily of personnel salaries
and fringe benefits and related costs associated with our product development
efforts. Other related items included in this category are costs associated with
the development and introduction of new products and components, sustaining
engineering on existing products, test equipment, and related facilities costs.
Research and development expenses were $1.1 million and $0.7 million for the
three months ended September 30, 2004 and 2003, respectively.
The increase of nearly $0.4 million was comprised of two offsetting
factors. First, the three acquisitions in the previous quarter resulted in the
addition of about 40 engineering and technical support personnel increasing
salaries and fringe by just over $0.6 million. This increase was offset by the
fact that we capitalized approximately $0.2 million of software development.
Other income (expenses)
Other income increased to $290,000 from $49,000 for the three months ended
September 30, 2004 as compared to the same period in 2003. Interest income for
the quarter ending September 30, 2004 increased to $360,000 from $81,000 during
the same period in 2003 due to the marketable securities acquired in the
Terabeam acquisition in the previous quarter. Interest expense also increased to
$76,000 from $32,000 due to the note associated with the Ricochet acquisition
and the note payable acquired in the Terabeam acquisistion.
18
Income Taxes
As of September 30, 2004, we cannot accurately predict when sufficient
taxable income will be generated to justify recognition of deferred tax assets
without a valuation allowance. Income taxes for the three months ended September
30, 2003 in the amount of $410,000 relates to a reversal of a deferred income
tax asset.
For the nine-months ended September 30, 2004 and 2003
The following table provides statement of operations data as a percentage
of sales for the periods presented.
2004 2003
------ ------
Sales ................................ 100% 100%
Cost of goods sold ................... 61 61
------ ------
Gross profit ......................... 39 39
Operating expenses
Selling costs .................... 11 8
General and administrative ....... 42 23
Research and development ......... 12 6
------ ------
Total operating expenses ...... 65 37
------ ------
Operating (loss) income .............. (26) 2
Other income (expenses) .............. 5 --
Income tax (expense) benefit ......... -- (1)
Extraordinary gain ................... -- 20
------ ------
Net income (loss) .................... (21)% 21%
====== ======
Sales
Sales for the nine months ended September 30, 2004 were $17.1 million as
compared to $21.7 million for the same period in 2003 for a decrease of $4.6
million or 21%. There were a number of reasons for the revenue decline. First
was the receipt of significant orders in 2003 from a major telecommunications
carrier for their "Hot Spot" trial build-out in a major metropolitan area, which
were not replicated in 2004. Second, increased competition and pricing pressures
continued to escalate during the nine months ended September 30, 2004 as
compared to the same period during 2003. Third, we believe the overall United
States wireless market (where we currently sell most of our products) was
generally soft, and will continue to remain so in 2004. Offsetting these
declines was the realization of a full third quarter of revenue from the three
strategic acquisitions we made during the second quarter of 2004. Also, we
realigned and enhanced our sales and marketing departments to focus on selling
larger system-based communications solutions; thus, adding to our historical
equipment sales efforts.
For the nine months ending September 30, 2004 and 2003, international
sales, excluding Canada, approximated 13% and 15% respectively, of total sales.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the nine months ended September
30, 2004 were $10.4 million and $6.7 million, respectively. For the same period
in 2003, costs of goods sold and gross profit were $13.1 million and $8.6
million, respectively. Gross profit margin, as a percentage of sales, for the
nine months ended September 30, 2004 and 2003 was 39% and 39%, respectively.
Gross profit as a percentage of revenue remained the same for the nine
months ended 2004 vs. 2003 due primarily to the following factors that offset
each other. On the downside, we lost a few high margined customers that had
one-time orders in 2003. Also, increased competition forced us to reduce some of
our prices to remain competitive. On the upside, the introduction of several
enhanced core products that included upgrades not only improved product
functionality, but allowed us to maintain higher than normal prices as well as
reducing our
19
products' cost thus improving margins. Another major enhancement to margins for
the period was the third quarter revenue from our software sales resulting from
our acquisition of KarlNet. We expect that higher software margins will continue
to have a positive impact on overall gross profit margin.
We expect that the introduction of new products will help us maintain and
hopefully increase our weighted average gross margins even as we respond to the
pricing pressures within the wireless industry for products that are later in
their product life cycle.
