Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
--------------------------
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
of incorporation or organization) Identification No.)
8000 Lee Highway
Falls Church, VA 22042
(Address of principal executive offices)
(703) 205-0600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of each class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
As of June 30, 2004, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant was
$67,676,873. For purposes of this calculation only, shares of common equity held
by each of the registrant's directors and officers on that date and by each
person who beneficially owned 10% or more of the outstanding common stock on
that date have been excluded in that such persons may be deemed to be
affiliates. The aggregate market value has been computed based on a price per
share of $5.75, which is the price at which the common equity was last sold on
June 30, 2004.
As of March 18, 2005, the registrant had 22,407,724 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission in connection with the registrant's 2005
annual meeting of stockholders are incorporated by reference into Part III of
this Form 10-K.
================================================================================
PART I
This Annual Report on Form 10-K contains forward-looking statements as
defined by federal securities laws. Forward-looking statements are predictions
that relate to future events or our future performance and are subject to known
and unknown risks, uncertainties, assumptions, and other factors that may cause
actual results, outcomes, levels of activity, performance, developments, or
achievements to be materially different from any future results, outcomes,
levels of activity, performance, developments, or achievements expressed,
anticipated, or implied by these forward-looking statements. Forward-looking
statements should be read in light of the cautionary statements and important
factors described in this Form 10-K, including Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations--Safe Harbor for
Forward-Looking Statements. We undertake no obligation to update or revise any
forward-looking statement to reflect events, circumstances, or new information
after the date of this Form 10-K or to reflect the occurrence of unanticipated
or any other subsequent events.
Item 1. Business.
Overview
We provide broadband, or high-speed, wireless access products in the
United States and internationally. Our systems enable service providers,
enterprises and governmental organizations to deliver high-speed data
connectivity enabling a broad range of applications. We believe our fixed
wireless systems address the growing need of our customers and end-users to
rapidly and cost effectively deploy high-speed communication networks. Our goal
is to offer reliable wireless data equipment with improved range, performance
and ease of use.
We are the result of a merger consummated on April 1, 2003 between Telaxis
Communications Corporation ("Telaxis") and Young Design, Inc. ("Young Design")
as well as the acquisitions described below. Telaxis was a publicly traded
company that focused on developing high capacity millimeter wave wireless
products. Young Design was a privately held company that developed, produced,
and sold wireless data products, primarily in microwave frequencies. Subsequent
to the merger, the company effected a 1 for 100 reverse stock split followed by
a 25 for 1 forward stock split, re-incorporated in Delaware, and changed its
name to YDI Wireless, Inc.
2004 Acquisitions
As discussed below, in the second quarter of 2004, we acquired KarlNet,
Inc., Terabeam Corporation, and Ricochet Networks, Inc.
Acquisition of KarlNet, Inc.
On May 13, 2004, we acquired KarlNet, Inc., a pioneer and leader in
software development for operating and managing wireless networks. The terms of
the merger agreement provided for an upfront cash distribution to the KarlNet,
Inc. stockholders of approximately $3.0 million, issuance of 1.0 million
restricted shares of our common stock, and subsequent cash payments of up to
$2.5 million based on achievement of certain performance milestones and
compliance with representations and warranties. The $3.0 million cash
distribution consisted of $1.2 million cash on hand at KarlNet and a $1.8
million loan we made from our operating capital.
Founded in 1993, KarlNet had grown from a pioneer in Internet firewall and
security solutions to a leading provider of wireless software and systems. From
creating the first commercially available firewall to creating the first
wireless residential gateway (the Apple Airport), Karlnet has been a leader in
technology. KarlNet had sold over 1.5 million wireless units and created
wireless software sold by companies such as Apple, Agere, Lucent, and Proxim.
The company was headquartered in Dublin, Ohio.
KarlNet is being integrated into our operations and is functioning as our
software design and support center as well as providing digital hardware design
and support.
2
Acquisition of Terabeam Corporation
On June 22, 2004, we acquired Terabeam Corporation. Terabeam, then
headquartered in Redmond, Washington, was a provider of broadband wireless
systems to telecommunications providers. Pursuant to the merger, we issued
approximately 11.6 million shares of our common stock in exchange for all of the
outstanding shares of Terabeam. At the time of the merger, Terabeam had
approximately $50.2 million in cash and marketable securities, $2.6 million in
other assets, and $8.7 million in total liabilities.
Terabeam was a leading provider of wireless fiber (broadband wireless)
solutions that extended and optimized carrier and enterprise networks.
Terabeam's wireless fiber solutions use high frequency millimeter wave (60 GHz
radio frequency) and free space optics (transferring data through the air with
light) technologies. Operating at full line rates of 100 Mbps to 1.25 Gbps,
millimeter wave and free space optics (also known as FSO) systems enabled
network service providers and business customers to achieve high bandwidth
connectivity at significantly lower costs and deployment times than other
high-data-rate technologies.
Terabeam had a history of losses and cash burn. In connection with the
merger and subsequent consolidation, we have reduced capital expenditures,
significantly reduced the personnel at Terabeam, closed Terabeam's two offices
in the Redmond, Washington area, exited a number of leases relating to unused
facilities, and consolidated resources at Terabeam's North Andover,
Massachusetts facility. The North Andover facility has been integrated into our
operations focusing on millimeter wave and microwave hardware development and
support. In addition, the addition of Terabeam has positioned us to aggressively
pursue non-communication millimeter wave products business such as radar systems
and sub-systems. We also greatly reduced expenditures relating to Terabeam's FSO
product line and development efforts, but, due to limited but vocal demand, we
have continued certain FSO products and development efforts.
Acquisition of Ricochet Networks, Inc.
On June 25, 2004, we acquired Ricochet Networks, Inc. Ricochet is a
leading mobile Wireless Internet Service Provider (WISP) headquartered in
Denver, Colorado. Ricochet provides high speed mobile Internet connectivity in
San Diego, California and Denver and had over 7,000 paying customers when we
acquired it. As of December 31, 2004, Ricochet had over 8,000 paying wireless
subscribers, and we believe that it is one of the largest, if not the largest,
WISP with a network operating exclusively in license free frequencies.
The purchase price for the transaction consisted of $3 million in cash,
42,105 restricted shares of our common stock, and a note payable for $300,000,
subject to certain reductions in the purchase price to the extent that we
experience liabilities beyond certain agreed upon limits. Ricochet's services
business is operated independent of the rest of our business - the equipment
business - except for certain overlapping personnel and functions.
Ricochet was originally formed to acquire certain assets from the
bankruptcy estate of Metricom. Prior to its bankruptcy, Metricom had deployed
the Ricochet(R) network in many major metropolitan cities including New York,
Los Angeles, San Francisco, Seattle, Chicago, Philadelphia, Phoenix, Baltimore,
Philadelphia, Atlanta, Dallas/Fort Worth, Minneapolis, and Washington, DC.
Ricochet is investigating the feasibility of restoring service in these markets.
In addition, Ricochet is pursuing opportunities to provide Homeland Defense and
public safety systems utilizing the Ricochet solution. Also, Ricochet is
offering equipment to service providers, WISPs, and municipalities who wish to
offer wireless Internet services and become part of Ricochet's network.
"Terabeam Wireless" Business Name
Effective in mid-August 2004, we implemented our go to market strategy
under the name of "Terabeam Wireless." This means that we plan to market the
company and do business using the name "Terabeam Wireless."
Industry Background
We believe that there exists a significant need for bandwidth where
digital phone lines or fiber optic cable are either too expensive to deploy,
unavailable or inadequate to meet demand. This barrier is often referred to as
the "last mile" gap. Carriers typically have to overcome cost, time,
technological, and other barriers when trying to close the last mile gap.
3
In the current economic climate, it is expected that network development,
especially at the network edge, will focus on deployments where new capital
expenditures will be closely followed by new revenue. Connecting new subscribers
to existing broadband at low incremental cost would fit well in this market
reality. A wireless complement would enable these connections. We believe that
our products are well suited to this market environment as they permit
telecommunications carriers to bring broadband connectivity to the network edge
faster and cheaper than with new landline build-outs.
As a result of the capital expenditure reductions by fiber carriers, some
potential subscribers are looking elsewhere to satisfy their connectivity needs.
For example, enterprises are expected to increasingly turn to network
integrators to provide connectivity between their local area networks ("LANs")
and storage area networks ("SANs"), as their business conditions improve.
Cellular network operators are faced with similar connectivity issues when they
try to provide backhaul to connect their cellular telephone towers to the rest
of their networks. We expect this issue to intensify as subscribers demand
increasingly data-intensive mobile services. Overlaying all of these industry
trends is the current desire for increased network redundancy and reduced
vulnerability through duplicate and alternative communications paths, which can
often readily be provided with our products.
Fixed Wireless Broadband
Telecommunications carriers that do not have direct connectivity to the
end customer through an existing medium such as copper, fiber, or cable cannot
cost effectively create a new land line connection to that customer and are
relegated to reselling the existing connectivity, possibly with enhancements, in
some form or fashion. As a reseller, the telecommunications carrier is subjected
to the quality of service and support provided by the underlying operator of the
network. Extended range license-free fixed wireless broadband systems allow
telecommunications carriers to establish an alternative network that they can
own and control to enable them to offer superior connectivity head to head with
the incumbent service provider. Our products allow a telecommunications carrier
to offer broadband connectivity to markets where no broadband has been
previously deployed because it was not cost effective to offer broadband
connectivity using traditional landline solutions. Equally important, the use of
license-free spectrum permits a new entrant to rapidly and cost effectively
reach a new market of subscribers demanding broadband connectivity.
Many small to medium sized ISPs (Internet Service Providers) have no other
viable means to offer high-speed Internet service to their customers other than
using the license-free radio bands. ISPs are increasingly offering wireless
broadband connectivity and are known as WISPs (Wireless Internet Service
Providers). Our point-to-multipoint systems have been deployed by over 1,500
WISPs and are currently serving tens of thousands of end customers, many of
which had no broadband access prior to the roll outs incorporating our
equipment.
Rural Broadband
In many rural areas of the country there is no DSL or cable TV service
available. Residential and business customers there typically only have
slow-speed dial-up Internet access. Some use satellite links for broadband
Internet access, but its relatively slow upload speeds and long latency do not
make it an ideal choice for high-speed wireless Internet access. Many Internet
Service Providers now use the license-free radio bands to offer high-speed
wireless Internet to their rural dial-up customers. Our long-range
point-to-multipoint systems are well suited for these rural areas and towns
where there is no other viable broadband option.
Public Hot Spots and Hot Zones
A Hot Spot is a geographical area in which end users utilizing a WLAN
(Wireless LAN) card can access a broadband wireless connection for Internet
connectivity. The Hot Spot is usually offered by a telecommunications carrier
for a fee or by the local venue owner/operator for a fee or as an amenity. An
increasing number of Hot Spots permitting free public access are being deployed
by a variety of organizations including cities and towns. The advantages of Hot
Spots are broadband connectivity, ease of use, mobile operations and roaming
capabilities. The primary disadvantage of Hot Spots is that their effective
range of less than 300 feet greatly limits the benefit of a single Hot Spot and
would require the deployment of a large number of Hot Spots to generate any
meaningful level of coverage. To date, the deployment of Hot Spots has been
sporadic and is generally limited to high traffic areas such as airports,
convention centers, hotels and coffee shops. This limited deployment has
attracted limited attention from end-users who require a broader area of
coverage to widely adopt the service.
4
We have been an industry leader in the concept of Hot Zones. A Hot Zone is
the functional equivalent of a Hot Spot except that it incorporates our
amplifier and high gain antenna technology to illuminate a dramatically larger
area of coverage than is covered by a traditional Hot Spot. For instance, rather
than providing a single coffee shop with wireless coverage by utilizing a Hot
Spot, a carrier could provide wireless coverage to a zone of several coffee
shops and restaurants by utilizing a Hot Zone. Also, since the deployment of Hot
Zones is more similar to the deployment of cellular telephone systems, we
believe that telecommunications carriers will migrate to Hot Zone deployments
rather than attempting to build out Hot Spots one building at a time. We believe
that the proliferation of Hot Zones will create a dramatic improvement in the
geographical footprint of Hot Spot type coverage which is required to increase
the acceptance and demand from end users.
Cellular Backhaul
We believe that the need for high-speed backhaul, the connections between
cellular telephone towers and the rest of the cellular telephone network, will
remain solid and even increase due to the increased capacity demands of existing
cellular deployments as well as the deployment of additional cellular systems.
The amount of data that needs to be backhauled from cellular systems should
increase significantly as 2.5G, 3G and other high-data-rate cellular systems are
developed and deployed and more data intensive applications are offered. We
believe that the backhaul data rates required for some individual cells will
exceed the capabilities of the land line T-1/E-1 connections that are typically
used today, thereby providing an attractive market for our Link CX product with
its 45 Mbps (Megabits per second) and DS-3 capabilities and our other
high-capacity products.
Private Enterprise Networks
Business, government and institutional enterprise network deployments are
increasingly deploying high-speed connections between multiple buildings
occupied by the same or affiliated businesses or other enterprises in a campus
or business complex setting. Given that public fiber network carriers have
curtailed their capital spending programs, enterprises are turning to network
integrators to connect their LANs together. These integrators are motivated to
quickly and cost effectively deploy solutions and are very receptive to
considering alternative methods of providing connections - such as our products
- - rather than just fiber optic cable. In addition, high-data-rate next
generation fixed wireless LAN systems such as IEEE 802.11a/b/g (several
different standards for wireless LAN interoperability) are creating additional
needs for LAN-to-LAN connectivity that could be met with our products, depending
upon the data rate required. The higher data rate capabilities within the LAN
are generating demand for higher speed connections between LANs such as our
Gigalink(R) products, with its Gigabit Ethernet (1.25 Gigabits per second) data
rate capabilities.
The Desire for Redundancy and Reduced Vulnerability
In both government and commercial communications systems, there is now a
strong emphasis on redundancy in networks, including the use of alternative
media in achieving redundancy. In addition, there is greater emphasis on
distributed network infrastructures to prevent single node network failures.
These trends could favorably affect all of the market segments that we are
addressing as our products provide a redundant path of wireless connectivity
rather than the exclusive use of land-line-based connectivity.
Increasing Acceptance and Demand to Carry Voice over Internet Protocol (VoIP)
There has been an increasing demand for Voice over Internet Protocol as a
low cost replacement for existing telephone voice connections. VoIP permits a
voice connection whereever an Internet connection exists. VoIP operates best in
a broadband environment due to its connectivity and latency requirements, and we
believe that wireless systems, such as systems built with our products, provide
an excellent infrastructure for VoIP capabilities. A network providing high
speed wireless data communications with our equipment could add VoIP
capabilities with little or no recurring expense but greatly expand the
network's addressable market through the addition of the voice offering. We are
actively working to enhance our products to optimize their ability to support
VoIP including increasing bandwidth and adding Quality of Service (QOS) to our
point-to-multipoint products to give VoIP communications priority over other
types of data communications on the system.
5
Increasing Acceptance of Wireless Mesh Solutions
As network providers try to achieve higher levels of reliability while
utilizing license-free frequency bands, wireless mesh solutions are being
utilized at an increasing rate. The advantage of a wireless mesh network is that
data traffic has multiple potential paths from the base station to the end
customer. This allows the network to dynamically route around failures in the
network and provide a much higher level of reliability than would be possible in
a typical point-to-point or point-to-multipoint network. Ricochet's self healing
wireless mesh networks operate by having multiple wireless routers direct data
traffic back to one or more base stations that are connected to a wired or
wireless backhaul connection. In addition, Ricochet's network has supported
large scale deployments of over 5,000 users in metropolitan markets.
Our Solution
We believe that there exists a growing market to provide license-free
high-speed wireless connectivity. The advantage of utilizing license-free
spectrum is that the operator can deploy the necessary equipment without the
expense and time associated with acquiring a license. This allows for rapid
deployment as well as creating a more competitive landscape without the
artificial barriers associated with a license holder having a monopolistic hold
over a geographical area. There are several significant advantages of utilizing
wireless connectivity as opposed to traditional land-line solutions such as
copper, fiber, digital subscriber line (DSL) or cable modems. Wireless can be
very rapidly and selectively deployed at a much lower cost than traditional
land-line solutions. This permits service providers to rapidly enter new markets
and offer new services. Wireless is also well positioned to improve and grow
over time as applications dictate while many landline solutions are usually
inherently limited in bandwidth by the medium that they operate in. Finally, as
demonstrated by the rapid proliferation of cellular phones worldwide, users have
demonstrated an enjoyment of the mobility and freedom of wireless systems.
We try to provide the best price/performance ratio for our class of
products by, where possible, combining industry standardized wireless
communication equipment, such as 802.11b equipment, with enhanced range,
functionality and robustness. The goal is to provide higher quality products
that can be utilized under the demanding conditions required by large-scale
service providers while keeping the price of the equipment at a range that
permits a relatively rapid payback of investment by our customers. Because our
proprietary technology enables our systems to transmit over longer distances
than competing product designs, service providers, businesses and other
enterprises require fewer units to cover a specified area. As a result, they are
able to reduce both their initial and incremental capital expenditures for
network deployment.
We offer a broad range of systems that enable service providers,
businesses and other enterprises to create complete broadband wireless networks
that connect end-users to the fiber backbone. Our point-to-point systems are
primarily used within the backhaul segments of networks and also provide last
mile access to large businesses. Our point-to-multipoint systems are used
primarily to provide last mile access to small to mid-sized businesses and
residential users. Many of our systems use similar radio frequency technology,
digital signal processing and network management software. We believe this
design commonality offers service providers, businesses and other enterprises
higher end-to-end performance, lower equipment costs and lower training and
maintenance costs.