In addition to the development of new products, we continuously review our
existing products to try to reduce their costs while trying to enhance their
features to help counter the downward price pressures from our competitors. As
normally is the case on the manufacturing side, we use a number of different
contract manufacturers to get the benefits of reduced costs resulting from
volume production. We have started sourcing a few products off-shore and
continue to explore the possibility of significant off-shore manufacturing that
has the potential of additional savings.
Selling Costs
Selling costs consist primarily of employee salaries and associated
costs for selling, marketing, and customer support. Selling and marketing
expenses increased slightly to $1.8 million from $1.7 million or $0.1 million
for the nine months ended September 30, 2004 and 2003 or an increase of less
than 6%. The additional costs of approximately $0.1 million were mostly a result
of increased travel by sales personnel and the addition of several experienced
sales and marketing personnel.
During the past nine months, we have continued to make necessary
changes to our sales and marketing efforts to focus on solutions for large
communications systems. We also continued our efforts to enhance our
international sales department in order to strengthen our presence in the
international arena. We plan to grow our international sales, which typically
have not constituted a large part of our overall sales. In conjunction with our
increased international focus, we are continuing to have more of our products
certified by selected in-country regulatory authorities to improve our products'
acceptance in these regions.
General and Administrative Expenses
General and administrative expenses consist primarily of employee
salaries, benefits and associated costs for information systems, finance, legal,
and administration of a public company. General and administrative expenses
increased to $7.3 million for the nine months ended September 30, 2004 an
increase of $2.3 million from $5.0 million for the nine months ended September
30, 2003 or an increase of about 46% period over period.
The nearly $2.3 million increase was due to several significant factors
comprised of increased headcount by approximately 27 in this expense category,
increased general and administration support costs relating to more personnel,
facilities, communications and increased professional fees.
Increased personnel and fringe benefit costs resulted in an increase in
expense of about $1.0 million, both recurring and non-recurring general and
administrative expenses increased nearly $1.1 million, professional fees went up
over $0.2 million while amortization and other various expense categories made
up the difference in the overall increase. Efforts have already begun to reduce
these expenses further going forward in order to help reduce our breakeven point
across the Company and allow us to return to profitability as soon as possible.
We expect that our general and
20
administrative expenses will be somewhat lower as we end the year as we continue
to integrate the recent acquisitions into our operation and realize the
resulting synergies.
Research and Development Expenses
Research and development expenses consist primarily of personnel salaries
and fringe benefits and related costs associated with our product development
efforts. Other related items included in this category are costs associated with
the development and introduction of new products and components, sustaining
engineering on existing products, test equipment, and related facilities costs.
Research and development expenses increased to $2.0 million for the nine months
ended September 30, 2004 from $1.3 million for the nine months ended September
30, 2003, a $0.7 million increase or 54% period over period. The increase was
comprised of two offsetting factors. First, the three acquisitions in the
previous quarter resulted in the addition of about 40 engineering and technical
support personnel increasing salaries and fringe benefit expense by just over
$0.9 million. This increase was offset by the fact that we capitalized
approximately $0.2 million of software development.
Other income (expense)
Other income for the nine months ending September 30, 2004 was $0.8
million compared to $28,000 for the same period ending in 2003. Interest income
increase to $410,000 from $112,000 for the nine months ended September 30, 2004
due primarily to the marketable securities acquired in the Terabeam acquisition.
Interest expense increase to $139,000 from $94,000 due to the note payable
issued for the Ricochet acquisition and the notes payable assumed with the
Terabeam acquisition. Other income was also increased by $500,000 from the sale
intellectual property and other excess equipment held for sale during 2004.
Income Taxes
Provision for income taxes for the nine months ended September 30, 2004 in
the amount of $2,000 relates to minimum state income taxes due. As of September
30, 2004, we cannot accurately predict when sufficient taxable income will be
generated to justify recognition of deferred tax assets without a valuation
allowance. Income taxes for the nine months ended September 30, 2003 in the
amount of $233,000 relates to reversal of a deferred income tax asset.
Extraordinary gain
The extraordinary gain during the first nine months of 2003 was due to the
immediate recognition into income of the negative goodwill of $4.3 million
related to the Telaxis combination in accordance with SFAS No. 141.
Liquidity and Capital Resources
At September 30, 2004, we had cash and cash equivalents of $23.0 million,
excluding restricted cash, and $18.2 million in securities. For the nine months
ended September 30, 2004, cash used by operations was $2.4 million.