Markets which are benefiting from the use of our license-free wireless
equipment include:
o Service providers such as WISPs who utilize fixed wireless
connectivity to offer broadband connectivity to their
customers
o Telecommunications carriers that can utilize our products to
offer enhanced services or to fill in gaps in their existing
networks quickly and cost effectively
o Service providers or enterprises that need high speed
connectivity between two or more points such as linking the
LANs of two buildings
o Operators of Hot Spots who utilize our equipment to provide
high speed mobile connectivity in high density areas such as
airports, convention centers and downtown areas
o Government, military or emergency service providers who
utilize our equipment in order to provide a rapidly deployable
high speed data distribution system in the event that existing
6
communication systems are inadequate or unavailable or as a
redundant back up to their primary communication systems
o Cities and towns wishing to provide Hot Spots and Hot Zones
o State and local government requiring data interconnectivity
for education, medical facilities, and general governmental
requirements
Our broadband wireless access systems have various disadvantages and
limitations. For example, the broadband wireless access industry is technology
intensive and requires us to continually develop new products or product
enhancements in order for us to remain competitive.
WiMax is a highly publicized wireless development that is creating
significant disruption in our industry. Although we are developing our own WiMax
products, it is difficult to determine the impact that WiMax will have on our
industry and thus it is difficult to decide how much of our resources should be
applied to WiMax.
In addition, in contrast to mobile wireless access solutions, our systems
require line-of-sight installation, which often requires the end-user to obtain
roof rights from third parties. Since we focus primarily on license-free bands,
our systems may also experience problems due to radio signal interference, which
may occur if multiple wireless systems are operating on the same radio
frequencies and in the same geographic areas as our systems. Signal fade due to
rain is a significant limiting factor for the operation of our products that
operate in the higher 24 GHz and 60 GHz frequencies. Certain aspects of our
product line can be substituted with off the shelf WLAN products which have been
subjected to extreme commoditization and price erosion over the last few years.
Such products are extremely low cost and can either cause downward pressure on
the prices that we can receive in the market place for our products and, in some
cases, even replace our products entirely.
Strategy
Our objective is to be a leading global provider of broadband wireless
access systems operating in the license-free frequencies. Our strategy to
accomplish this objective is to:
Capitalize on our technology expertise to rapidly introduce new products.
Our team of engineers has multi-disciplinary technical capabilities, including
radio frequency technology spanning from microwave to millimeter waves as well
as digital, software and networking expertise. We have dramatically enhanced our
software development capabilities with the acquisition of KarlNet, Inc. during
the second quarter of 2004. We believe integrating these capabilities is highly
complex, and we intend to continue to take advantage of our technology expertise
to introduce product enhancements and new products in a rapid and cost effective
manner. As systems become more complex and sophisticated and particularly as
systems operate at higher data rates and frequencies, we believe that it will
become increasingly difficult for organizations without our breadth of skills to
be competitive in product development.
Evolve our direct sales model and direct relationship with our end
customers into a channel strategy with value add partners. Due to our direct
sales model, we have relationships with many of our end customers. As a result
of this, we believe that we have closer and more sustainable relationships and
generate more product loyalty. In addition, by maintaining direct contact with
the end users we believe that we remain more attuned to the limitations of
existing technology and opportunities for new product development. Although we
plan to continue to directly support and sell to major and strategic accounts,
we are becoming more actively involved with partners who offer much greater
exposure into opportunities than we can develop alone. We are working with these
partners to leverage our sales people and technical knowledge to pursue a
greater number of opportunities for our solutions.
Expand our sales efforts outside of the United States and establish
international channels of distribution. Currently approximately 74% of our
revenues are generated by the sale of products within the United States. We
believe that markets outside of the United States actually offer better market
potential than what exists inside the United States because there is
significantly less deployed communications infrastructure throughout much of the
world. While we have had limited success in our overseas efforts to date, we
believe that our products are competitive in the overseas markets. We believe
that results to date have been limited in some part due to our application of
our direct sales model into overseas markets. We believe that establishing
distribution channels may be a better system for offering our products in
overseas markets and have recently begun developing such
7
distribution channels. It is still too early for us to ascertain if the use of
local distributors will improve our overseas revenues.
Expand through acquisitions. We intend to pursue acquisitions of
complementary businesses, technologies, products or services to expand our
presence in the broadband wireless access market. We are currently integrating
the operations, customer bases, and product lines from KarlNet and Terabeam. In
particular, we are working to integrate Terabeam's millimeter product line with
the millimeter back-haul products acquired as the result of the Young Design,
Inc. - Telaxis Communications Corporation merger. Our RAN and Link EX, Link 4X,
and Link CX product lines are a result of technology purchases from InterWAVE
Communications in May 2002 and March 2003, respectively. Our Ricochet
acquisition expanded our business into services.
Products
Equipment Business
We have two primary product lines: high-speed point-to-point products and
point-to-multipoint products. In 2004, point-to-point products accounted for
approximately 28% of our revenues and our point-to-multipoint products accounted
for approximately 72% of our revenues. Our best selling point-to-point products
are our Link CX and Marquee Bridge, and our best selling point-to-multipoint
products are our AP-Plus and EtherAnt II and Marquee. In addition, as a result
of the KarlNet acquisition, we now offer standalone software solutions. Our
Terabeam acquisition has enabled us to offer millimeter wave subsystems as well
as component parts to government, military, and other customers.
Services Business
Our acquisition of Ricochet expanded our business into mobile Non-Line of
Sight (NLOS) wireless communication services. We currently operate the
Ricochet(R) network in Denver, Colorado, San Diego, California, and Aurora,
Colorado. We currently have over 8,000 paying subscribers. Commencement of
service in Aurora in the fourth quarter of 2004 was our first expansion of the
Ricochet(R) network. We are currently considering numerous other markets in
which we may begin to offer Ricochet(R) service.
High-Speed Point-to-Point Products
Point-to-point systems are used to bridge networks from one location to
another ("Bridging") or carry data traffic from remote locations to a service
provider's core network ("Backhaul"). Each of our point-to-point systems
consists of identical piece(s) of equipment deployed at each end of the desired
link. Each piece of equipment is first connected to an end-user's network by a
cable and a connector and the radio unit and antennas are positioned to have
clear line of sight to each other, usually on a rooftop or tower. All of our
point-to-point products are designed for the radio unit to be deployed as close
to the antenna as possible to minimize cable cost and loss of the radio signal.
Several units are available with an integrated antenna as an option to maximize
efficiency and ease of installation. The two antennas are then aimed at one
another to create a wireless connection between the two locations. By using
multiple systems, an operator can connect more than two locations to form a more
extensive network. Our products offer a variety of transmission speeds and radio
frequencies. The table below summarizes the features of our current products:
------------------------------------------------------------------------
PRODUCT NAME DATA RATE FREQUENCY
------------------------------------------------------------------------
BRIB (Bridge in a Box) 4 Mbps half duplex 2.4 GHz
11 Channels
------------------------------------------------------------------------
EtherLeap(R) 4 Mbps half duplex 24 GHz
13 channels
------------------------------------------------------------------------
Link EX 8 Mbps full duplex UNII (5.2/5.7 GHz)
(16 Mbps aggregate) 8 channels
------------------------------------------------------------------------
Link 4X Four (4) E-1 circuits UNII (5.2/5.7 GHz)
8 channels
------------------------------------------------------------------------
Link CX 45 Mbps full duplex/DS3 5.3 GHz or 5.7 GHz
2 channels
------------------------------------------------------------------------
GigaLink(R) OC-3, OC-12 or 1.25 60 GHz
Gbps full duplex
------------------------------------------------------------------------
Marquee 24 Mbps half-duplex 2.4 GHz, 4.9 GHz and
5.8 GHz
------------------------------------------------------------------------
Avara(R) 100 Mbps full duplex Optics (light)
850 nm
------------------------------------------------------------------------
8
BRIB and EtherLeap(R). These point-to-point products have the same central
radio technology inside them and differ only in the frequency at which they
operate. All units utilize direct sequence spread spectrum (DSSS) technology for
improved interference resistance. These units are designed to be pole mounted
with data and power carried along a single line of weatherized cable allowing
for quick and easy deployment. These products share the same feature-rich radio
management and monitoring software interface.
The BRIB has a line of sight range of about 3 miles (longer range versions
are available) and is an excellent low cost solution for low density deployments
or for an enterprise connecting two buildings. The EtherLeap has a range of
about 1 to 3 miles and is used primarily by organizations seeking a higher level
of security or interference resistance or in extremely radio frequency hostile
environment where the other license-free frequencies are all occupied.
Link EX and Link 4X. The Link EX product consists of a pole-mounted radio
that gets power and data from a single weatherized cable. The Link EX offers 8
Mbps full duplex connectivity with a line-of-sight range of up to 10 miles. Full
duplex operation means that data is passed in both directions at the same time.
This is important in latency sensitive applications such as voice or streaming
video applications. The Link 4X product incorporates a Link EX with an indoor
unit that channelizes the Link EX's data stream into four (4) E-1 channels for
easy integration into phone systems based upon European telco transmission
standards. The Link EX or 4X is used primarily by carriers with small to
mid-size backhaul needs.
Link CX. The Link CX product is primarily deployed to enable service
providers, businesses and other enterprises to expand or establish private
networks by bridging Internet and network traffic among multiple facilities. In
addition, the Link CX is also used to provide fiber extension and last mile
access. The Link CX has a line of sight range of up to 25 miles and offers
extremely feature rich management and monitoring capabilities.
Gigalink(R). The Gigalink(R) product is a compact, easily deployed product
operating in the 60 GHz millimeter-wave band between 57 GHz and 64 GHz. It
enables fiberless transmission of data, voice and video communication at
variable fiber optic data rates from OC-3 (155 Mbps) to OC-12 (622 Mbps) and
Ethernet traffic at speeds up to 1.25 Gbps full duplex. It is engineered to
provide link distances of up to 1,000 meters with 99.99% availability, depending
upon prevailing rainfall rates in the geographic regions where it will be used.
Marquee. The Marquee product is an advanced point-to-point and
point-to-multipoint system utilizing OFDM modulation. Marquee also incorporates
our TurboCell(R) software which optimizes the performance of Marquee in outdoor
and extended range applications. Significant features of Marquee include
non-line of sight (NLOS) propagation, dynamic active polling, packet
aggregation, dynamic bandwidth shaping on the base and remote side, power over
Ethernet, and a single piece, easy to install form factor. We have introduced
Marquee products operating at 4.9 and 5.8 GHz and expect to introduce a 2.4 GHz
version of Marquee in 2005. We believe that this product was the first product
certified by the Federal Communications Commission for operating in the new
"public safety" 4.9 GHz radio band. This product thus enables public safety
entities to benefit from the wireless broadband capabilities available using
this recently allocated public safety band.
Avara(R). Our Avara(R) product is the latest in a line of high-bandwidth,
carrier-grade systems developed by Terabeam Wireless. Avara is unique among our
solutions in that it operates via free-space optics and thus does not use radio
waves. The system is a cost-effective solution for high-bandwidth connectivity
at ranges less than one kilometer and is ideal for deployments such as mobile
wireless backhaul, single customer access, multi-tenant building access,
enterprise E1/T1, Fast Ethernet extension and LAN-to-LAN or campus connectivity.
Avara operates at a wavelength of 850 nm and is completely eye-safe, with a
Class 1 IEC/CDRH rating, which means no warning labels or access restrictions
are required.
9
Point-to-multipoint products
Our point-to-multipoint systems are designed to enable service providers,
businesses and other enterprises to address the last mile bottleneck. Our
systems enable service providers to cost-effectively connect end-users to a
central hub. Businesses, governmental agencies and other enterprises may also
use these systems to cost-effectively connect multiple facilities within their
private networks. Our point-to-multipoint systems permit cumulative connectivity
of up to 25 Mbps from a single base unit and can support hundreds of customers
from a single location. These systems can operate over distances of 10 miles or
more providing for extremely large areas of coverage. Since our
point-to-multipoint systems require line of sight to connect, actual coverage is
dictated by the ability to achieve actual line of sight from the base site to
the end customer's antenna.
Our point-to-multipoint system are typically deployed in a hub and spoke
configuration consisting of (1) a single central base station, and (2) customer
premise equipment (CPE) located at each end-user's location. The Base Station
wirelessly connects to the remote CPE. The Base Station offers high-speed
two-way data communications to each end-user using a technique called time
division duplexing (TDD). The Base Station can operate in 2.4 GHz or 5.8 GHz
frequencies, in various geographic configurations and can be divided in discrete
sectors to permit supporting hundreds of clients from a single base station. The
Base Station is able to connect to the central office of a service provider
using land line connectivity for both our point-to-point and our
point-to-multipoint technologies.
Our most popular CPE, our EtherAnt-II product, transmits and receives data
between the end-user and the Base Station. The EtherAnt-II is extremely easy to
install and uses a single weatherized Category 5 Ethernet cable carrying both
data and power to the pole-mounted antenna with integrated radio. Our
proprietary software allows for remote management and monitoring of an unlimited
number of EtherAnt-IIs from a single location. In December 2004, we began our
initial introduction of our EtherAnt-3. The EtherAnt-3 incorporates much of the
performance of the EtherAnt-II with the added advantage of being upgradeable to
a TurboCell(R) service solely with a software upgrade that can be performed in
the field.
Finally, we offer certain software elements of our point-to-multipoint
systems as a standalone product to select original equipment manufacturer
customers. KarlNet developed and is continuing to improve our
point-to-multipoint software offerings. This results in both enhanced wireless
products for us to sell as well as attractive potential revenue streams from
sales of the standalone software. To date, over 1.0 million wireless devices
running our software have been sold. We offer both feature rich solutions
utilizing industry standard 802.11a/b/g software as well as our proprietary
TurboCell(R) software. TurboCell software permits industry standard 802.11a/b/g
hardware to run on a proprietary protocol that optimizes the wireless
performance in outdoor and extended range applications. Advantages of TurboCell
over standard 802.11a/b/g include active polling, packet aggregation, dynamic
bandwidth shaping, enhanced security, and resolution of the "hidden node"
problem.
Sales and Marketing
Equipment Business
We sell our products domestically and internationally to service
providers, government agencies, businesses and other enterprises directly
through our sales force and indirectly through distributors and value-added
resellers. We focus our marketing efforts on supporting our direct sales force,
distributors, value-added resellers and systems integrators. We also seek to
stimulate market demand by increasing brand awareness and educating potential
customers about the advantages of using our products. We regularly hold wireless
training seminars to introduce our customers and potential customers to the
technologies and theories behind wireless data communications.
We focus primarily on the domestic market but have recently increased our
efforts to improve sales outside of the United States. In the United States we
primarily sell directly through our internal sales force but also work with
value added resellers (VARs) and system integrators/installers. Overseas, we
currently sell directly but we are increasing our number of international
distributors and VARs and we expect that indirect channels will become an
increasingly large portion of our international sales.
10
Services Business
Our service business is currently operated only in the United States in
Denver, Colorado and Aurora, Colorado and San Diego, California. We are actively
considering the expansion of the Ricochet(R) network, particularly in those
cities where Ricochet infrastructure has previously been deployed. In addition
to our current model of providing high speed mobile wireless Internet services
to primarily individuals, we are considering offering those services to various
municipal departments and personnel for mobile communications, especially
homeland security, fire, safety, health and welfare requirements. Finally, we
are exploring opportunities to offer the Ricochet services on a wholesale level
to parties interested in reselling our services on a private label or co-labeled
basis.
Customer Service
We are committed to providing our customers with high levels of service
and support both in our equipment and services businesses. We provide training,
technical assistance and customer support on the installation, management, use
and testing of our products. We also provide a 12-month warranty for our systems
and offer both in-warranty and out-of-warranty repair services. Our repair
center is staffed with technicians who work to identify potential problems and
repair equipment.
Customers
We have a very diversified base of customers and end-users consisting of
service providers, government agencies, businesses and other enterprises. Most
of our business is conducted with customers who expect delivery very quickly
after placing their orders with us. Although our business is not strongly
seasonal, we generally see a higher level of activity in the second and third
quarter of each year as warmer weather in the Northern Hemisphere makes outdoor
installations of our equipment easier. We typically see a relative decline in
our business in the fourth quarter of each year, particularly in the month of
December.
During the years ended December 31, 2004, 2003, and 2002, no customers
accounted for more than 10% of sales.
For the years ended December 31, 2004, 2003, and 2002, sales to customers
outside of the United States and Canada accounted for approximately 18%, 16%,
and 10%, respectively, of revenues. As of December 31, 2004, the Company had a
single employee and minor assets located outside of the United States.
Our firm backlog as of December 31, 2004, 2003, and 2002 was approximately
$1,450,000, $1,175,000, and $745,000, respectively.
Research and Development
Our research and development efforts are focused on improving the
functionality and performance of our existing products as well as developing new
products to meet the changing needs of our diverse base of customers and
end-users. We devote a substantial portion of our resources to developing new
products, enhancing existing products, expanding and improving our core wireless
technologies and strengthening our technological expertise. We are currently
pursuing the following research and development initiatives:
o Developing point-to-multipoint systems in different
frequencies and with lower price points
o Adapting our products to additional frequencies and interfaces
o Developing higher speed products
o Enhancing our products with new software features as well as
developing new software architectures that will increase
capacity of our products and their overall performance.
We are currently developing Logan, our next generation software platform,
which will be our building block for future product introductions. We expect to
introduce a higher speed version of our Marquee products, a higher powered
version of our Marquee 4.9 product for the public safety/homeland defense market
and a 2.4 GHz version of Marquee. Logan will also be the software foundation of
our 802.16 WiMAX-compliant product currently under development. We are also
exploring the use of Logan as the foundation for a next generation wireless mesh
product that would utilize Ricochet intellectual property.
11
In addition, we are working to enhance our high end point-to-point
offering with projects to develop a lower cost gigabit Ethernet 60 GHz product
and a 70/80 GHz product. Finally, we are considering the introduction of a low
cost self install Free Space Optics product.
We devote a substantial portion of our resources to developing new
products, enhancing existing products, expanding and improving our core wireless
technologies, and strengthening our technological expertise. We invested
approximately $3.5 million ($2.9 million of expenses and $0.6 million of
capitalized software), $1.7 million and $0.4 million in research and development
activities in 2004, 2003, and 2002, respectively.
Manufacturing
We outsource much of our manufacturing to a variety of contract
manufacturers. We complete the final assembly and testing of our products at our
Falls Church, Virginia facility, our North Andover, Massachusetts facility and
to a lesser extent, our Sunnyvale, California facility. Our in-house
manufacturing consists primarily of pilot production, final product assembly and
product testing. Our strategy is to outsource manufacturing and procurement of
component parts to manufacturers with the expertise and ability to achieve the
cost reductions associated with volume manufacturing and to respond quickly to
orders, while maintaining our quality standards. This allows us to focus our
internal resources on developing new products.
We depend on single or limited source suppliers for several key components
used in our products. Several of these components have recently been
discontinued by their manufacturers, and as a result, we have been forced to
purchase large quantities of sub-components for these products. We believe that
our current inventory of discontinued subcomponents is adequate for the expected
volume of products to be produced in the future; however if the required volume
of products exceeds expectations, we may be forced to find replacement parts or
redesign the products, which may add significantly to our costs. We are in the
process of re-designing those products which use the old parts with a current
generation of parts. Conversely, if the actual volume of products is less than
expected, we may end up holding inventories of sub-components that will not have
any value to us. As of December 31, 2004, our inventory and commitments for
large quantities of discontinued parts was less than $150,000.
Our WLAN products are currently dependent on Agere System's ("Agere") WLAN
division as our primary sources for proprietary 802.11 chips, modules and cards.
Agere has formally announced that they are discontinuing their WLAN offering and
we are in the process of migrating to alternative WLAN platforms. In addition,
our RAN and Link EX, Link 4X, and Link CX products all incorporate one or more
single source components. If, for any reason, a supplier fails to meet our
quantity or quality requirements, or stops selling components to us or our
contract manufacturers at commercially reasonable prices, we could experience
significant production delays and cost increases, as well as higher warranty
expenses and product reputation problems. Because the key components and
assemblies of our products are complex, difficult to manufacture and require
long lead times, we may have difficulty finding alternative suppliers to produce
our components and assemblies on a timely basis. We have experienced shortages
of some of these components in the past, which delayed related revenue, and we
may experience shortages in the future. In addition, because the majority of our
products have a short sales cycle of between 30 and 90 days, we may have
difficulty in making accurate and reliable forecasts of product needs. As a
result, we could experience shortages in supply, which could delay or decrease
revenue because our customers may cancel their orders or choose a competitor for
their future needs.
We have limited manufacturing capability and limited experience in large
scale or foreign manufacturing. There can be no assurance that we will be able
to develop or contract for additional manufacturing capacity on acceptable terms
on a timely basis. In addition, in order to compete successfully, we will need
to achieve significant product cost reductions. Although we intend to achieve
cost reductions through engineering improvements, production economies, and
manufacturing at lower cost locations, including outside the United States,
there can be no assurance that we will be able to do so. In order to remain
competitive, we must continue to introduce new products and processes into our
manufacturing environment, and there can be no assurance that any such new
products will not create obsolete inventories related to older products.
We have been producing our Marquee and Avara (R) products for a relatively
short time. Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in developing industries,
particularly companies in relatively new and rapidly evolving markets. These
risks include:
12
o an evolving and unpredictable business model;
o uncertain acceptance of new products and services;
o competition; and
o challenges in managing growth.
We cannot assure you that we will succeed in addressing these risks. If we
fail to do so, our revenue and operating results could be materially harmed.
Competition
The markets for broadband wireless systems and WLAN are extremely
competitive and we expect that competition will intensify in the future.
Increased competition could adversely affect our business and operating results
through pricing pressures, the loss of market share and other factors. The
principal competitive factors affecting wireless local area networking and fixed
wireless markets and WLAN include the following: data throughput; effective
radio frequency coverage area; interference immunity; network security; network
scalability; price; integration with voice technology; wireless networking
protocol sophistication; ability to support industry standards; roaming
capability; power consumption; product miniaturization; product reliability;
ease of use; product costs; product features and applications; product time to
market; product certifications; changes to government regulations with respect
to each country served and related to the use of radio spectrum; brand
recognition; OEM partnerships; marketing alliances; manufacturing capabilities
and experience; effective distribution channels; and company reputation.
With our broadband products, we could be at a disadvantage to competitors,
particularly Alcatel, Business Networks AB, Alvarion, Ceragon Networks, AirSpan
Networks, Inc., Cisco Systems, Proxim and Stratex Networks, which have broader
distribution channels, brand recognition, extensive patent portfolios and more
diversified product lines. In addition, broadband wireless access solutions
compete with other high-speed solutions such as cable modem technologies,
satellite technologies, digital subscriber lines and fiber optic cables. Many of
these alternative technologies can take advantage of existing installed
infrastructure and have achieved significantly greater market acceptance and
penetration than broadband wireless access technologies. Other factors that
influence the choice between wireless and wire line products include reliability
and security, speed and volume capacity, cost effectiveness, availability of
sufficient frequencies and geographic suitability. We expect to face increasing
competitive pressures from both current and future technologies in the broadband
access market.
We have extensive competition in our WLAN business, including without
limitation, Cisco (including LinkSys), D-Link, Enterasys Networks, Harris
Corporation, Intel Corporation, Intersil Corporation, Nokia Corporation, Proxim,
Symbol Technologies and 3Com Corporation. Additionally, numerous companies have
announced their intention to develop competing products in both the commercial
wireless and home networking markets, including several Asia-based companies
offering low-price IEEE 802.11a/b/g products. We could also face future
competition from companies that offer products which replace network adapters or
offer alternative communications solutions, or from large computer companies, PC
peripheral companies, as well as other large networking equipment companies.
Furthermore, we could face competition from certain of our OEM customers, which
have, or could acquire, wireless engineering and product development
capabilities, or might elect to offer competing technologies. We can offer no
assurance that we will be able to compete successfully against these competitors
or those competitive pressures we face will not adversely affect our business or
operating results.
Many of our present and potential competitors have substantially greater
financial, marketing, technical and other resources with which to pursue
engineering, manufacturing, marketing, and distribution of their products. These
competitors may succeed in establishing technology standards or strategic
alliances in the broadband wireless or WLAN markets, obtain more rapid market
acceptance for their products, or otherwise gain a competitive advantage. We can
offer no assurance that we will succeed in developing products or technologies
that are more effective than those developed by our competitors. Furthermore, we
compete with companies that have high volume manufacturing and extensive
marketing and distribution capabilities, areas in which we have only limited
experience. We can offer no assurance that we will be able to compete
successfully against existing and new competitors as wireless markets evolve and
the level of competition increases.
13
Intellectual Property
Our success depends on the preservation and protection of our product and
manufacturing process designs and other proprietary technology. We use a variety
of intellectual property in the development and manufacturing of our products,
but do not believe that any of our intellectual property is individually
critical to our current operations. Taken as a whole, however, we believe our
intellectual property rights are significant. In addition to our registered
intellectual property, we also use proprietary technology in our business. This
technology includes internally developed proprietary comprehensive network
management software and specialized knowledge and technical expertise that have
been developed over time by our employees.
In order to maintain the confidential nature of this technology, we have
chosen to protect it by generally limiting access to it, treating portions of it
as trade secrets and obtaining confidentiality or non-disclosure agreements from
persons who are given access to it. All of our employees have signed our
standard confidentiality agreement, which prohibits them from disclosing our
confidential information, technology developments and business practices, as
well as any confidential information entrusted to us by other parties.
We also have two intellectual property license agreements with interWAVE
Communications which grant us a non-exclusive royalty-free perpetual license to
use some of its intellectual property, including patents, patent applications,
copyrights, software, technology and proprietary information related to our RAN
and Link EX, Link 4X, and Link CX products.
We increased our patent portfolio substantially through the acquisitions
of KarlNet, Terabeam and Ricochet. While we do not believe that any of these
patents individually is material to our current equipment business, we believe
our patent portfolio is valuable. We continue work to procure additional patents
that are beneficial to our business and are looking at ways to optimize the
value of the patents that we have recently acquired. We currently do not receive
any material amounts from licensing any of our patents.
Government Regulation
Our products are subject to extensive telecommunications-based regulation
by the United States and foreign laws and international treaties.
In the United States, we are subject to various Federal Communications
Commission, or FCC, rules and regulations. Current FCC regulations permit
license-free operation in certain FCC-certified bands in the radio spectrum. Our
spread spectrum wireless products are certified for unlicensed operation in the
2.4 -- 2.4835 GHz, 5.15 -- 5.35 GHz, 5.725 -- 5.825 GHz, 24.05-24.25 GHz and
57.05-64 GHz frequency bands. Operation in these frequency bands is governed by
rules set forth in Part 15 of the FCC regulations. The Part 15 rules are
designed to minimize the probability of interference to other users of the
spectrum and, thus, accord Part 15 systems secondary status in the frequency. In
the event that there is interference between a primary user and a Part 15 user,
a higher priority user can require the Part 15 user to curtail transmissions
that create interference. In this regard, if users of our products experience
excessive interference from primary users, market acceptance of our products
could be adversely affected, which could materially and adversely affect our
business and operating results. The FCC, however, has established certain
standards that create an irrefutable presumption of noninterference for Part 15
users and we believe that our products comply with such requirements. There can
be no assurance that the occurrence of regulatory changes, including changes in
the allocation of available frequency spectrum, changes in the use of allocated
frequency spectrum, or modification to the standards establishing an irrefutable
presumption for unlicensed Part 15 users, would not significantly affect our
operations by rendering current products obsolete, restricting the applications
and markets served by our products or increasing the opportunity for additional
competition.
Our products are also subject to regulatory requirements in international
markets and, therefore, we must monitor the development of spread spectrum and
other radio frequency regulations in certain countries that represent potential
markets for our products. We must conform our products to a variety of
regulatory requirements and protocols established to, among other things, avoid
interference among users of radio frequencies and to permit interconnection of
equipment. Each country has different regulations and a different regulatory
process. In order for our products to be used in some jurisdictions, regulatory
approval and, in some cases, specific country compliance testing and re-testing
may be required. In addition, domestic and international authorities continue to
14
regulate the allocation and auction of the radio frequency spectrum. These
regulations have a direct impact on us, because our licensed products can be
marketed only if permitted by suitable frequency allocations, auctions and
regulations. The implementation of these regulations may delay our end-users in
deploying their systems, which could, in turn, lead to delays in orders of our
products by our customers and end-users. The delays inherent in this regulatory
approval process may force us to reschedule, postpone or cancel the installation
of our products by our customers, which may result in significant reductions in
our sales.
While there can be no assurance that we will be able to comply with
regulations in any particular country, we will design our products to minimize
the design modifications required to meet various 2.4 GHz and 5 GHz
international spread spectrum regulations. In addition, we will seek to obtain
international certifications for our product line in countries where there are
substantial markets for wireless networking systems. Changes in, or the failure
by us to comply with, applicable domestic and international regulations could
materially adversely affect our business and operating results. In addition,
with respect to those countries that do not follow FCC regulations, we may need
to modify our products to meet local rules and regulations.
Regulatory changes by the FCC or by regulatory agencies outside the United
States, including changes in the allocation of available frequency spectrum,
could significantly affect our operations by restricting our development
efforts, rendering current products obsolete or increasing the opportunity for
additional competition. Several changes by the FCC were approved within the last
eight years including changes in the allocation and use of available frequency
spectrum, as well as the granting of an interim waiver. These approved changes
could create opportunities for other wireless networking products and services.
There can be no assurance that new regulations will not be promulgated that
could materially and adversely affect our business and operating results. It is
possible that the United States and other jurisdictions will adopt new laws and
regulations affecting the pricing, characteristics and quality of broadband
wireless systems and products. Increased government regulations could:
o decrease the growth of the broadband wireless industry;
o hinder our ability to conduct business internationally;
o reduce our revenues;
o increase the costs and pricing of our products;
o increase our operating expenses; and
o expose us to significant liabilities.
Any of these events or circumstances could seriously harm our business and
results of operations.
We are also subject to U.S. government export controls. We rely on our
customers to inform us when they plan to deliver our products to other
countries, and we regularly inform our customers of the export controls with
which they must comply. However, a violation of U.S. export controls could
seriously harm our business.
Employees
As of March 18, 2005, we had 123 employees, consisting of 25 in
manufacturing, 42 in research and development, 36 in sales, marketing and
customer service, and 20 in finance and administration. We had 111 employees in
our equipment business and 12 employees in our services business. We are not a
party to any collective bargaining agreement. We believe that relations with our
employees are good.
Item 2. Properties.
Properties
We lease approximately 175,000 square feet of facilities in nine
locations. Our headquarters is an approximately 15,000 square foot facility
located in Falls Church, Virginia. This facility accommodates the following
departments: senior management, administration, finance, marketing,
manufacturing, sales and a small amount of research and development. This
property is leased from an affiliate of ours on terms that are believed to be at
market rates. The term of the lease for this facility expires on December 31,
2010.
15
We lease an approximately 32,000 square foot facility located in South
Deerfield, Massachusetts. This facility accommodates legal and corporate affairs
and a research and development area as well as limited assembly capabilities.
The term of the lease for this facility expires on October 31, 2005. We do not
plan on extending this lease and are in the process of locating and leasing a
different facility. We believe we will be able to locate a suitable facility
without undue difficulty.
We lease an approximately 18,000 square foot facility located in
Sunnyvale, California. This facility accommodates sales as well as technical
support and final manufacturing, testing, and repair of our RAN and Link EX,
Link 4X, and Link CX products. The term of the lease for this facility expires
on March 31, 2007.
We lease an approximately 10,000 square feet facility located in Dublin,
Ohio. This facility accommodates our primary software development and sales
operations and personnel. The lease is comprised of two locations within the
same building expiring at different times. The term of the lease for 7,000
square feet expires on January 31, 2008. The term of the lease for 3,000 square
feet expires on January 31, 2006.
We lease an approximately 11,000 square feet facility located in North
Andover, Massachusetts. This facility accommodates approximately 25 engineering,
development, manufacturing, and associated staff for our Harmonix Division. The
term of the lease expires August 31, 2005. We do not expect to extend our lease
of this facility so are in the process of locating and leasing a different
facility. We believe we will be able to locate a suitable facility without undue
difficulty.
Our Ricochet Networks subsidiary leases an approximately 5,000 square feet
facility located in Denver, Colorado. This facility accommodates engineering,
development, sales, and marketing operations, and associated staff, for our
Ricochet Networks subsidiary. The term of the lease expires on January 31, 2008.
We have guaranteed the obligations of Ricochet Networks under this lease.
Our Ricochet Networks subsidiary leases approximately 84,000 square feet
located in two facilities in Denver, Colorado and one facility in Tulsa,
Oklahoma. These facilities provide warehouse space for Ricochet's inventory. The
two Denver facilities are leased on a month-to-month basis. The term of the
lease for the Tulsa facility expires on December 31, 2005. If any of these
facilities were to become unavailable for our continued use, we believe we could
locate suitable new warehouse space without undue difficulty.
Primarily with respect to our Ricochet Networks subsidiary, we or Ricochet
directly will lease and has been leasing space in and around each of the areas
where it provides service as necessary to house switches, other equipment, and
personnel.
There are a number of facilities leased by Terabeam Corporation prior to
our acquiring that company that are not presently being used and that we have no
present plans to use. We have been negotiating with the landlords of the various
facilities for the early termination of those leases.
Item 3. Legal Proceedings.
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
16
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. 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 the 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.
Consummation of the proposed settlement remains conditioned on, among
other things, receipt of both preliminary and final court approval. Formal
settlement documents were submitted to the court in June 2004, together with a
motion asking the court to preliminarily approve the form of settlement. Certain
underwriters who were named as defendants in the settling cases, and who are not
parties to the proposed settlement, opposed preliminary approval of the proposed
settlement of those cases. On February 15, 2005, the court issued an order
preliminarily approving the proposed settlement in all respects but one. The
plaintiffs and the issuer defendants are in the process of assessing whether to
proceed with the proposed settlement, as modified by the court. If the
plaintiffs and the issuer defendants elect to proceed with the proposed
settlement, as modified by the court, they will submit revised settlement
documents to the court. The underwriter defendants may then have an opportunity
to object to the revised settlement documents. 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.
17
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 we cannot predict the outcome of such claims
and legal actions with certainty, we believe that such matters should not result
in any liability which would have a material adverse affect on our business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of stockholders during the three
months ended December 31, 2004.
18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market Information
Our common stock is currently quoted on the Nasdaq SmallCap Market under
the symbol "YDIW." The table below shows, for the calendar year quarters
indicated, the reported high and low sale prices of our common stock, as
reported on the Nasdaq SmallCap Market from January 1, 2003 until March 31, 2003
and again from June 30, 2004 to December 31, 2004. The table below shows, for
the period from April 1, 2003 through June 29, 2004, the reported high and low
bid quotations for our common stock on the OTC Bulletin Board. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not necessarily represent actual transactions. In each case, this
information is based on published financial sources. Our common stock prices and
bids have been adjusted to reflect the net 1 for 4 reverse stock split
implemented on July 9, 2003.
YDI Common Stock
----------------------
High Low
---- ---
2003
First Quarter $1.12 $0.44
Second Quarter $4.84 $0.60
Third Quarter $4.95 $3.00
Fourth Quarter $5.45 $3.05
2004
First Quarter $7.90 $3.60
Second Quarter $6.80 $3.60
Third Quarter $5.85 $1.96
Fourth Quarter $7.55 $2.15
As of March 18, 2005, the number of stockholders of record of our common
stock was approximately 234. We have never declared or paid any cash dividends
on any class of our common equity. We currently intend to retain any future
earnings to fund the development and growth of our business and currently do not
anticipate paying cash dividends in the foreseeable future.
Equity Compensation Plan Information
The following table and narrative provide information about our equity
compensation plans as of December 31, 2004. More information about our stock
options is contained in our financial statements, including the notes thereto,
included in this Annual Report on Form 10-K.