For the nine months ended September 30, 2004, cash provided by investing
activities was $22.7 million. The acquisition of Terabeam provided $10.3
million, while we used $4.8 million for the acquisitions of KarlNet and Ricochet
Networks during the second quarter of 2004. As the investments in corporate and
U.S. agency bonds acquired from Terabeam mature, the proceeds presently are
being invested in short-term money market funds. During the nine month period
ending September 30, 2004, $16.9 million in investments held for sale have
matured.
Cash used by financing activities was $6.3 million for the nine months
ended September 30, 2004. Debt repayments totaled $118,000, while stock option
exercises accounted for $356,000 in cash provided. In addition, stock
repurchases used $6.5 million.
21
During the first quarter of 2004 and 2003, Merry Fields distributed to its
members $50,000 and $40,000, respectively. The distributed amounts were Merry
Fields' funds generated from YDI Wireless' rental payments to Merry Fields.
Although Merry Fields is a separate legal entity from YDI Wireless, its
financial statements are consolidated with YDI Wireless for financial reporting
purposes.
Our long-term financing requirements depend upon our growth strategy,
which relates primarily to our desire to increase both domestic and foreign
sales as well as diversifying our product line. One significant constraint to
our growth is the rate of new product introduction. These new products or
product lines may be designed and developed internally or acquired from existing
suppliers to reduce the time to market and inherent risks of new product
development. Our current funding levels may have to be supplemented through our
existing bank line of credit ($2 million), new bank debt financing, public debt
or equity offerings, or other means, depending upon our desired rate of future
growth.
Debt, Covenant Compliance and Liquidity
We have a $2.0 million line of credit with Bank of America. We have not
used this line of credit as of September 30, 2004. This line of credit is
collateralized by a $2.0 million Certificate of Deposit at Bank of America.
Safe Harbor for Forward-Looking Statements
General Overview
This Quarterly Report on Form 10-Q contains forward-looking statements as
defined by federal securities laws that 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," "could," "expects," "intends," "plans," "anticipates," "contemplates,"
"believes," "estimates," "predicts," "projects," 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-Q, 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-Q or to reflect the occurrence of unanticipated or any other subsequent
events, and we disclaim any such obligation.
You should read forward-looking statements carefully because they may
discuss our future expectations, contain projections of our future results of
operations or of our financial position, or state other forward-looking
information. However, there may be events in the future that we are not able to
accurately predict or control. Forward-looking statements are only predictions
that relate to future events or our future performance and are subject to
substantial known and unknown risks, uncertainties, assumptions, and other
factors that may cause actual results, outcomes, levels of activity,
performance, developments, or achievements to be materially different from any
future results, outcomes, levels of activity, performance, developments, or
achievements expressed, anticipated, or implied by these forward-looking
statements. As a result, we cannot guarantee future results, outcomes, levels of
activity, performance, developments, or achievements, and there can be no
assurance that our expectations, intentions, anticipations, beliefs, or
projections will result or be achieved or accomplished. In summary, you should
not place undue reliance on any forward-looking statements.
Cautionary Statements of General Applicability
In addition to other factors and matters discussed elsewhere in this Form
10-Q, in our other periodic reports and filings made from time to time with the
Securities and Exchange Commission, and in our other public
22
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, a severe worldwide
slowdown in the telecommunications equipment market and in the United States in
particular; the downturn and ongoing uncertainty in the telecommunications
industry and larger economy; developments in our relatively new industry and in
the larger economy; the intense competition in the telecommunications equipment
industry and resulting pressures on our pricing, gross margins, and general
financial performance; the impact, availability, pricing, and success of
competing technologies and products; difficulties in distinguishing our products
from competing technologies and products; difficulties or delays in obtaining
customers; dependence on a limited number of significant customers; lack of or
delay in market acceptance and demand for our current and contemplated products;
difficulties or delays in obtaining raw materials, subassemblies, or other
components for our products at the times, in the quantities, and at the prices
we desire or expect; risks arising from and relating to our recent acquisitions
of Ricochet Networks, Inc., Terabeam Corporation, and KarlNet, Inc. (including
without limitation management distraction due to those acquisitions, the ability
of the companies to integrate in a cost-effective, timely manner without
material liabilities or loss of desired employees or customers; the risk that
the expected synergies and other benefits of the transactions will not be
realized at all or to the extent expected; the risk that cost savings from the
transactions may not be fully realized or may take longer to realize than
expected; reactions, either positive or negative, of investors, competitors,
customers, suppliers, employees, and others to the transactions; and the risk
that those transactions will expose YDI to lawsuits or other liabilities); the
expense of defending and settling and the outcome of pending and any future
stockholder litigation, including without limitation, our possible exposure
under the contemplated settlement of that litigation; the expense of defending
and settling and the outcome of pending and any future litigation against us;
our recent focus on certain aspects of our current business; difficulties or
delays inherent in entering new markets and business areas; difficulties or
delays in developing and establishing new products, product lines, and business
lines; difficulties or delays in developing, manufacturing, and supplying
products with the contemplated or desired features, performance, price, cost,
and other characteristics; difficulties in estimating costs of developing and
supplying products; difficulties in developing, manufacturing, and supplying
products in a timely and cost-effective manner; difficulties or delays in
developing improved products when expected or desired and with the additional
features contemplated or desired; our limited ability to predict our future
financial performance; the expected fluctuation in our quarterly results; the
expected fluctuation in customer demand and commitments; the expected volatility
and possible stagnation or decline in our stock price, particularly due to the
number of shares of our stock we issued in connection with the acquisitions we
made in the second quarter of 2004 and the relatively low number of shares that
trade on a daily basis; difficulties in attracting and retaining qualified
personnel; our dependence on key personnel; inability to protect our proprietary
technology; the potential for intellectual property infringement, warranty,
product liability, and other claims; failure of our customers to sell broadband
connectivity solutions that include our products; difficulties in our customers
or ultimate end users of our products obtaining sufficient funding; cancellation
of orders without penalties; difficulties in complying with existing
governmental regulations and developments or changes in governmental regulation;
difficulties or delays in obtaining any necessary governmental or regulatory
permits, waivers, or approvals; our dependence on third-party suppliers and
manufacturers; difficulties in obtaining satisfactory performance from
third-party manufacturers and suppliers; risks associated with foreign sales
such as collection, currency and political risk; investment risk resulting in
the decrease in value of our investments; difficulties in collecting our
accounts receivable; future stock sales by our current stockholders, including
our current and former directors and management; the effect of our anti-takeover
defenses; and risks associated with any acquisitions or investments in which we
may be involved. Many of these and other risks and uncertainties are described
in more detail in our annual report on Form 10-K, as amended, for the year ended
December 31, 2003 filed with the Securities and Exchange Commission.
Specific Cautionary Statements Relating to the Contemplated Acquisition of
Phazar Corp.
On October 30, 2003, YDI Wireless announced a definitive merger agreement
to acquire Phazar Corp. There can be no assurance whatsoever that this
acquisition or any other combination transaction between YDI Wireless and Phazar
will be consummated. We do not believe that transaction will be completed before
November 30, 2004, which is the date either party may unilaterally terminate the
merger agreement . Additionally, failure of the transaction to close by November
30, 2004 may require us to pay a financial penalty to Phazar. Other risks
associated with or arising from this contemplated transaction include risks
relating to the companies' ability and desire to satisfy the conditions to
closing the transaction set forth in the definitive transaction documentation
(including, without limitation, the need to obtain the approval of Phazar's
stockholders); the possibility that the
23
terms of the transaction, as amended to date, may be further amended; the
substantial time and costs each company will be expending and incurring relating
to a contemplated transaction; the ability to obtain any necessary regulatory
approvals and clearances, including federal and state securities registrations,
qualifications, approvals, clearances, and/or exemptions, needed to consummate a
transaction; the ability of the companies to integrate in a cost-effective,
timely manner without material loss of employees, customers, or suppliers; the
risk that the expected synergies and other benefits of the transaction will not
be realized at all or to the extent expected; the risk that cost savings from
the transaction may not be fully realized or may take longer to realize than
expected; reactions, either positive or negative, of investors, competitors,
customers, suppliers, employees, and others to the transaction; the time and
costs required to complete the contemplated transaction and then integrate the
companies; management and board interest in and distraction due to the
contemplated transaction and integrating the companies; the uncertain impact on
the trading market, volume, and price of each company's stock; difficulties in
predicting the combined company's future business and financial performance;
costs and delays in implementing common systems and procedures, including
financial accounting systems; and the fact that the registration, issuance,
and/or future sale of a large number of shares of our common stock may cause a
stagnation or decline in the market price of our common stock.
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, sales, 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 3. Quantitative and Qualitative Disclosures about Market Risk.