19
- ------------------------------------------------------------------------------------------------------------------
Number of securities Number of securities remaining
to be issued upon Weighted-average available for future issuance
exercise of exercise price of under equity compensation plans
outstanding options, outstanding options, (excluding securities reflected
warrants and rights warrants and rights (1) in column (a))
Plan category (1) (a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 970,831 $5.25 621,250 (2)
- ------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders 79,165 $2.10 0
- ------------------------------------------------------------------------------------------------------------------
Total 1,049,996 $5.01 621,250
- ------------------------------------------------------------------------------------------------------------------
- ------------
(1) This column does not reflect the options outstanding on December 31, 2004 to
purchase 121,638 shares of our common stock at an exercise price of $1.60 per
share that we assumed in connection with our combination with Young Design, Inc.
on April 1, 2003. Those options had been issued under an equity compensation
plan that was approved by Young Design's stockholders. No future grants of
options may be made under that plan.
(2) Consists of shares available for future issuance under our 2004 Stock Plan.
On July 17, 2001, our board of directors adopted our 2001 Nonqualified
Stock Plan and reserved 375,000 shares of our common stock for issuance pursuant
to that plan. The 2001 plan provides for the grant of non-qualified stock
options, performance share awards, and stock awards (restricted or unrestricted)
to directors, officers, and employees. The compensation committee of the board
of directors generally administers the 2001 plan and recommends to the board of
directors or decides itself the terms of stock rights granted, including the
exercise price, the number of shares that may be purchased under individual
option awards, and the vesting period of options. The board of directors may
amend, modify, or terminate the 2001 stock plan at any time as long as the
amendment, modification, or termination does not impair the rights of plan
participants under outstanding options or other stock rights. Effective
September 9, 2004, the 2001 plan was amended to reduce the number of shares of
our common stock issuable thereunder to 175,764, which was the number of shares
subject to outstanding options as of that date. No further grants or awards will
be made pursuant to the 2001 plan.
Stock Repurchase
- -------------------------------------------------------------------------------------------------------------------
(d) Maximum
Number (or
Approximate Dollar
(a) Total (c) Total Number of Value) of Shares (or
Number of Shares (or Units) Units) that May Yet
Shares (or (b) Average Purchased as Part of Be Purchased Under
Units) Price Paid per Publicly Announced the Plans or
Period Purchased Share (or Unit) Plans or Programs Programs
- -------------------------------------------------------------------------------------------------------------------
Month #1 (October 1, 2004 - 0 N/A N/A N/A
October 31, 2004)
- -------------------------------------------------------------------------------------------------------------------
Month #2 (November 1, 2004 -
November 30, 2004) 0 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Month #3 (December 1, 2004 -
December 31, 2004) 500,000(1) $2.31 0 0
- -------------------------------------------------------------------------------------------------------------------
Total 500,000 $2.31 0(2) 0(2)
- -------------------------------------------------------------------------------------------------------------------
- ----------
(1) On December 17, 2004, we signed a stock purchase agreement pursuant to which
we agreed to repurchase 500,000 shares of our common stock from MTB Investment
Advisors, Inc. These 500,000 shares were issued to that investor in a private
placement in December 2003. The aggregate purchase price for this stock was
$1,155,000.
(2) We have not publicly announced any plan or program to repurchase any of our
common stock.
20
Item 6. Selected Financial Data.
The following selected historical consolidated financial data was derived
from our historical financial statements. The financial statements for the
fiscal year ended December 31, 2000 were audited by Reznick Fedder & Silverman,
independent accountants. The financial statements for the fiscal years ended
December 31, 2001 through 2004 were audited by Fitzgerald, Snyder, & Co., P.C.,
an independent registered public accounting firm. This information should be
read in conjunction with our management discussion and analysis of financial
condition and results of operations and our financial statements, including the
related notes, contained elsewhere in this annual report on Form 10-K.
Year Ended December 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue, net ....................................... $ 13,046 $ 14,314 $ 20,304 $ 27,241 $ 22,897
Gross profit ....................................... 6,673 5,028 7,928 11,527 9,483
Income (loss) from continuing operations ........... 2,248 125 947 300 (1,346)
Extraordinary item ................................. -- -- 89 4,347 --
Change in accounting ............................... -- -- 526 -- --
Net income (loss) applicable to common
stockholders ...................................... 2,248 125 1,562 4,647 (1,346)
Basic earnings (loss) per share from continuing
operations ........................................ 0.23 0.01 0.10 0.02 (0.07)
Basic - Extraordinary gain ......................... -- -- 0.01 0.35 --
Basic - Change in accounting ....................... -- -- 0.06 -- --
Basic earnings (loss) per share .................... 0.23 0.01 0.17 0.37 (0.07)
Diluted earnings (loss) per share from continuing
operations ........................................ 0.23 0.01 0.10 0.02 (0.07)
Diluted - Extraordinary gain ....................... -- -- 0.01 0.34 --
Diluted - Change in accounting ..................... -- -- 0.06 -- --
Diluted earnings (loss) per share .................. $ 0.23 $ 0.01 $ 0.17 $ 0.36 $ (0.07)
Shares used in computing basic earnings per share .. 9,568 9,375 9,375 12,571 19,792
Shares used in computing diluted earnings per share 9,568 9,375 9,375 12,841 19,792
December 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents and short term
investments ...................................... $ 1,219 $ 1,133 $ 939 $ 8,990 $40,737
Working capital ...................................... 2,793 2,111 2,946 12,577 41,532
Total assets ......................................... 4,806 6,898 8,572 20,719 77,284
Long-term obligations, less current portion .......... 10 1,568 1,402 1,298 1,270
Total stockholders' equity ........................... $ 2,870 $ 2,908 $ 4,508 $16,185 $65,991
During the second quarter of 2003, we recognized a one-time gain of
approximately $4.3 million due to the negative goodwill resulting from the Young
Design-Telaxis combination. During the second quarter of 2004, we acquired
KarlNet, Terabeam and Ricochet. These acquisitions (primarily Terabeam)
significantly strengthened our balance sheet while also increasing liabilities.
These acquisitions also increased our operating loss by more than $5.0 million
from the prior year. This increased operating loss was offset by the one-time
gain of approximately $3.7 million from the sale of Phazar stock in the fourth
quarter of 2004.
Our Quarterly Financial Data
Quarter
(in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------
2004 First Second Third Fourth
- ------------------------------------------------- ------- ------- ------- -------
Revenue ......................................... $ 6,017 $ 4,733 $ 6,370 $ 5,777
Gross profit .................................... 2,466 1,540 2,688 2,789
Net income (loss) ............................... 303 (1,605) (2,351) 2,307
Basic and diluted earnings (loss) per share ..... $ 0.02 $ (0.10) $ (0.09) $ 0.10
- -----------------------------------------------------------------------------------------------------------------------
21
Quarter
(in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------
2003 First Second Third Fourth
- --------------------------------------------- --------- --------- --------- ----------
Revenue ..................................... $ 6,436 $ 7,229 $ 8,029 $ 5,547
Gross profit ................................ 1,998 2,268 4,288 2,973
Income (loss) before extraordinary item ..... 106 (815) 1,053 (44)
Extraordinary item .......................... -- 4,347 -- --
Net income (loss) ........................... 106 3,532 1,053 (44)
Basic earnings (loss) per share before
extraordinary item ....................... 0.01 (0.06) 0.08 0.00
Basic earnings per share - Extraordinary
item ..................................... -- 0.32 -- --
Basic earnings per share .................... 0.01 0.26 0.08 0.00
Diluted earnings (loss) per share before
extraordinary item ....................... 0.01 (0.06) 0.07 0.00
Diluted earnings per share - extraordinary
item ..................................... -- 0.32 -- --
Diluted earnings per share .................. $ 0.01 $ 0.26 $ 0.07 $ 0.00
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) per share calculations for each of the quarters are based
on the weighted average shares outstanding for each period. The sum of the
quarters may not necessarily be equal to the full year earnings per share
amounts.
Item 7. 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 licensed-free wireless products 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. During 2003 and 2002, we made a strategic decision to expand our
product suite to include high bandwidth PTP backhaul products that would
complement our 802.11b PTM product offerings. Therefore rather than design such
a product on our own, we purchased inventory of RAN and Link CX, Link EX, and
Link 4X products and license rights to manufacture and sell these products.
These products continue to give us expanded sales growth within this large
product segment. Our PTP products primarily enable service providers,
businesses, and other enterprises to expand or establish private networks by
bridging data traffic among multiple facilities. In addition, we have developed
enhanced PTM systems that enable service providers, businesses, and other
enterprises to connect multiple facilities within a geographic area to a central
hub. We also 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, changed its name to YDI Wireless, Inc.
("YDI" or the "Company") and implemented a net 1 for 4 reverse stock split.
Effective May 13, 2004, we acquired KarlNet, Inc., a wireless software
development company. Effective June 22, 2004, we acquired Terabeam Corporation,
a wireless telecommunications company. Effective June 25,
22
2004, we 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 herein.
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.
Revenue Recognition
For our equipment business, we recognize revenue when a formal purchase
commitment has been received, shipment has been made to the customer, collection
is probable and, if contractually required, a customer's acceptance has been
received. For our services business, we recognize revenue when the customer pays
for and then has access to our network for the current fiscal period. Any funds
the customer pays for future fiscal periods are treated as deferred revenue and
recognized in the future fiscal periods for which the customer has access to our
network.
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. The operations of the acquired entity are
included in our operations following the date of acquisition.
Capitalized Software
We have capitalized software costs of approximately $1.6 million, net of
amortization, related to software products available for sale. We are amortizing
those costs over the expected lives of the products. The annual amortization
will be 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
$680,000 of software related costs are not being amortized since the software
has not been placed in service as of the December 31, 2004. Approximately
$600,000 was capitalized in software costs during 2004. Prior to the KarlNet
acquisition on May 13, 2004, we had no internally developed software capitalized
costs.
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, particularly where we have made last-time-buys of components.
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.
23
Goodwill
Goodwill is the excess of the cost of an acquired entity over the net
amounts assigned to assets acquired and liabilities assumed. Goodwill is not
amortized but is tested for impairment at least annually at the reporting unit
level, and more frequently if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount. As of December 31, 2004, no impairment losses have been
recognized on any of our acquired goodwill.
Intangible Assets
Intangible assets are accounted for in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets". Intangible assets with finite lives are
amortized over the estimated useful lives using the straight-line method.
Intangible assets with finite lives are reviewed for impairment. An impairment
loss on such assets is recognized if the carrying amount of an intangible asset
is not recoverable and its carrying amount exceeds its fair value. Intangible
assets with indefinite useful lives are not amortized but are tested for
impairment at least annually, or more frequently if there are indications that
the asset is impaired. The impairment test for these assets consists of a
comparison of the fair value of the asset with its carrying amount. If the
carrying amount of an intangible asset with an indefinite useful life exceeds
its fair value, an impairment loss is recognized in an amount equal to that
excess. For either type of intangible asset, after an impairment loss is
recognized, the adjusted carrying amount of the intangible asset becomes its new
accounting basis. Subsequent reversal of a previously recognized impairment loss
is prohibited.
Our intangible assets include purchased technology and various assets
acquired in business combination transactions. Assets acquired in business
combination transactions include existing hardware technologies, trade names,
existing software technologies, customer relationships and patents. Some of
these assets have finite useful lives and some have indefinite useful lives. As
of December 31, 2004, no impairment losses have been recognized on any of the
intangible assets we owned.
24
Result of Operations
Years Ended December 31, 2004 and 2003
The following table provides statement of operations data as a percentage
of sales for the periods presented.
Years Ended
December 31
--------------------
2004 2003
------- -------
Sales ............................................... 100% 100%
Cost of sales ....................................... 59 58
------- -------
Gross profit ........................................ 41 42
Operating expenses
Selling ......................................... 11 8
Research and development ........................ 13 6
General and administrative ...................... 44 26
------- -------
Total operating expenses ..................... 68 40
------- -------
Operating income (loss) ............................. (27) 2
Other income ........................................ 21 --
Income taxes ........................................ -- (1)
Extraordinary gain and change in accounting -- 16
------- -------
Net income (loss) ................................... (6)% 17%
======= =======
Sales
Sales for the year ended December 31, 2004 were $22.9 million as compared
to $27.2 million for the same period in 2003 for a decrease of $4.3 million or
16%. There were two significant factors contributing to our net decline in
sales. First was the receipt of significant orders in 2003 from two large
customers. One was Verizon for their "Hot Spot" trial build-out, and the other
was Enterasys for whom we did some production on a trial basis. Those orders
were not replicated in 2004 resulting in a sales decrease of nearly $3.8
million. Second, a general softness in the demand for 802.11b equipment within
the industry resulted in an additional sales decrease of about $3.0 million.
However, these sales declines were offset by sales from the three companies we
acquired in the second quarter of 2004. Sales by these acquired companies were
nearly $2.5 million from the date of acquisition through year-end. We also
increased the amount of our international sales during 2004. For the years
ending December 31, 2004 and 2003, international sales, excluding Canada, were
approximately 18% and 16%, respectively, of total sales. We enhanced our
international sales presence in the second half of 2004 by hiring two
experienced international sales professionals as well as having several of our
products certified by in-country regulatory authorities. Presently we are
focusing our efforts in Latin America, the Middle East and Africa. We intend to
expand our international presence in the near future into Asia Pacific and other
geographic regions where we believe there is a market for our products.
The challenges for 2005 continue to be our efforts to expand our current
customer base by obtaining larger customers, to replace any lost customers, and
to expand our sales channels to include distributors, value added resellers, and
federal and other government-related customers. We want to realign and enhance
our sales and marketing departments to expand our efforts to sell larger
system-based communication solutions into first and second tier carriers while
continuing to stay close to our core WISP customers. We have hired an
experienced Vice President of Marketing from a large telecommunications company
to help promote our products and brands in our current markets as well as in
other markets into which we would like to expand. We expect our sales will
continue to benefit from our acquisitions of KarlNet, Terabeam, and Ricochet.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the year ended December 31, 2004
were $13.4 million and $9.5 million, respectively. For the same period in 2003,
costs of goods sold and gross profit were $15.7 million and
25
$11.5 million, respectively. Gross profit, as a percentage of sales, for the
years ended December 31, 2004 and 2003 was 41% and 42%, respectively.
There were a few major reasons for the change in cost of goods sold and
gross profit from 2004 compared to 2003. During 2004, we did not replace the
revenue we received in 2003 from two large customers, Verizon and Enterasys. The
lack of the revenue from Verizon negatively impacted our gross profit by
approximately 2.6% as a percent of total sales. The lack of revenue from
Enterasys positively impacted our gross profit comparison by approximately 1.0%.
We also realized a partial year positive impact in our gross profit
compared to 2003 due to our acquisition of KarlNet and Terabeam. This resulted
in an increase in our gross profit as a percent of sales for the year of
approximately 0.5% which was offset by a decrease in gross profit for the year
of approximately 0.1% due to the Ricochet acquisition.
Our introduction of new products did help our overall gross profit but
only by about 0.2% because these new products were introduced late in the year.
However, in 2005, we will realize a full year of benefit from these late 2004
product introductions. We also expect to introduce new and improved products in
2005.
However, even as we introduce new products to our customers in 2005, we
believe that our profit margins will be challenged because of the significant
downward pressure brought about by increased competition from the many new
competitors entering the wireless marketplace. Some competitors may use more
favorable pricing structures than us to try and gain immediate market share. We
have seen more examples of this behavior now than in past years and expect it to
only intensify over time. Maintaining our profit margins continues to be one of
our major goals. One of the best ways to maintain profit margins is to
continually seek and implement cost savings ideas or new designs that will
reduce the cost of our products. In addition, we are continually looking for
more cost effective contract manufacturers. When properly utilized, contract
manufacturers can bring significant production efficiencies by reducing labor
costs as well as material costs because of the large volumes of raw material
purchases larger contract manufacturers can negotiate. We have begun utilizing
off-shore manufacturers for certain mechanical parts of our products. We are
also investigating the use of lower cost offshore contract manufacturers for
possible turnkey manufacturing of our products, but are balancing that with the
additional risks of using offshore manufacturers. Despite our efforts, we may be
unable to maintain our margins in this highly competitive market.
Sales and Marketing Expenses
Selling and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, and customer support. Selling and
marketing expenses increased to $2.6 million for the year ended December 31,
2004 from $2.2 million for the year ended December 31, 2003, which is a $0.4
million or 16% increase. The relatively large increase in overall sales and
marketing expenses is a combination of several factors, some which are
offsetting, including: (1) while overall sales personnel headcount decreased,
the hiring of experienced new sales personnel, with resulting higher salaries,
resulted in an increase in related costs of approximately $0.3 million, and (2)
the hiring of a new Vice President of Marketing, increase in advertising,
increased membership in professional associations, attendance at more trade
shows, and increase in brand and product awareness marketing costs in the
aggregate increased costs approximately $0.1 million.
In 2005, we plan to hire a senior sales executive to lead our sales
efforts as well as several more seasoned sales and marketing personnel with both
domestic and international experience in the wireless market. Additionally, we
are also looking to expand our distributor channel, establish a new value added
reseller channel and first and second tier carrier channel, and increase our
sales to federal and other government-related customers.
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. These include costs for development of products and components, test
equipment and related facilities. Research and development expenses increased to
$2.9 million for the year ended December 31, 2004 from $1.7 million for the year
ended December 31, 2003, a $1.2 million increase or 73% year over year. $0.9
million of the increase in research and development expenses from 2003 to 2004
was attributable to the net addition of 23 research and development personnel as
a result of our three acquisitions, while the remaining $0.3 million increase
was due to the purchase of additional prototype materials and other related
26
support costs. We believe that the increase in research and development
personnel increased our product development capability, particularly on the
software side.
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 $10.0 million for the year ended December 31, 2004 from $7.1
million for the year ended December 31, 2003, a $2.9 million increase or 41%.
The increase is primarily due to the following factors: (1) salaries and fringe
benefit expenses increased by approximately $1.2 million, (2) professional,
legal, and accounting fees increased by approximately $0.9 million, (3)
depreciation and amortization expense increased by approximately $0.9 million,
(4) additional rents, maintenance and utilities on new facilities was
approximately $0.4 million, and (5) insurance and bad debt expense decreased by
approximately $0.3 million and $0.2 million, respectively. As with all expenses,
we are monitoring our general administrative expenses with the goal of reducing
them in 2005.
Income Taxes
Benefit for income taxes for the year ended December 31, 2004 in the
amount of $2,000 relates to net refunds of state income taxes. As of December
31, 2004, we cannot accurately predict when sufficient taxable income will be
generated to justify recognition of deferred tax assets without a valuation
allowance. Provision for income taxes for the year ended December 31, 2003 in
the amount of $0.3 million relates to (1) an increase in the valuation allowance
associated with the deferred tax assets of $0.4 million offset by (2) the tax
benefit from carrying back existing net operating losses to recover taxes
previously paid.
Years Ended December 31, 2003 and 2002
The following table provides statement of operations data as a percentage
of sales for the periods presented.
Years Ended
December 31
-----------------------
2003 2002
------- -------
Sales ............................................ 100% 100%
Cost of sales .................................... 58 61
------- -------
Gross profit ..................................... 42 39
Operating expenses
Selling ...................................... 8 12
Research and development ..................... 6 2
General and administrative ................... 26 18
------- -------
Total operating expenses .................. 40 32
------- -------
Operating income (loss) .......................... 2 7
Other income ..................................... -- 1
Income taxes ..................................... (1) (4)
Extraordinary gain and change in accounting 16 4
------- -------
Net income (loss) ................................ 17% 8%
======= =======
Sales
Sales for the year ended December 31, 2003 were $27.2 million as compared
to $20.3 million for the same period in 2002 for an increase of $6.9 million or
34%. The increase in sales is primarily due to the addition of two new large
customers, the introduction of new products, and the modification of our list
prices both upwards and downwards as market competition dictates. First, sales
to Enterasys resulted in about $2.5 million or 9.2% of revenue and sales to
Verizon resulted in about $2.2 million or 8.1% of revenue. Second, revenue for
new products amounted to just under $2.0 million or 7.4% of revenue. Finally,
after the modification of our list prices, as mentioned above, we realized an
overall increase in our revenue during 2003.
27
For the years ending December 31, 2003 and 2002, international sales,
excluding Canada, were approximately 16% and 10%, respectively, of total sales.
Young Design's business combination with Telaxis had no impact on our
revenue in 2003 because Telaxis had virtually no revenue from its products in
2003 or 2002 due to lack of customer demand.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the year ended December 31, 2003
were $15.7 million and $11.5 million, respectively. For the same period in 2002,
costs of goods sold and gross profit were $12.4 million and $7.9 million,
respectively. Gross profit, as a percentage of sales, for the years ended
December 31, 2003 and 2002 was 42% and 39%, respectively.
In order of significance, during 2003, we introduced several new products
to the market and realized higher gross profit margins, the most significant
being our integrated two-channel "Hot Spot" access point product for the telco
market. This product resulted in a 0.6% improvement in our annual gross profit
from 2002. Other new product introductions, especially the Etherant-II, resulted
in an additional 1.0% improvement in our gross profit. Our modification of list
prices helped improve gross profit margin by an estimated 0.9%.
Next, due to a large glut of excess inventory in the electronic component
industry, we were able to purchase large quantities of excess electronic
component parts in late 2000, 2001 and early 2002 at a significant discount. As
electronic component prices began to rebound in late 2002 and throughout 2003,
we were able to reduce our current year purchases as a result of our previous
purchases of surplus electronic parts, resulting in a 0.5% improvement of our
annual profit margin. The surplus parts previously purchased and discussed above
have been completely used during 2003.
Sales and Marketing Expenses
Selling and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, and customer support. Selling and
marketing expenses decreased to $2.2 million for the year ended December 31,
2003 from $2.4 million for the year ended December 31, 2002, which is
approximately a $0.2 million or 8% decline. The relatively small decrease in
overall sales and marketing expenses is a combination of several offsetting
factors: (1) increased headcount of sales personnel to expand customer contacts,
(2) reduction of advertising, dues for professional associations and elimination
of attendance at trade shows which historically produced little in product sales
or company and brand awareness, and (3) establishment of a central travel
administrator position to ensure compliance with our travel and entertainment
guidelines.
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. These include costs for development of products and components, test
equipment and related facilities. Research and development expenses increased to
$1.7 million for the year ended December 31, 2003 from $0.4 million for the year
ended December 31, 2002, a $1.3 million increase or 325% year over year. The
increase in research and development from 2002 to 2003 was primarily
attributable to the addition of 17 research and development engineers amounting
to approximately $1.1 million, while the remainder was for the purchase of
additional prototype materials and other related support costs.
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 $7.1 million for the year ended December 31, 2003 from $3.6 million
for the year ended December 31, 2002 or 97%. The increase of approximately $3.5
million is made up of several significant expenses mostly attributable to Young
Design's business combination with Telaxis on April 1, 2003. In order of
magnitude are the following expense elements and their individual impact: (1)
salaries and fringe benefit expenses increased approximately $0.9 million, (2)
Directors and Officers insurance as well as property and casualty insurance
increased approximately $0.7 million, (3) additional rents, maintenance and
utilities on new facilities was approximately $0.7 million, (4) professional,
legal, and accounting fees increased approximately $0.6 million, and
28
(5) bad debt increased approximately $0.3 million, but on significantly higher
revenue. For 2003, bad debt expense was 2.4% of revenue as compared to 1.8% for
2002.
Income Taxes
Provision for income taxes for the year ended December 31, 2003 in the
amount of $0.3 million relates to (1) an increase in the valuation allowance
associated with the deferred tax assets of $0.4 million offset by (2) the tax
benefit from carrying back existing net operating losses to recover taxes
previously paid. As of December 31, 2003, we cannot accurately predict when
sufficient taxable income will be generated to justify recognition of deferred
tax assets without a valuation allowance. Provision for income taxes for the
year ended December 31, 2002 in the amount of $0.8 million relates to an
estimated effective tax rate of 42%.
Extraordinary gain
The extraordinary gain was due to the immediate recognition into income of
negative goodwill of $4.3 million related to the Telaxis combination in
accordance with SFAS No. 141.
Liquidity and Capital Resources
At December 31, 2004, we had cash, cash equivalents, and investments
available-for sale of $40.7 million. This excludes restricted cash of $5.1
million. For the year ended December 31, 2004, cash used by operations was $5.6
million. We currently are meeting all of our working capital needs through cash
on hand as well as internally generated cash from operations and other
activities. We do this through active cash management such as matching our Days
Payable Outstanding (DPO) with our Days Sales Outstanding (DSO). Currently, both
DPO and DSO are between 44 and 47 days. In addition, approximately 25 - 30% of
our sales are paid prior to shipment by credit card, wire transfer, or letter of
credit, which increases cash flow and decreases credit risk and bad debt
expense. We see no immediate requirement over the next twelve months for
external financing to fund our day-to-day normal operations, which includes
sales and marketing, research and development, and general and administrative
expenses of our core business.
For the year ended December 31, 2004, cash provided by investing
activities was approximately $40.0 million. The increase in cash relates
primarily to the $10.3 million of cash and $34.6 million from sales of
securities acquired in connection with the three companies we acquired in the
first half of 2004. This was offset by cash used for acquisitions of $4.8
million.
Cash used in financing activities was $7.6 million for the year ended
December 31, 2004. The primary uses of the funds were approximately $7.7 million
for repurchases of outstanding stock.
Our long-term financing requirements depend upon our growth strategy,
which relates primarily to our desire to increase revenue both domestically as
well as internationally. One of the biggest obstacles to success is bringing new
products to the market in a timely fashion. New products or product lines may be
designed and developed internally, but it may be more cost effective to acquire
product offerings from competitors to reduce time to market. Our current funding
levels may have to be supplemented through new bank debt financing, public or
private debt or equity offerings, or other means, depending upon our desired
rate of future growth.
29
We have the following contractual obligations and commercial commitments
as of December 31, 2004:
Payments due by period (numbers in thousands)
----------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 year years years years
---------- ---------- ---------- ---------- ----------
Operating leases - buildings - in use ............. $ 4,196 $ 1,355 $ 2,225 $ 303 $ 313
Operating leases - buildings - not in use ......... 3,610 2,670 746 194 --
Notes payable ..................................... 4,268 3,011 846 411 --
Operating leases - equipment ...................... 131 131 -- -- --
Employment Contracts .............................. 537 537 -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations ................ $ 12,742 $ 7,704 $ 3,817 $ 908 $ 313
========== ========== ========== ========== ==========
The above table includes the $1.3 million of principal and interest
payments for the Merry Fields' mortgage and the lease payments from YDI to Merry
Fields. The lease payments are the source of cash for Merry Fields to repay the
mortgage. The mortgage is the responsibility of Merry Fields; however, we
guarantee full payment of this mortgage.
Impact of Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS 123R, a revision of SFAS 123,
"Accounting for Stock-based Compensation." SFAS 123R requires public companies
to recognize expense associated with share-based compensation arrangements,
including employee stock options, using a fair value-based option pricing model,
and eliminates the alternative to use Opinion 25's intrinsic value method of
accounting for share-based payments. In accordance with the new pronouncement,
we plan to begin recognizing the expense associated with our share-based
payments, as determined using a fair value-based method, in our statement of
operations beginning on July 1, 2005. Adoption of the expense provisions of the
statement may have a material impact on our results of operations. The standard
allows three alternative transition methods for public companies: modified
prospective application without restatement of prior interim periods in the year
of adoption; modified retrospective application with restatement of prior
interim periods in the year of adoption; and modified retrospective application
with restatement of prior financial statements to include the same amounts that
were previously included in pro forma disclosures. We have not determined which
transition method we will adopt.
During November 2004, the FASB issued SFAS No. 151 "Inventory Costs." This
statement clarifies the accounting for abnormal amounts of idle facility
expenses, freight, handling costs, and wasted material (spoilage). The statement
requires that these costs be accounted for as current period charges. The
adoption of this pronouncement had no material impact on our results of
operations, financial position or cash flows in the reported periods.
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 in this
Part II, Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations, Safe Harbor for Forward-Looking Statements.
As of December 31, 2004, we had bank balances of cash and cash equivalents
of $35.4 million and restricted cash of $5.1 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 December 31, 2004, the uninsured portion
totaled approximately $41.4 million.
In addition, we presently hold approximately $5.4 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
30
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.
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.
Safe Harbor for Forward-Looking Statements
General Overview
This Annual Report on Form 10-K contains forward-looking statements as
defined by federal securities laws which are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, intentions, projections, developments, future
events, performance or products, underlying assumptions and other statements
which are other than statements of historical facts. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "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-K, including those set forth below, and any other cautionary
statements which may accompany the forward-looking statements. In addition, we
undertake no obligation to update or revise any forward-looking statement to
reflect events, circumstances, or new information after the date of this Form
10-K or to reflect the occurrence of unanticipated or any other subsequent
events, and we disclaim any such obligation.
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
In addition to other factors and matters discussed elsewhere in this Form
10-K, in our other periodic reports and filings made from time to time with the
Securities and Exchange Commission, and in our other public statements from time
to time (including, without limitation, our press releases), some of the
important factors that, in our view, could cause actual results to differ
materially from those expressed, anticipated, or implied in the forward-looking
statements include, without limitation, the following:
31
o The continuing uncertainty in the telecommunications industry and the
global economy is adversely affecting our sales due in part to our
being a smaller, younger company. In the past few years, the overall
economic climate in the United States and many other parts of the world
has declined. Telecommunication equipment markets specifically have
experienced a severe downturn. This downturn has resulted in our
customers having less capital available from capital markets, and less
willingness to spend internal capital, to purchase equipments such as
ours. As a result, potential customers may be less willing to spend
their limited budgets on products from us, a relatively small, young
company that may not survive the economic downturn. Because we do not
have the financial resources or name recognition of larger companies,
this downturn may adversely affect the growth and stability of our
business and our financial condition and results of operations.
o The WLAN equipment industry in which we principally operate is
intensely competitive which could negatively impact our financial
results. The telecommunications equipment industry in which we operate
is intensely competitive. Most of our products are in a portion of the
telecommunications equipment industry generally referred to as wireless
local area networks (WLAN). Competition is intense in this industry for
a number of reasons. For example, there are relatively few barriers to
entry in this market. Also, this industry has attracted substantial
media and other attention in recent months in part due to the ability
of this equipment to provide broadband Internet connectivity simply,
quickly, and efficiently. These same reasons, among others, have caused
a number of companies to develop products that compete (or could be
viewed as competing) with ours. This large number of companies offering
products that may be perceived to be similar or even interchangeable
with our products can have the effect of reducing the prices at which
we are able to sell our products. In turn, this can reduce our gross
margins and negatively impact our general financial results.
o We face substantial competition from a number of larger companies with
substantially greater resources and longer operating histories, and we
may not be able to compete effectively. Many of our competitors or
perceived competitors offer a variety of competitive products and
services and some may offer broader telecommunications product lines.
These companies include Proxim, Alvarion, Cisco, Alcatel, Stratex
Networks, Ceragon, Nokia, Business Networks AB, AirSpan Networks,
D-Link, Enterasys Networks, Intel Corporation, Intersil Corporation,
Symbol Technologies, 3Com Corporation, Wi-Lan, Inc., Hyperlink, and
Harris Corporation. Additionally, our millimeter wave radio products
must compete with the existing and new fiber optic infrastructure and
suppliers in the United States and elsewhere. Many of these companies
have greater customer recognition, installed bases, financial
resources, and sales, production, marketing, manufacturing,
engineering, and other capabilities than we do.
o We also face competition from private and start-up companies given the
limited barriers to entry in our business. We face actual and potential
competition not only from established companies, but also from start-up
and other private companies that are developing and marketing new
commercial products and services. Most of the products we sell are
based on standards established by the Institute of Electrical and
Electronics Engineers (IEEE) that require interoperability. Also, there
are not substantial technical development difficulties, manufacturing
difficulties, prohibitive intellectual property rights, or high
business start-up costs that may create greater barriers to entry in
other businesses. As a result, there are not significant barriers to
entry into a number of markets we serve. This lack of barriers and the
perceived attractiveness of some of these markets, among other reasons,
have resulted in private companies entering these markets. These
private companies include Vivato, Trapeze, Colubris Networks, and
Trango Broadband.
o We may experience difficulty in distinguishing our products from other
WLAN products which may reduce our sales and gross margins. We believe
that some products in the WLAN business in which we primarily operate
have become commodities in which there is intense price competition,
and we believe that trend will continue and intensify. We need to
carefully and clearly distinguish our products from competing products
and technologies that may be able to provide wireless broadband access
or connectivity. Points of distinction include operating range of our
products, scalability of networks using our products, remote management
and monitoring capabilities, durability and robustness of our products,
data rate transmission capabilities of our products, ease and speed of
installation of our products, markets served by our products, cost of
our products, other features of our products, security and interference
issues, and value proposition of our products for our customers.
Failure to distinguish our products for our
32
customers, investors, and others could hinder market acceptance of our
products, delay our obtaining customers for our products, force
reductions in contemplated sales prices of our products, and reduce our
overall sales and gross margins. This ability to distinguish is
becoming more important as we try to introduce more feature-rich
products at higher prices.
o Potential customers may view price as the primary differentiator
between our products and products of our competitors, which could
reduce the price at which we can sell our products and negatively
impact our financial results. Because products in our WLAN business
have to comply with specific public standards, at times potential
customers may perceive there to be little other than price to
differentiate our products from products of a competitor. This intense
customer focus on pricing can have the effect of reducing the prices at
which we are able to sell our products. In turn, this can reduce our
gross margins and negatively impact our general financial results.
o Alternative broadband connectivity technologies may have advantages
over our products and make our products less attractive to customers. A
number of competing technologies may be able to provide high-speed,
broadband access or connectivity. These competing technologies include
digital subscriber lines, hybrid fiber coaxial cable, fiber optic
cable, T-1/E-1 and other high-speed wire, laser (also known as free
space optics), satellite, and other point-to-multipoint wireless and
point-to-point wireless technologies. Some of these technologies may
have advantages over our products, such as lower cost, greater range,
better security, and greater current market acceptance.
o New broadband connectivity technologies may be developed that have
advantages over our products and make our products less attractive to
customers. New products or new technologies may be developed that
supplant or provide lower-cost or better performing alternatives to our
products. For example, the majority of products we sell are based on
the IEEE 802.11b standard. We believe products are being developed
based on the IEEE 802.11a/b/g and 802.16 (also known as WiMax)
standards which may have advantages over products based on the IEEE
802.11b products, such as greater data transmission capabilities and
longer range.
o The actual or potential availability of new broadband connectivity
technologies could cause our customers to delay buying decisions. We
operate in a business where there is rapid technological change, and
new products and technologies are continually introduced to the market
in actual or conceptual form. These new products or technologies may
have or appear or be described to have advantages over our products or
other products then currently available. Even though actual products
may not be available until some (perhaps indefinite) time after initial
introduction of the conceptual product or technology, the possibility
of obtaining these new products could cause potential customers to
delay their decision to buy products such as ours. This delay could
adversely impact our business, financial condition, and results of
operations.
o We are selling into a market that has a broad range of desired product
characteristics and features which may make it difficult for us to
develop products that will address a broad enough market to be
commercially viable. We are selling into a market place that is
experiencing a convergence of competing technologies. The market that
we currently serve is experiencing a convergence of voice driven
telecommunications methodology and data centric networking based
methodology. As a result there exists a divergence of product
requirements and corporate cultures for our customers and even within
the same customer. Typically, established telecommunications providers
desire extremely robust products with the expectation of a relatively
long effective life. Networking providers on the other hand are looking
for optimal performance at any given time with the assumption that they
will be upgrading the equipment again in several years and therefore
are extremely cost sensitive. In addition, established
telecommunications providers seek products that fit into their existing
networks (T-1, E-1, OC-3, OC-12 interfaces and data rates) while
networking based providers prefer ethernet interfaces and data rates.