Disclosures About Market Risk
The following discusses our exposure to market risks related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are exposed to risks and
uncertainties, many of which are out of our control. Actual results could vary
materially as a result of a number of factors, including those discussed above
in Part I, Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations, Safe Harbor for Forward-Looking Statements.'
As of September 30, 2004, we had cash and cash equivalents of $23.0
million and restricted cash of $5.2 million. All these funds are on deposit in
short-term accounts with several national banking organizations. Therefore, we
do not expect that an increase in interest rates would materially reduce the
value of these funds. The primary risk to loss of principal is the fact that
these balances are only insured by the Federal Deposit Insurance Corporation up
to $100,000 per bank. At September 30, 2004, the uninsured portion totaled
approximately $27.9 million.
In addition, we presently hold approximately $18.1 million in corporate
and U.S. Federal agency bonds. These bonds have a maturity dates no later than
February 2006. These bonds are interest rate sensitive and therefore as rates
rise, the value of these bonds will decrease. We do not believe that a
significant increase in interest rates would have a material effect on our
financial condition or results of operations, particularly given the relatively
short-term nature of these holdings.
We guarantee the Merry Fields, LLC debt. The interest rate on the loan is
fixed. Therefore, fluctuations in interest rates would not impact the amounts
payable relating to that debt.
As of September 30, 2004, our investment in Phazar common stock was valued
at $1.4 million. The carrying value of our investment is subject to fluctuation
in the market price and, consequently, the amount realized in any subsequent
sale of this investment may significantly differ from the reported market value.
Fluctuation in the market price of a security may result from perceived changes
in the underlying economic characteristics of the issuer of the security, the
relative price of alternative investments, and general market conditions.
Furthermore, amounts realized in the sale of a particular security may be
affected by the relative quantity of the security being sold. As
24
stated in the notes to the financial statements, we have signed a definitive
agreement to merge with Phazar. The carrying value of the investment may be
adversely affected should the merger not be completed. Should the merger be
completed, the $1.4 million will be reduced by the unrealized gain, $0.6 million
as of September 30, 2004, on YDI holdings of Phazar stock and the remaining $0.8
million will increase the acquisition cost of Phazar to YDI. However,
fluctuation in the market price of Phazar will not impact our operations.
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. Additionally, we import from other
countries. Our sales and product supply may therefore be subject to volatility
because of changes in political and economic conditions in these countries.
We presently do not use any derivative financial instruments to hedge our
exposure to adverse fluctuations in interest rates, foreign exchange rates,
fluctuations in commodity prices or other market risks; nor do we invest in
speculative financial instruments.
Due to the nature of our borrowings and our short-term investments, we
have concluded that there is no material market risk exposure and, therefore, no
quantitative tabular disclosures are required.
Item 4. Controls and Procedures.
Disclosure controls and procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
September 30, 2004 have concluded that as of such date our disclosure controls
and procedures were adequate and effective.
Internal controls
There has not been any change in our internal controls over financial
reporting that occurred during the fiscal quarter covered by this Quarterly
Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
During the period from June 12 to September 13, 2001, four purported
securities class action lawsuits were filed against Telaxis 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 lawsuits also named one or more of the
underwriters in the Telaxis initial public offering and certain of its officers
and directors. On April 19, 2002, the plaintiffs filed a single consolidated
amended complaint which supersedes the individual complaints originally filed.
The amended complaint alleges, among other things, violations of the
registration and antifraud provisions of the federal securities laws due to
alleged statements in and omissions from the Telaxis initial public offering
registration statement concerning the underwriters' alleged activities in
connection with the underwriting of Telaxis' shares to the public. The amended
complaint seeks, among other things, unspecified damages and costs associated
with the litigation. These lawsuits have been assigned along with, we
understand, approximately 1,000 other lawsuits making substantially similar
allegations against approximately 300 other publicly-traded companies and their
public offering 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 believe the claims against us are without merit and have defended the
litigation vigorously. The litigation process is inherently uncertain, however,
and there can be no assurance that the outcome of these claims will be favorable
for us.
On July 15, 2002, together with the other issuer defendants, Telaxis filed
a collective motion to dismiss the consolidated, amended complaints against the
issuers on various legal grounds common to all or most of the issuer defendants.
The underwriters also filed separate motions to dismiss the claims against them.