If we are unable to satisfy one or more of the requirements of our
current and prospective customers, we may lose, or fail to gain,
meaningful market share.
o We may not develop products for the portions of the broadband
connectivity and access markets that grow. Predicting which segments of
the broadband connectivity and access markets will develop and at what
rate these markets will grow is difficult. We may needlessly spend
money and resources developing products for a market that does not
develop. On the other hand, we may miss market opportunities if we
33
fail to act promptly and decisively to develop new products. Our
business, financial condition, and results of operations will be
materially adversely affected if we develop the wrong product or miss
market opportunities.
o Our sales may decline if we are unable to keep pace with rapid
technological changes and industry standards. Our ability to succeed in
our competitive market will depend upon successful development,
introduction, and sale of new products and enhancements on a timely and
cost-effective basis in response to changing customer requirements and
competitors' product developments. We may not be successful in
selecting, developing, manufacturing, and marketing new products or
enhancements which could adversely affect our sales.
o We believe that the prices for our products will decline over time
which could hurt our financial results. We believe that average selling
prices for our products will tend to decline from the point at which a
product is initially priced and marketed. Reasons for this decline may
include the maturation of such products, the effect of volume price
discounts in existing and future contracts, technology changes, and the
intensification of competition, including from lower-cost foreign
suppliers. This price decline could hurt our financial results.
o The expected price decline of our products will hurt our financial
results unless we are able to offset those declines with cost savings
or new product introductions. We will attempt to offset expected price
declines of our products by reducing our product costs and non-product
costs and by introducing new products with higher gross margins. If we
are unable to offset declining selling prices by reducing direct
materials and manufacturing expenses, our gross margins will decline.
If we cannot develop new products in a timely manner or we fail to
achieve increased sales of new products at higher gross margins, our
revenue and gross margins may decline.
o Our plans to continue to introduce new products will require capital
and other investments that may not be recovered. We devote significant
resources to the development and marketing of new products and
technologies and expect to continue to do so. These investments include
facilities, equipment, inventory, personnel, and other items to develop
and produce these products and to provide marketing, sales, service and
support, and administration organizations to service and support these
products. We anticipate many of these commitments and expenditures
would be made in advance of realization of increased sales, which may
not occur. If sales do not increase as expected, our gross margins and
general financial performance would be adversely affected.
o Our financial results have fluctuated significantly, and we expect the
fluctuations will continue for a variety of reasons, many of which are
out of our control. Our quarterly financial results have fluctuated
significantly for a number of reasons including our acquisitions of
Terabeam Corporation, Ricochet Networks, Inc., and KarlNet, Inc. in the
second quarter of 2004; the combination of Telaxis and Young Design in
April 2003; our limited long-term commitments from customers; the
receipt of significant customer orders; timing of obtaining customers
for any new products we may introduce; the mix of our product sales;
our manufacturing capacity constraints and our ability to fulfill
orders; our inability to obtain components in the quantities we need;
new product introductions by us or by our competitors; seasonal factors
that may affect capital spending by customers; and general economic
conditions. We expect that many of these and other factors will
continue to affect our business and will cause our financial results to
fluctuate in the future.
o Our past acquisition activity and contemplated future acquisition
activity contributes to the difficulty in predicting our future
financial performance. The combination of Telaxis and Young Design in
April 2003 resulted in changes in our financial performance. The
historically unprofitable financial results of Telaxis caused the
operating results of the combined company to be unprofitable in the
second quarter of 2003. Although the combined company did briefly
return to profitability, the acquisitions of the unprofitable Terabeam
Corporation, KarlNet, Inc., and Ricochet Networks, Inc. in the second
quarter of 2004 have caused the company to be unprofitable (on an
operating basis) in its most recent fiscal quarters. However, the
company's balance sheet has become significantly stronger given the
addition of the assets from the acquired companies. We have stated our
intention to make selected acquisitions from time to time and,
therefore, expect that our future acquisition activity will contribute
to fluctuations in our financial results and to difficulties in
predicting our financial performance.
34
o We may not achieve the contemplated benefits of our three 2004
acquisitions which could materially and adversely affect our business.
In the second quarter of 2004, we acquired Terabeam Corporation,
Ricochet Networks, Inc., and KarlNet, Inc. We may not be able to
achieve the expected synergies and other benefits of those acquisitions
at all or to the extent expected. We may not be able to integrate those
companies in a cost-effective, timely manner without material
liabilities or loss of desired employees, suppliers, or customers. Our
management may be distracted from our core business due to those
acquisitions. The expected cost savings from the transactions may not
be fully realized or may take longer to realize than expected. Our
investors, competitors, customers, suppliers, employees, and others may
react negatively to the acquisitions. We may have little experience
operating in some of the business areas in which those acquired
companies typically operated so may not fully benefit from the
acquisitions. Those acquisitions may expose us to lawsuits or other
liabilities, known or unknown. Addition of these companies may increase
the difficulty for us, financial analysts, and others to predict the
combined company's future business and financial performance. These
factors could materially and adversely affect our business, perception
in our market, and financial results. Should these factors materially
and adversely affect our business, it could result in a material
impairment charge to write-down goodwill.
o The fact that we receive few long-term purchase commitments from
customers contributes to the difficulty in predicting our future
financial performance. Due to the nature of our products and customers,
we generally have a very short time between receiving an order and
shipping the order. Very few of our customers provide us with long-term
purchase commitments. As a result, we generally have a relatively low
backlog and have limited visibility of sales going forward. This lack
of visibility contributes to the difficulty in predicting our future
financial performance by us, financial analysts, and investors.
o Receipt of significant customer orders have caused our financial
results to fluctuate and contribute to the difficulty in predicting our
future financial performance. At times, we have received significant
orders from customers that have caused our financial results to
fluctuate. For example, we received large orders from a single customer
in 2003 that contributed positively to the financial results of several
quarters in 2003. The non-recurrence of those orders in 2004 has made
our financial results look worse in comparison. We expect that at times
we may get similar significant orders in the future which could cause
significant fluctuations in sales, gross margins, and operating
results. These fluctuations contribute to the difficulty in predicting
our future financial performance by us, financial analysts, and
investors.
o Difficulties in obtaining the components we need to manufacture our
products have caused our financial results to fluctuate and contribute
to the difficulty in predicting our future financial performance. In
the third and fourth quarters of 2003 and to a lesser extent in the
first quarter of 2004, we were unable to obtain sufficient components
to manufacture certain of our products. We believe this shortage had a
negative impact on our revenue and financial results for those
quarters. Given the number of components in our products, the age of
some of our products, and the limited number of suppliers of some of
these components, we may experience similar component shortages from
time to time in the future. These shortages could contribute to
fluctuations in our financial results and to the difficulty in
predicting our future financial performance.
o We cannot predict when or whether we will be able to achieve operating
profitability, which could adversely affect our ability to continue as
a going concern and our stock price. We were not profitable on an
operating basis in any fiscal quarter of 2004. We have made no
predictions concerning our future profitability or lack of
profitability, particularly given our acquisition in 2004 of three
unprofitable companies. Our failure to achieve and maintain
profitability may affect our ability to continue as a going concern and
cause the market price of our stock to decline or prevent it from
rising.
o We may be unsuccessful in leveraging our direct sales model into one
using more distributors and resellers. Historically, the great majority
of our sales were direct sales made by our employees. We are seeking to
expand our sales channels through the use of distributors and
resellers, particularly for international sales. Use of distributors
and resellers makes us dependent, to some extent, on those third
parties who will have the relationships with the end customers. We may
not be successful in attracting qualified distributors and resellers.
The use of distributors or resellers may not increase our sales and may
result in channel and price conflict, customer confusion, and customer
dissatisfaction, all of which could adversely impact our business and
financial results.
35
o We may be unsuccessful in our efforts to obtain larger customers, and
these efforts could adversely impact our current business. We currently
have a diversified customer base with many relatively small customers.
We are trying to expand our customer base by obtaining larger
customers. Our efforts may not be successful. For example, larger
customers may not want to deploy products like ours that operate in
unlicensed frequencies. Our efforts could adversely impact our current
business due to diversion of efforts and attention, our current
customers not being pleased by our customer expansion efforts, and
other reasons.
o Our business depends in part on continued demand for broadband
connectivity and access. The future success of our business is
dependent in part upon the continued and increasing demand for
high-speed, broadband connectivity and access, particularly with regard
to the Internet, and for high-speed telecommunications products. The
markets for such services may not grow at all or as expected.
o We depend on our senior employees who are extensively involved in many
aspects of our business, and our business would likely be harmed if we
lose their services and cannot hire additional qualified personnel.
Particularly because we are a relatively small company, our future
operating results depend in significant part upon the continued
contributions of senior management and key sales and technical
personnel, many of who would be difficult to replace. Future operating
results also depend upon the ability to attract and retain qualified
management, sales, and technical personnel. Competition for these
personnel is intense, and we may not be successful in attracting or
retaining them. Only a limited number of persons with the requisite
skills to serve in these positions may exist, and it may be difficult
for us to hire the skilled personnel we need. We have experienced
difficulty in attracting, hiring, and retaining experienced sales
personnel with the right blend of skills for our company, and we may
experience difficulty with other types of personnel in the future.
o We have no key-man life insurance on any of our executive officers or
other employees. Loss of the services of any of our key executive
officers or other key employees could have a material adverse effect on
our business, financial condition, and results of operations. The lack
of key man insurance means that we would receive no insurance proceeds
to buffer any such adverse effects.
o We do not currently have a succession plan in place. We currently do
not have a succession plan in place if our chief executive officer or
other senior personnel were to become unable to perform their
responsibilities due to illness, injury, termination of service, or
other reasons. Loss of the services of our chief executive officer or
other senior personnel could have a material adverse effect on our
business, financial condition, and results of operations. Lack of a
succession plan could exacerbate our difficulties in overcoming the
issues created by the loss of services of our chief executive officer
or other senior personnel due to uncertainty and responsibility
transition issues.
o Our limited internal manufacturing capacity makes us dependent on
contract manufacturers, which could harm our sales and damage our
reputation. Our internal manufacturing capacity, by design, is limited.
We currently expect to rely on contract manufacturers to provide
manufacturing of our complete products, components, and subassemblies.
Our failure to obtain satisfactory performance from any contract
manufacturers could cause us to fail to meet customer requirements,
lose sales, and expose us to product quality issues. In turn, this
could damage relationships with customers and have a material adverse
effect on our reputation, business, financial condition, and results of
operations.
o We may be unable to engage contract manufacturers to manufacture our
products which could force us to increase our internal manufacturing
capacity. The technical nature of our products, the wide variety of our
products, and the current uncertainty and historical fluctuation in our
business may make contract manufacturers unwilling or reluctant to
manufacture products for us at all or on acceptable terms. It may be
difficult and time-consuming to engage a third-party manufacturer or
manufacturers. If we are unable to engage a third-party manufacturer or
manufacturers, we may have to increase our internal manufacturing
capability. We may be unable to do so at all or without significant
expense.
o Because many of our components or products are provided by limited or
single-source suppliers, we may not be able to obtain sufficient
quantities to meet our business needs. Many of the components,
subassemblies, and services necessary for the manufacture of our
systems are obtained from a sole supplier
36
or a limited group of suppliers. We generally do not have any committed
long-term supply agreements with these vendors. We have from time to
time experienced an inability to obtain an adequate supply of required
components and subassemblies. For example, in the third and fourth
quarters of 2003 and to a lesser extent in the first quarter of 2004,
we were unable to obtain sufficient components to manufacture certain
of our products. Our inability to obtain these components in the
quantities and at the times we desire could halt production, reduce our
ability to meet customer demands, and reduce our sales.
o Because many of our components or products are provided by limited or
single-source suppliers, we may not be able to obtain sufficient
quantities at prices to make our products profitably. Many of the
components, subassemblies, and services necessary for the manufacture
of our systems are obtained from a sole supplier or a limited group of
suppliers. Our inability to obtain these items at the prices we desire
could hurt our sales and lower our margins.
o Because many of our components or products are provided by limited or
single-source suppliers, we may have to purchase extra inventory that
ultimately may not be used. Many of the components, subassemblies, and
services necessary for the manufacture of our systems are obtained from
a sole supplier or a limited group of suppliers. A supplier may decide
to end the manufacture of a product and provide us with an opportunity
to make a last-time buy of the product. In that situation, we have to
estimate our future needs for that product. If we underestimate, we
would have an insufficient supply to manufacture our products. If we
overestimate, we may end up purchasing inventory that is not used or
becomes obsolete and that ultimately we have to write off. That loss
could adversely affect our financial results.
o Our inability to receive sufficient quantities of limited or single
source components or products could make us develop alternative
sources, which could reduce our sales and may be time consuming and
expensive if it can be done at all. In the event of a reduction or
interruption in the supply of a key component, we may have to develop
alternative sources for the component. We may not be able to locate an
alternative supplier of certain products or components at all or at
acceptable prices. Our inability to develop alternative sources for
components could result in delays or reductions in product shipments,
increase our costs, and reduce or eliminate our profit margins. Even if
we are successful at developing alternative sources, a significant
amount of time could be required to receive an adequate flow of
components from the alternative source.
o Our inability to receive sufficient quantities of limited or single
source components or products could make us reconfigure our products,
which could reduce our sales and may be time consuming and expensive if
it can be done at all. In the event of a reduction or interruption in
the supply of a key component, we may have to reconfigure our products
to work with different components. Reconfiguration of our products to
adapt to new components could entail substantial time and expense. We
may be unable to reconfigure our products to work with new components.
Even if we are successful at reconfiguring our products, a significant
amount of time could be required to receive an adequate flow of
replacement components.
o Our reliance on limited or single-source suppliers makes us vulnerable
to difficulties at those suppliers. The production of our products is
vulnerable to production difficulties, quality variations, work
stoppages, acts of God such as weather and fire, and other events
beyond our control at our suppliers. All of these events could
adversely affect the cost and timely delivery of our products.
o Failure to maintain adequate levels of inventory could result in a
reduction or delay in sales and harm our results of operations. In a
competitive industry such as the wireless telecommunications equipment
industry, the ability to effect prompt turnaround and delivery on
customer orders can make the difference in maintaining an ongoing
relationship with our customers. This competitive market condition
requires us to keep inventory on hand to meet such market demands.
Given the variability of customer requirements and purchasing power, it
is difficult to predict the amount of inventory needed to satisfy
demand. If we over- or under-estimate inventory requirements to fulfill
customer needs, our results of operations could be adversely affected.
If market conditions change swiftly, it may not be possible to
terminate purchasing contracts in a timely fashion to prevent excessive
inventory increases. In particular, increases in inventory could
materially adversely affect operations if such inventory is ultimately
not used or becomes obsolete. To date, we do not believe that we have
materially over-estimated or under-estimated our inventory
requirements.
37
o Our failure to effectively manage our recent and anticipated future
growth could strain our management, infrastructure, and other resources
and adversely affect our results of operations. We expect our recent
and anticipated future growth to present management, infrastructure,
systems, and other operating issues and challenges. These issues
include controlling expenses, the development, introduction, marketing,
and sales of new products, the development and application of
consistent internal controls and reporting processes, the integration
and management of a geographically and ethnically diverse group of
employees, and the monitoring of third-party manufacturers and
suppliers. Any failure to address these issues at a pace consistent
with our business could cause inefficiencies, additional operational
expenses and inherent risks, greater risk of billing delays, inventory
write-downs, and financial reporting difficulties.
o Difficulties in reducing our operating expenses could harm our results
of operations. A material portion of our operating expenses is fixed.
For example, approximately $3.0 million of our $4.4 million in
operating expenses in the fourth quarter of 2004 (approximately 68%)
were fixed expenses. If we experience a material reduction or delay in
sales, we may find it difficult to reduce our operating expenses on a
timely basis. Difficulties of this nature would adversely affect our
financial condition and harm our operating results.
o We typically permit flexible purchase order changes that may adversely
affect our margins and operating results. We have typically permitted
purchase orders to be modified or canceled with limited or no
penalties. Any inability or failure to reduce actual costs or cancel
supplier and contract manufacturing commitments in response to a
customer modification or cancellation could adversely affect our gross
margins and operating results.
o Our business and financial results could be adversely affected by
warranty claims. Products as complex as ours frequently contain
undetected errors or defects, especially when first introduced or when
new versions are released. This is especially a concern for us given
our anticipated continuing introduction of new products. The occurrence
of such errors or defects could result in products being returned under
warranty for repair or replacement with us having to bear the
associated expense. Although we maintain what we believe to be
appropriate overall warranty reserves based on historical repair
occurrences, an unanticipated high repair occurrence related to a
specific product or number of products could make the reserves
inadequate at any specific time and adversely affect our financial
results.
o Our business and financial condition could be adversely affected by
product liability claims. Products as complex as ours frequently
contain undetected errors or defects, especially when first introduced
or when new versions are released. This is especially a concern for us
given our anticipated continuing introduction of new products. The
occurrence of such errors or defects could result in product liability
claims being brought against us. Although we have not had any material
product liability claims brought against us to date, such claims may be
brought in the future and could adversely affect our financial results.
o Our international business activities expose us to a number of risks
not present in our United States operations, which we have little
experience addressing. Our international business activities may carry
additional risks and difficulties, including complying with complex
foreign laws and treaties applicable to doing business and selling our
products in other countries; availability of suitable export financing;
timing and availability of export licenses; tariffs and other trade
barriers; difficulties in staffing and managing foreign operations;
difficulties in complying with foreign customs and general ways of
doing business; and political and economic instability which may be
more pronounced in less-developed areas. We have little experience in
facing many of these issues and may not be able to address the issues
in a manner to enable us to expand our international sales and
operations.
o Because of international sales and operations, we may be exposed to
currency risk that could adversely affect our financial condition and
results of operations. Some of our sales to date have been made to
customers located outside the United States, and we expect that some of
our future sales will continue to be to customers outside the United
States. We are currently trying to increase our sales to customers
outside the United States. Historically, our international sales have
been denominated in United States dollars. For international sales that
are denominated in United States dollars, a decrease in the relative
value of foreign currencies could make our products less
price-competitive and could have an adverse effect on our financial
condition and results of operations. For any international sales
denominated
38
in foreign currencies, a decrease in the value of the foreign
currencies relative to the United States dollars could result in
decreased margins from those transactions.
o The laws and legal systems of foreign governments may limit our ability
to enforce our rights against our customers. Our customer purchase and
other agreements may be governed by foreign laws, which may differ
significantly from United States laws. Also, the court systems and
procedures in foreign countries may differ significantly from United
States courts. Therefore, we may be limited in our ability to collect
our accounts receivable, to enforce our other rights under such
agreements, and to collect damages, if awarded.
o Lack of relationships in foreign countries may limit our ability to
expand our international operations and sales. In many cases,
regulatory authorities in foreign countries own or strictly regulate
local telephone companies. Established relationships between
government-owned or government-controlled telephone companies and their
traditional indigenous suppliers of telecommunications equipment often
limit access to those markets. The successful expansion of our
international operations in some markets will depend on our ability to
form and maintain strong relationships with established companies
providing communication services and equipment or other local partners
in those regions. The failure to establish regional or local
relationships could limit our ability to successfully market or sell
our products in international markets and expand our international
operations.
o Governmental regulation affecting markets in which we compete or
products we make or services we offer could adversely affect our
business and results of operations. Radio communications and services
are extensively regulated by the United States and foreign governments
as well as by international treaties. To operate in a jurisdiction, we
must obtain regulatory approval for our products and comply with
differing and evolving standards and regulations. The delays inherent
in this approval process may cause the cancellation, postponement, or
rescheduling of the installation of communications systems by us and
our customers. The failure to comply with regulations in a jurisdiction
could result in the suspension or cessation of our ability to operate
in that jurisdiction. New regulations or changes in the interpretation
of existing regulations could require us to modify our products or
services and incur substantial costs to bring our products or services
into compliance.
o Our products typically require regulatory approval before they can be
commercially deployed. Our products must typically receive regulatory
approvals before they can be commercially deployed. As a result,
customers may require that we obtain these approvals before buying or
agreeing to buy our products. Obtaining these approvals can be a long,
expensive process. Delays in obtaining the necessary approvals could
hinder market acceptance of our products, delay sales of our products,
and adversely affect our ability to market those products.
o Changes in governmental regulation could adversely affect our
competitive position. Governmental laws and regulations applicable to
our products and services evolve and change frequently. These changes
could hurt our competitive position. For example, a point we often use
in marketing our equipment products is that our products have been
approved by the United States Federal Communications Commission, which
sometimes can be a long, expensive process. The Federal Communications
Commission proposed regulations that would relax this approval process
and potentially allow more products to operate as approved products. If
enacted, these regulations could make it easier for competitive
products to qualify as products approved by the Federal Communications
Commission. This could adversely affect our competitive position.