In October 2002, the court approved a stipulation dismissing without prejudice
all claims against the Telaxis directors and officers who had been defendants in
the litigation. On February 19, 2003, the court issued its ruling on the
separate motions to dismiss filed by the issuer defendants and the underwriter
defendants. The court granted in part and denied in part the issuer defendants'
motions. The court dismissed, with prejudice, all claims brought against Telaxis
under the anti-fraud provisions of the securities laws. The court denied the
motion to dismiss the claims brought under the registration provisions of the
securities laws (which do not require that intent to defraud be pleaded) as to
Telaxis and as to substantially all of the other issuer defendants. The court
denied the underwriter defendants' motion to dismiss in all respects.
In June 2003, we elected to participate in a proposed settlement agreement
with the plaintiffs in this litigation. This decision was made by a special
independent committee of our board of directors. We understand that a large
majority of the other issuer defendants have also elected to participate in this
proposed settlement. If ultimately approved by the court, this proposed
settlement would result in a dismissal, with prejudice, of all claims in the
litigation against us and against the other issuer defendants who elect to
participate in the proposed settlement, together with the current or former
officers and directors of participating issuers who were named as individual
defendants. The proposed settlement does not provide for the resolution of any
claims against the underwriter defendants. The proposed settlement provides that
the insurers of the participating issuer defendants will guarantee that the
plaintiffs in the cases brought against the participating issuer defendants will
recover at least $1 billion. This means there will be no monetary obligation to
the plaintiffs if they recover $1 billion or more from the underwriter
defendants. In addition, we and the other participating issuer defendants will
be required to assign to the plaintiffs certain claims that the participating
issuer defendants may have against the underwriters of their IPOs.
The proposed settlement contemplates that any amounts necessary to fund
the guarantee contained in the settlement or settlement-related expenses would
come from participating issuers' directors and officers liability insurance
policy proceeds as opposed to funds of the participating issuer defendants
themselves. A participating issuer defendant could be required to contribute to
the costs of the settlement if that issuer's insurance coverage were
insufficient to pay that issuer's allocable share of the settlement costs.
Therefore, the potential exposure of each participating issuer defendant should
decrease as the number of participating issuer defendants increases. We
currently expect that our insurance proceeds will be sufficient for these
purposes and that we will not otherwise be required to contribute to the
proposed settlement.
26
Formal settlement documents, including a stipulation of settlement and
related documents, have now been filed with the court. The plaintiffs in the
case against us, along with the plaintiffs in the other related cases in which
issuer defendants have agreed to the proposed settlement, have requested
preliminary approval by the court of the proposed settlement, including the form
of the notice of the proposed settlement that will be sent to members of the
proposed classes in each settling case. Certain underwriters who were named as
defendants in the settling cases, and who are not parties to the proposed
settlement, have filed an opposition to preliminary approval of the proposed
settlement of those cases. In mid-September, the court asked lead counsel for
the plaintiffs and for the issuer defendants for additional information
concerning the adequacy of the settlement amount and how plaintiffs intend to
allocate any consideration paid under the settlement among the more than 300
separate class actions that are included in the settlement. Counsel for the
plaintiffs and for the issuer defendants are in the process of providing to the
court the information that it has requested.
Consummation of the proposed settlement remains conditioned on, among
other things, receipt of both preliminary and final court approval. If the court
preliminarily approves the proposed settlement, notice of the terms of the
proposed settlement be sent to all proposed class members and a hearing will be
scheduled at which any objections to the proposed settlement may be heard.
Thereafter, the court will determine whether to grant final approval to the
proposed settlement. If the proposed settlement described above is not
consummated, we intend to continue to defend the litigation vigorously.
Moreover, if the proposed settlement is not consummated, we believe that the
underwriters may have an obligation to indemnify us for the legal fees and other
costs of defending these suits. While there can be no assurance as to the
ultimate outcome of these proceedings, we currently believe that the final
result of these actions will have no material effect on our consolidated
financial condition, results of operations, or cash flows.
We are subject to potential liability under contractual and other matters
and various claims and legal actions which are pending or may be asserted
against us or our subsidiaries. These matters may arise in the ordinary course
and conduct of our business. While the outcome of any of the pending or
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 affect on our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
We issued 15,859 shares of common stock at $0.3977 per share in July 2004
to a warrant holder upon the exercise of warrants on a cashless basis (we
withheld 1,474 shares of common stock as payment for the aggregate exercise
price of the warrants). We received no cash proceeds from the issuance of these
shares. The issuance was completed without registration under the Securities Act
in reliance upon the exemptions contained in Section 4(2) of the Securities Act
and/or Rule 506 of Regulation D promulgated under the Securities Act for
transactions not involving a public offering. This issuance of common stock by
us did not involve the use of an underwriter, and no commissions were paid in
connection with this issuance.