Similarly, changes in the laws and regulations applicable to our
service business could adversely affect our competitive position in
that business.
o We are subject to domestic and international authorities' allocations
of the radio frequency spectrum. Equipment to support new systems and
services can be marketed only if suitable frequency allocations are
made available to telecommunications service providers. The process of
allocating frequencies to service providers is typically expensive,
complex, and lengthy. If service providers and others are delayed in
deploying new systems and services, we could experience lack of orders
or delays in orders. Similarly, failure by regulatory authorities to
allocate suitable frequency spectrum could have a material adverse
effect on our results.
39
o At time we rely on a limited number of customers for a material portion
of our sales, which exposes us to risks relating to the loss of sales
and credit risk. For the year ended December 31, 2004, no one customer
accounted for more than 10% of our sales. However, we did have a number
of substantial customers. We are currently attempting to increase its
number of substantial customers which could increase our customer
concentration risks. Our ability to maintain or increase our sales in
the future will depend in part upon our ability to obtain additional
orders from these customers. Our customer concentration also results in
concentration of credit risk. An acquisition of one of our significant
customers could cause any current orders to be delayed or canceled and
no new orders being placed with us and could further concentrate our
customer base. Adverse developments such as these with our significant
customers could adversely impact our sales and financial results.
o The continuing uncertainty in the telecommunications industry has
caused us to maintain tight credit limits, which may be adversely
affecting our sales. Many of our potential customers have faced or are
facing financial difficulties due to the industry-wide uncertainty and
depressed conditions. As a result, we have maintained what we believe
to be stringent policies concerning the extension of credit to
potential customers. We believe that these tight credit policies may be
limiting our sales. As a result, we may loosen our credit policies,
which may increase our sales but may also increase the likelihood of
having bad debts from customers who can't or won't pay.
o Given the relatively small size of many of our customers, they may not
be able to pay for the products they purchase from us in the time
period we expect or at all. We are subject to credit risk in the form
of trade accounts receivable. We could face difficulties in receiving
payment in accordance with our typical policies allowing payment within
30 days. Many of our customers are new and smaller service providers
which do not have the financial resources of existing, larger service
providers. Any delay, inability, or refusal to pay for purchases of our
products may materially adversely affect our business. Difficulties of
this nature have occurred in the past, and we believe they will likely
occur in the future.
o Our failure or inability to protect our intellectual property could
adversely affect our business and operations, particularly in our
equipment business which has otherwise relatively low barriers to
entry. Our ability to compete depends in part on our ability to protect
our intellectual property. The steps we have taken to protect our
technology may be inadequate to prevent misappropriation of our
technology and processes. Existing trade secret, trademark, and
copyright laws offer only limited protection. Our patents could be
invalidated or circumvented. Inability or failure to protect our
intellectual property could remove a barrier to a competitor entering
our WLAN business, which in general has lower barriers to entry than
other businesses.
o Laws of foreign countries where we do business may provide less
intellectual property protection for our products, which could
adversely affect our ability to compete in our price-sensitive
business. The laws of certain foreign countries in which our products
are or may be developed, manufactured, or sold may provide less
protection for the intellectual property contained in our products.
This may make the possibility of piracy of our technology and products
more likely. This piracy could result in cheaper copies of our products
being available on the market, which could adversely affect our
business and financial results.
o Our intellectual property rights do not prevent other companies from
developing similar technology, which could be superior to ours. Other
companies could develop products that use similar and perhaps superior
technology. This technology could be developed in a way to not violate
or infringe our intellectual property rights. As a result, our
intellectual property rights provide no assurance that competing and
perhaps superior products won't be developed, even if we are able to
protect our intellectual property rights.
o We may engage in litigation to protect our intellectual property, which
could be costly, long, and distracting even if ultimately successful.
If we believe our intellectual property rights are being infringed, we
may commence litigation or take other actions to enforce our patents,
protect our trade secrets and know-how, or determine the scope and
validity of the patents or intellectual property rights of others.
There can be no assurance that we would be successful in any such
litigation. Any litigation could result in substantial cost and divert
the attention of our management, which could harm our operating results
and future operations.
40
o Much of our material intellectual property is not protected by patents,
which may reduce the extent to which we can protect our intellectual
property. We rely primarily on trade secret laws, confidentiality
procedures, patents, copyrights, trademarks, and licensing arrangements
to protect our intellectual property. While we do have a number of
patents, the patents alone do not provide significant protection for
much of our intellectual property used in our current equipment
products. A significant portion of our proprietary technology is
know-how, and employees with know-how may depart before transferring
their know-how to other employees. The fact that much of our
intellectual property is not covered by patents could reduce the extent
to which we can protect our rights in that intellectual property.
o Our products and operations could infringe on the intellectual property
rights of others, which could have an adverse impact on our business.
We would have to address any such infringements by seeking licenses,
altering our products, or no longer selling the products. Any licenses
we may be required to seek may be expensive or otherwise onerous.
Similarly, changing our products may be costly, time-consuming, and
impractical and could detract from the value of our products. A party
making a claim of infringement could secure a judgment against us that
requires us to pay substantial damages. A judgment could also include
an injunction or other court order that could prevent us from selling
our products. Any claim of infringement by a third party also could
cause us to incur substantial costs defending against the claim, even
if the claim is invalid, and could distract the attention of our
management. Any of these events could seriously harm our business.
o We have limited experience operating our Ricochet(R) network and may be
unable to operate it effectively, which could adversely impact our
business. Our business historically has focused on selling wireless
communications equipment. Our purchase of Ricochet Networks in June
2004 was our first major entry into providing wireless communication
services - actual Internet connectivity instead of just providing the
equipment to enable the connectivity. The services market is a very
different market from the equipment market with different customer
bases, methods of doing business, and other issues. We may not be
successful at addressing the different issues and challenges relating
to our services business. The services business may divert management's
attention and financial and other resources from our equipment
business. These issues could adversely impact our overall business and
financial results.
o Our entry into the wireless communications services business through
Ricochet(R) could adversely impact our equipment business because those
customers may perceive us as now competing with them. In our equipment
business, we generally sell our products to companies that provide
wireless communications connectivity and services. Those companies may
be displeased with our purchase of Ricochet, as they may believe this
purchase now makes us an actual or potential competitor to them.
Therefore, these companies may be reluctant to, and may not, purchase
further wireless communications equipment from us or may reduce their
purchases. These reductions in purchases could adversely impact our
overall business and financial results.
o We expect to continue to generate losses as we continue to operate and
possibly expand our Ricochet(R) network and service. Our Ricochet
business has a history of losses, and we expect to incur significant
additional operating losses in the future. We cannot predict when or if
we will be able to achieve or sustain profitability for our Ricochet
business. Previous owners of Ricochet similarly experienced difficulty
in achieving or sustaining profitability of the business. If we are
unable to achieve or sustain profitability or positive cash flow from
Ricochet's operating activities, we may be unable to conduct that
business effectively or competitively.
o We may be unable to grow the user base and geographically expand the
Ricochet(R) network due in part to the turbulent history of Ricochet.
We are the fourth owner and operator of the Ricochet network in less
than five years. The initial operator of the network commenced
voluntary bankruptcy proceedings and, we believe, did not perform some
of its agreements relating to the network, including agreements to
expand the network. These ownership changes, bankruptcy, and related
uncertainty and non-performance of agreements have damaged Ricochet's
reputation and relationships that could be vital to the successful
operation and possible expansion of the network. This history may cause
users to be reluctant to subscribe to the Ricochet service and may
cause third parties to be reluctant to contract with us relating to the
operation and possible expansion of the network. These issues in
general could adversely impact our
41
efforts to maintain and grow our user base and geographically expand
the Ricochet network and our business in general.
o The data access market in which Ricochet operates is highly
competitive, which could adversely impact our ability to attract and
retain users of our Ricochet(R) service. Competition in the market for
data access and communications services is intense. A number of
privately and publicly held communications and data access companies
have developed or are developing new wireless and wired communications
and data access services and products using technologies that may
compete with ours. Some wireless data service companies have operated
for many years and are already broadly deployed in major markets and
well-recognized. Many of these companies have significantly greater
resources, more established brand names, and larger customer bases than
we do. In addition, several companies in various other industries, such
as the satellite communications industry, may enter the market for
mobile data access in the future. Further, we may face competition from
Internet service providers that could offer Internet, online or data
access services at prices lower than those offered by us. This
competition could limit our ability to increase our user base, cause us
to lose market share, and force us to reduce prices or incur additional
selling, marketing and product development expenses, any of which could
harm our business and our results of operations.
o Different data access technologies may have advantages over our
Ricochet(R) service, which could adversely impact our ability to
attract and retain users of our service. The market for data access and
communications services is characterized by rapidly changing
technology, new product introductions, and evolving industry standards.
A number of data access technologies, such as digital subscriber lines
and cable modems, generally are able to provide faster data rates than
our network. This may negatively affect user perceptions as to the
attractiveness of our wireless service and result in pressure to reduce
our prices. Increased data rates also may result in the widespread
development and acceptance of applications that require a higher data
transfer rate than our service provides. Our success will depend to a
substantial degree on our ability to differentiate our service from
competitive offerings and promote and sell the advantages of our
service. Our inability to do this could cause us to be unable to
increase our users and to lose users to competing service providers.
o The success of our Ricochet business ultimately will depend on our
ability to attract and retain sufficient users to our Ricochet(R)
service. There may only be a limited market today for our Ricochet
service, and we bear the risk that we will not sell enough
subscriptions to our service or generate sufficient revenue for us to
recoup the substantial expenditures we have made and will continue to
make to operate and possibly expand our network. In addition,
competition to provide wireless data access services of the type
Ricochet offers could result in a high turnover rate among our users,
which could have an adverse effect on our business and results of
operations.
o User demand for our Ricochet(R) service is unpredictable. We cannot
reliably project potential demand for our Ricochet service, including
whether there will be sufficient demand at the prices we need for that
business to be profitable in either the markets in which we currently
operate or in any markets into which we may expand. We cannot reliably
predict demand because the market for mobile wireless data access
services is in the early stages of development and it is not clear what
combination of features is required for a service to gain broad user
acceptance. Different possible features include cost, security, speed
of connectivity, reliability, ease of use, and quality of service. How
we address these issues is likely to affect the demand for our Ricochet
service.
o Our success depends, in part, on our ability to market our Ricochet(R)
service. We believe that a substantial marketing effort is necessary to
stimulate demand for our Ricochet service. We expect to be marketing
and advertising our service to attract users to our service. From time
to time, we may undertake special marketing plans or promotions for our
service. We may engage channel partners or others to assist us with
marketing our service. We cannot predict whether these marketing
efforts will be successful and attract the users that we need to
sustain our Ricochet business and operations. If we are unable to
market our service successfully, or at all, our ability to attract
users and generate revenues will be adversely affected and our business
will be adversely impacted.
o The success of our Ricochet(R) service depends, in part, on our ability
to provide adequate customer support. We currently provide users of the
Ricochet service with customer support. We cannot predict
42
whether users of our service will be satisfied with the customer
support provided. If we are unable to provide adequate customer
service, our ability to retain users could be adversely affected and
our reputation and business could be adversely impacted.
o We may be unable to attract users and compete with other data access
providers if we do not expand our Ricochet(R) network coverage area. We
currently are offering our Ricochet service in only two markets. We are
actively considering the expansion of the Ricochet service into other
markets. Competitive factors may require that we offer our service in
additional markets as well as further develop our Ricochet network in
the markets where we already are offering service. If we do not expand
our network, we may be unable to attract users and compete with other
data access providers, which may offer a competing service with a
broader coverage area. Consequently, our business and financial results
could be adversely impacted.
o There are numerous contingencies involved in the possible expansion of
our Ricochet(R) network, which if not resolved as expected could
adversely impact our business. Before we decide to expand our Ricochet
network to offer service to users in other targeted markets, we must
consider a number of business, regulatory, and implementation issues,
risks, and contingencies, many of which are not within our control.
These issues include predicted costs of expansion, making an accurate
assessment of potential markets, ability to use equipment installed by
a previous operator of the Ricochet system, resolving any issues
created by previous operators of the Ricochet system in the targeted
market, cost and availability of network and circuit backhaul
connections, any specific regulatory requirements relating to expansion
into a given market, and delays or refusals by local governments or
other third parties to enter into the agreements we need to deploy our
network. We may not be able to address these issues and risks in a
timely basis or at the cost that we have assumed or at all. Unfavorable
or untimely resolution of these issues could adversely impact our
business and financial results.
o We may not effectively manage our expansion of the Ricochet(R) service
into new markets, which could adversely impact our reputation and
business. If we decide to expand our network, we must manage the
design, deployment, installation, maintenance, operation, and support
of a bigger mobile wireless data access network. If we are unable to
manage this future growth effectively, or if we experience difficulties
in managing the growth of our network, our business, results of
operations, reputation and prospects for growth could be adversely
impacted.
o Our inability to obtain and retain attachment rights for our
Ricochet(R) network equipment could adversely affect our ability to
operate or expand our network. The operation and possible expansion of
our network depend to a significant degree on our ability to obtain and
maintain rights to attach our poletop radios to municipal or other
facilities from local municipalities, public utilities, or other
governmental or third-party entities. We may face delays or rejections
in attempting to obtain the approvals and agreements necessary to
install, attach, and maintain our network equipment. These difficulties
may, in some cases, be exacerbated by issues created by former
operators of the Ricochet network. Our inability to obtain these
agreements in a timely manner and on terms acceptable to us, or at all,
could force us to seek alternative sites on which to install network
radios. In turn, use of these alternatives sites could significantly
increase the time and cost required to operate or expand the network.
o Our inability to obtain and retain space on rooftops or towers for our
Ricochet(R) network equipment could adversely affect our ability to
operate or expand our network. The operation and possible expansion of
our network depend to a significant degree on our ability to lease
space for our wired access points on building rooftops or on
transmission towers owned by third parties. There is substantial
competition from a variety of communications companies for these sites.