We issued 9,416 shares of common stock at $2.2727 per share in August 2004
to a warrant holder upon the exercise of warrants on a cashless basis (we
withheld 13,684 shares of common stock as payment for the aggregate exercise
price of the warrants). We received no cash proceeds from the issuance of these
shares. The issuance was completed without registration under the Securities Act
in reliance upon the exemptions contained in Section 4(2) of the Securities Act
and/or Rule 506 of Regulation D promulgated under the Securities Act for
transactions not involving a public offering. This issuance of common stock by
us did not involve the use of an underwriter, and no commissions were paid in
connection with this issuance.
We issued 30,765 shares of common stock at $0.3977 per share in August
2004 to a warrant holder upon the exercise of warrants on a cashless basis (we
withheld 4,609 shares of common stock as payment for the aggregate exercise
price of the warrants). We received no cash proceeds from the issuance of these
shares. The issuance was completed without registration under the Securities Act
in reliance upon the exemptions contained in Section 4(2) of the Securities Act
and/or Rule 506 of Regulation D promulgated under the Securities Act for
27
transactions not involving a public offering. This issuance of common stock by
us did not involve the use of an underwriter, and no commissions were paid in
connection with this issuance.
Stock Repurchase
On September 14, 2004, we signed a stock purchase agreement pursuant to
which we agreed to repurchase 4,183,183 shares of our common stock from Michael
F. Young. The aggregate purchase price for this stock was $6,500,000. The
repurchased stock constituted approximately 15.5% of our 26,979,418 shares of
common stock outstanding prior to the repurchase.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders on September 9, 2004. At that
meeting, each of the following individuals was elected as a director of the
company (these individuals consist of all the directors of the company) by the
following votes:
Name of Individual Votes For Votes Withheld
------------------ --------- --------------
Daniel A. Saginario 21,864,155 22,956
Robert E. Fitzgerald 21,864,655 22,456
John W. Gerdelman 21,864,504 22,607
Daniel R. Hesse 21,826,687 60,424
Patrick L. Milton 21,864,755 22,356
Gary E. Rieschel 21,864,534 22,577
Robert A. Wiedemer 21,864,505 22,606
Also at that annual meeting, the stockholders of the company approved the
company's 2004 Stock Plan by a vote of 19,015,766 shares for, 210,696 shares
against, 27,943 shares abstained, and 2,632,706 shares non-voted.
Item 6. Exhibits.
See Exhibit Index.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YDI Wireless, Inc.
Date: November 15, 2004 By: /s/ Patrick L. Milton
--------------------------------------------
Patrick L. Milton,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
28
EXHIBIT INDEX
Exhibit
Number Description
2.1 Amendment No. 3 to Agreement and Plan of Merger, dated as of
September 30, 2004, by and among YDI Wireless, Inc., Stun
Acquisition Corporation, and Phazar Corp. (1)
10.1 2004 Stock Plan of YDI Wireless, Inc. (2)
10.2 Amendment No. 1 to 1996 Stock Plan of YDI Wireless, Inc. (2)
10.3 Amendment No. 1 to 1997 Stock Plan of YDI Wireless, Inc. (2)
10.4 Amendment No. 1 to 1999 Stock Plan of YDI Wireless, Inc. (2)
10.5 Amendment No. 1 to 2001 Nonqualified Stock Plan of YDI Wireless,
Inc. (2)
10.6 Stock Purchase Agreement, dated as of September 14, 2004, between
YDI Wireless, Inc. and Michael F. Young. (3)
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).
32.1 Certification Pursuant to Rule 13a-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350
of Chapter 63 of Title 18 of the United States Code).
- ----------
All non-marked exhibits listed above are filed herewith.
(1) Incorporated herein by reference to the exhibits to Form 8-K filed with
the SEC on October 5, 2004.
(2) Incorporated herein by reference to the exhibits to Form 8-K filed with
the SEC on September 15, 2004.
(3) Incorporated herein by reference to the exhibits to Form 8-K filed with
the SEC on September 21, 2004.
29