Given this competition, obtaining the desired space can be a
time-consuming, expensive process. If we are unable to identify and
negotiate leases for the desired space in a timely manner and on terms
favorable or acceptable to us, the operation and expansion of our
network could be impaired.
o Our ability to increase the number of users of the Ricochet(R) system
and to expand the geographic reach of the Ricochet system could be
limited by availability of necessary equipment. One of the assets we
acquired when we purchased Ricochet was its significant inventory of
modem, poletop radio, and wired access point equipment. We believe this
inventory will enable continued operation and some amount of expansion
of the Ricochet network without significant inventory costs. However,
at some point, our
43
operation and possible expansion of the Ricochet network may require us
to obtain additional inventory. Doing some may be a time-consuming,
expensive process, if we are able to do so at all. Our inability to
obtain this additional inventory at the times, in the quantities, and
at the prices we desire could adversely impact our competitive
position, our continued operation of the network, our plans to expand
the network, and our general business.
o Our Ricochet(R) service depends on a network connections provided by
third parties, which are subject to disruption by events beyond our
control. Our success will depend upon the adequacy, reliability, and
security of the networks and circuits used to carry data within our
Ricochet network and between our Ricochet network and corporate
networks and the Internet. Because these connections used to carry the
data are owned or controlled by third parties, we have no control over
their quality and maintenance. Generally, we have limited recourse
against the providers of these connections if the connection fails. If
there is any failure of the Internet backbone, the network connecting
our system to the Internet backbone, any circuit supporting the
exchange of data between our wired access points or our network
interface facilities, or any other link in the delivery chain, whether
from operational disruption, natural disaster, or otherwise, our
service could be interrupted and our reputation, business, and results
of operations could be adversely affected.
o The failure of our third-party contractors to maintain and repair the
Ricochet(R) system equipment on a timely, efficient basis could
adversely affect our reputation with our customers. We generally use
third-party contractors to install and replace when needed our poletop
radios and wired access points. The successful operation of our network
is dependent on timely actions by these parties, which can be affected
by numerous factors, including the supply of labor, materials and
equipment, and prevailing weather conditions, all of which are beyond
our control. Failure to repair the network in a timely fashion could
adversely impact our relationship with our customers, our general
reputation, and our business and prospects.
o The Ricochet(R) network operates in unlicensed radio frequencies, which
subject the network to harmful interference issues. Because the
Ricochet network operates in frequency bands on a license-free basis,
the Federal Communication Commission requires that we not cause harmful
interference to licensed users in the band and we must accept any
interference present in the bands. Excessive harmful interference could
disrupt our service and discourage users from subscribing to or
retaining our service. This could harm our reputation, affect our
competitive position, and impair our business and results of
operations.
o We are a defendant in pending stockholder litigation that could
materially and adversely affect our business. We are a party to four
purported securities class action lawsuits. These lawsuits relate to
the underwriters' alleged unlawful activities in connection with our
initial public offering in February 2000. The lawsuits have been
assigned along with approximately 1,000 other lawsuits making
substantially similar allegations against hundreds of other publicly
traded companies and their public offering underwriters to a single
federal judge for consolidated pre-trial purposes. A tentative
settlement of these lawsuits has been reached between the plaintiffs
and affected companies. However, there can be no assurance that this or
any other settlement will be consummated. These lawsuits are at an
early stage and involve substantial uncertainty and, accordingly, we
cannot predict the outcome. Defending lawsuits of this nature can be a
lengthy and expensive process, and we may not prevail. Even if we
prevail or the action is settled, the costs associated with these
lawsuits could be substantial. In addition, these lawsuits could have
other material adverse impacts on us, such as management distraction,
adverse publicity, and adverse reaction from the financial markets,
from our customers, or from actual or potential strategic partners. The
difficulties and uncertainties relating to these lawsuits very likely
may be increased and complicated because of the large number of pending
similar cases and other parties involved. The outcome of these lawsuits
could materially compromise our ability to continue to operate our
business.
o We have elected to participate in a proposed settlement of this pending
stockholder litigation, but there can be no assurance that this
settlement will be consummated. In June 2003, we elected to participate
in a proposed settlement agreement with the plaintiffs in the pending
stockholder litigation. The proposed settlement does not provide for
the resolution of any claims against the underwriter defendants. The
parties to the proposed settlement submitted formal settlement
documents to the court in June 2004 and requested preliminary approval
by the court of the proposed settlement. Certain defendant underwriters
in the settling cases opposed preliminary approval of the proposed
settlement. In February 2005, the court
44
issued an order preliminarily approving the proposed settlement in all
respects but one. The plaintiffs and the issuer defendants are in the
process of assessing whether to proceed with the proposed settlement,
as modified by the court. If the plaintiffs and the issuer defendants
elect to proceed with the proposed modified settlement, they will
submit revised settlement documents to the court. The underwriter
defendants may then have an opportunity to object to the revised
settlement documents. If the court preliminarily approves the proposed
settlement, notice 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. Consummation of the proposed
settlement remains conditioned on, among other things, receipt of both
preliminary and final court approval. Given the number of companies and
attorneys involved in these proceedings, we expect that any
consummation of this settlement will be a lengthy process. There can be
no assurance that this settlement will be consummated.
o Proceeds under our directors' and officers' insurance policies may be
unavailable or insufficient to cover our exposure under the proposed
settlement of the pending stockholder litigation. The proposed
settlement provides that the insurers of the participating issuer
defendants will guarantee that the plaintiffs will recover at least $1
billion from the underwriter defendants. Any amounts necessary to fund
that guarantee would come from participating issuers' directors' and
officers' liability insurance policy proceeds as opposed to funds of
the participating issuer defendants themselves. However, we could be
required to contribute to the costs of the settlement if our insurance
coverage were insufficient to pay our allocable share of the settlement
costs. We have a total of $15 million in directors and officers
insurance coverage applicable to this litigation. We currently believe
that this insurance coverage would be sufficient to cover our allocable
share of the settlement costs. However, the insurance proceeds may be
unavailable if the companies issuing those policies experience
financial difficulties or are otherwise unable or unwilling to pay
under those policies. Also, there can be no assurance that proceeds
under those policies would be sufficient to cover our exposure under
the settlement.
o Our stock price has been volatile and may continue to be volatile. The
market price of our common stock has been volatile and is likely to
remain volatile. Some of the reasons for the volatility are within our
control, but many are beyond our control and unrelated to our operating
performance. We believe the following factors, among others, have
contributed to our stock price volatility:
o Our financial performance and results
o Announcements by us concerning our relationships with our
existing or new customers
o Announcements by us concerning our completed and contemplated
acquisitions and other strategic growth plans
o Announcements by our customers
o Our integration of Telaxis Communications and Young Design
following the April 2003 combination of the two companies
o Our integration of Terabeam Corporation, Ricochet Networks,
Inc. and KarlNet, Inc. following the second quarter 2004
acquisition of those companies
o Sales of shares of our stock that we issued in connection with
our completed acquisitions or the perception that such shares
may be sold
o The relatively low number of shares of our stock that trade on
an average day
o The announcement of our filing an application to list our
common stock on the Nasdaq SmallCap Market
o The introduction of new products by us
o The financial performance of our competitors
o The introduction of new products by our competitors
o Other announcements by our competitors
o General conditions of the financial markets
We expect these factors and others to continue to contribute to the
volatility of our stock price.
o Registration of the restricted stock held by one of our major
stockholders could cause our stock price to fall. One stockholder,
Concorde Equity, owned approximately 23% of our outstanding common
stock on March 18, 2005. Concorde Equity is an investment company
controlled by Robert E. Fitzgerald, a board member and our chief
executive officer. Concorde Equity received this stock in a private
placement in connection with the combination of Young Design and
Telaxis in April 2003. As such, this stock has
45
been and is currently subject to restrictions on sale or transfer. In
the merger agreement, we agreed to register this stock with the SEC in
the first half of 2004, which, if completed, would enable this stock to
be sold with much less restriction. We have not yet registered this
stock. This registration and potential sale of large amounts of our
common stock could cause our stock price to fall or prevent it from
increasing.
o Expiration of the lock-up period restricting the sale or transfer of
stock held by our major stockholders could cause our stock price to
fall. Funds controlled by Mobius Venture Capital and SOFTBANK Capital
Partners currently hold some stock that cannot be sold or otherwise
transferred due to contractual lock-up provisions. We believe these
stockholders collectively owned approximately 32% of our outstanding
common stock on March 18, 2005. Gary E. Rieschel, a co-founder of
Mobius Venture Capital, currently sits on our board of directors. These
stockholders, all former Terabeam stockholders, entered into lock-up
agreements with us in connection with our acquisition of Terabeam. The
lock-up agreements provide that these stockholders will not sell or
transfer any of our stock issued to them pursuant to the merger for a
period of at least 180 days after closing of the merger (through at
least December 19, 2004). These stockholders may sell or transfer up to
50% of the shares issued to them during the period beginning December
19, 2004 and ending on the date that is 270 days after closing (March
19, 2005). These stockholders may sell or transfer up to an additional
25% of the shares issued to them during the period beginning March 19,
2005 and ending on the one-year anniversary of the closing (June 22,
2005). All restrictions under those agreements on the sale or transfer
of the stock issued in the merger expire on June 22, 2005. Once the
lock-up periods expire, these stockholders could sell their shares of
our stock or distribute those shares to their investors who then could
sell the shares. Based on the lock-up release schedule described above,
half of the stock held by these stockholders as of March 18, 2005 was
free from the lock-up restrictions and another 25% of that stock was
released from the lock-up restrictions effective March 19, 2005. This
expiration of these lock-up periods and potential distribution and/or
sale of large amounts of our common stock could cause our stock price
to fall or prevent it from increasing.
o Future actual or potential stock distributions or sales by our major
stockholders could cause our stock price to fall. Our major
stockholders, Concorde Equity and funds controlled by Mobius Venture
Capital, owned approximately 47% of our outstanding common stock on
March 18, 2005. Our stock held by Concorde Equity is currently subject
to restrictions on sale or transfer but portions of this stock can be
(and have been) sold in the open market. Commencing April 2, 2005, the
legal restrictions on sale or transfer of this stock will be reduced
due to the length of time Concorde Equity held the stock. At that time,
Concorde Equity will have more flexibility in selling shares of stock
or distributing it to the investors in Concorde Equity. Similarly, as
the stock controlled by Mobius is released from the lock-up
restrictions, Mobius will have flexibility in selling shares of stock
or distributing it to its investors. Because principals of Concorde
Equity and Mobius are members of our board of directors, any sales or
distributions by those stockholders will be reported publicly shortly
after they occur. Actual or potential sales of this stock by these
stockholders (or their investors) could cause our stock price to fall
or prevent it from increasing for numerous reasons. For example, a
substantial amount of our common stock becoming available (or being
perceived to become available) for sale in the public market could
cause the market price of our common stock to fall or prevent it from
increasing, particularly given the relatively low trading volumes of
our stock. Also, actual or potential distributions or sales by these
stockholders could be viewed negatively by other investors because
these stockholders are controlled by members of our board of directors
and/or senior executives.
o Future actual or potential sales of the stock we issued in connection
with our acquisitions in 2004 could cause our stock price to fall. In
the second quarter of 2004, we acquired three companies and issued
approximately 12.6 million shares in connection with those
acquisitions. Approximately 4.5 million of these shares were able to be
sold immediately in the public markets. That number has increased as
approximately 5.3 million shares that were originally subject to
lock-up restrictions are now free from those restrictions.
Additionally, commencing in May 2005, portions of another 1.0 million
shares will be able to be sold in the public markets. Some of the
shares issued in the acquisitions were acquired by former Terabeam
Corporation option holders who exercised their options shortly before
we acquired Terabeam. The exercise prices for some of those options
were significantly lower than the recent market price of our common
stock so holders of this stock may be willing to sell at lower prices.
A substantial amount of this common stock becoming available (or being
perceived to become available) for sale in the public market could
cause the market price of our common stock to fall or prevent it from
increasing, particularly given the relatively low trading volumes of
our stock.
46
o Future actual or potential sales of the stock we privately issued prior
to the initial public offering of our common stock in February 2000
could cause our stock price to fall. We believe that a number of our
pre-IPO stockholders continue to hold their shares, and those
stockholders may decide to sell their shares. A substantial amount of
this common stock becoming available (or being perceived to become
available) for sale in the public market could cause the market price
of our common stock to fall or prevent it from increasing, particularly
given the relatively low trading volumes of our stock.
o Future actual or potential sales of the stock we issue upon exercise of
stock options could cause our stock price to fall. As of March 18,
2005, we had options outstanding to buy approximately 1,607,621 shares
of our common stock and may grant options or other stock grants
relating to an additional approximately 130,250 shares of our common
stock. We have filed registration statements with the SEC relating to
the shares of our common stock that may be issued pursuant to the
exercise of those outstanding stock options and stock options or other
stock grants that we may grant in the future. In many cases, holders of
those options could decide to exercise the options and immediately sell
the shares. A substantial amount of this common stock becoming
available (or being perceived to become available) for sale in the
public market could cause the market price of our common stock to fall
or prevent it from increasing, particularly given the relatively low
trading volumes of our stock. Further, actual or potential sales of
this stock could be viewed negatively by other investors because some
of these stock options are held by our directors and senior executives.
o Future actual or potential sales of the stock we issue upon exercise of
stock warrants could cause our stock price to fall. On March 18, 2005,
we had warrants outstanding to purchase approximately 784,991 shares of
our common stock at a weighted average purchase price of $3.00 per
share. Shares of our common stock received upon exercise of those
warrants may, depending on the method of exercise, be immediately
available for public sale. A substantial amount of this common stock
becoming available (or being perceived to become available) for sale in
the public market could cause the market price of our common stock to
fall or prevent it from increasing, particularly given the relatively
low trading volumes of our stock.
o If we acquire other companies or product lines by issuing stock, the
result may be dilutive to existing stockholders. In the second quarter
of 2004, we acquired three companies and issued approximately 12.6
million shares in connection with those acquisitions. We may acquire
other companies, businesses, and product lines in the future and may
issue shares of our stock in connection with any such acquisitions. Any
such issuances could significantly dilute the holdings of our current
stockholders.
o If we raise additional capital by issuing stock, the result may be
dilutive to existing stockholders. Our board of directors may decide to
issue additional equity securities in many situations without the need
for any stockholder vote. Given the recent prices for our common stock,
significant dilution to our stockholders could result if we raise
additional funds by issuing equity securities. Further, these issuances
may also involve issuing stock at a price per share below the current
trading prices. For example, on December 8, 2003, we issued 500,000
shares of our common stock in a private placement at a price of $4.10
per share. That price was an approximately 14% discount from the last
sale price of our common stock on that date of $4.75 per share.
o The terms of any equity securities we may issue in the future may be
better than the terms of our common stock. Our board of directors is
authorized to create and issue equity securities that have rights,
privileges, and preferences senior to those of our common stock. In
many situations, our board could take these actions without the need
for any stockholder vote.
o We have limited capital resources and our prospects for obtaining
additional financing, if required, are uncertain. Our future capital
requirements will depend on numerous factors, including expansion of
marketing and sales efforts, development costs of new products, the
timing and extent of commercial acceptance for our products, our
integration with Terabeam Corporation, Ricochet Networks, Inc., and
KarlNet, Inc. and any other companies we may acquire, and potential
changes in strategic direction. Additional financing may not be
available to us in the future on acceptable terms or at all. If funds
are not available, we may have to delay, scale back, or terminate
business or product lines or our sales and marketing, research and
development, acquisition, or manufacturing programs. Our inability to
obtain
47
capital could seriously damage our business, operating results, and
financial condition and cause our stock price to decline.
o We may raise additional capital on terms that we or our stockholders
find onerous, which could adversely affect our financial results and
stock price. In the future, we may be able to raise additional capital
only on terms that we find onerous. Alternatively, some of our
stockholders may find the terms of our capital arrangements to be
onerous. For example, a small number of stockholders expressed
displeasure at our issuing shares in December 2003 in a private
placement at a price below the current trading price of our stock. We
may also obtain funds through arrangements with partners or others that
may require us to relinquish rights to certain of our technologies or
potential products or other assets. The terms of our capital
arrangements or the perceived onerous nature of those arrangements
could adversely affect our financial results and stock price.
Possible Implications of Cautionary Statements
The items described above, either individually or in some combination,
could have a material adverse impact on our reputation, business, need for
additional capital, ability to obtain additional debt or equity financing,
current and contemplated products gaining market acceptance, development of new
products and new areas of business, cash flow, results of operations, financial
condition, stock price, viability as an ongoing company, results, outcomes,
levels of activity, performance, developments, or achievements. Given these
uncertainties, investors are cautioned not to place undue reliance on any
forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
See Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations, Disclosures about Market Risk.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm .................. 49
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................... 50
Consolidated Statements of Operations..................................... 51
Consolidated Statement of Changes in Stockholders' Equity................. 52
Consolidated Statements of Cash Flows..................................... 53
Notes to Consolidated Financial Statements................................ 54
Schedule II - Valuation and Qualifying Accounts........................... 74
48
Report of Independent Registered Public Accounting Firm
================================================================================
TO THE BOARD OF DIRECTORS
YDI WIRELESS, INC.
Falls Church, Virginia
We have audited the accompanying consolidated balance sheets of YDI WIRELESS,
INC., (the "Company") as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 2004, 2003, and 2002. We also have
audited the related financial statement Schedule II for the years ended December
31, 2004, 2003, and 2002. These consolidated financial statements and financial
statement Schedule II are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement Schedule II based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of YDI WIRELESS, INC.
as of December 31, 2004 and 2003 and the results of its operations and cash
flows for the years ended December 31, 2004, 2003, and 2002 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement Schedule II for the years ended
December 31, 2004, 2003 and 2002, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As described in Note 2 to the financial statements, during 2002 the Company
changed its method of accounting for the excess of acquired net assets over
cost.
/s/ Fitzgerald, Snyder & Co., P.C.
McLean, Virginia
February 25, 2005
49
YDI WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share data)
2004 2003
---------- ----------
Assets
Current assets:
Cash and cash equivalents ....................................................... $ 35,368 $ 8,990
Investment securities - available-for-sale ...................................... 5,369 --
Accounts receivable, net ........................................................ 2,972 2,511
Refundable income taxes ......................................................... 151 226
Inventory ....................................................................... 7,442 3,134
Assets held for sale ............................................................ -- 790
Prepaid expenses ................................................................ 253 162
---------- ----------
Total current assets ........................................................ 51,555 15,813
Property and equipment, net ........................................................ 2,511 1,747
Other Assets:
Restricted cash ................................................................. 5,136 --
Investment securities - available-for-sale ...................................... -- 2,316
Investment securities - at cost ................................................. -- 311
Goodwill ........................................................................ 6,072 --
Intangible assets, net .......................................................... 11,919 483
Deposits ........................................................................ 91 49
---------- ----------
Total other assets .......................................................... 23,218 3,159
---------- ----------
Total assets ................................................................ $ 77,284 $ 20,719
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ........................................... $ 6,965 $ 3,023
Deferred revenue ................................................................ 159 --
Current maturities of notes payable ............................................. 2,899 213
---------- ----------
Total current liabilities ................................................... 10,023 3,236
Notes payable, net of current maturities ........................................... 1,270 1,298
---------- ----------
Total liabilities ........................................................... 11,293 4,534
Commitments and contingencies
Stockholders' Equity
Preferred stock, $0.01 par value; authorized 4,500,000, none issued at
December 31, 2004 and December 31, 2003 ....................................... -- --
Common stock, $0.01 par value, 100,000,000 shares authorized; 22,845,847
issued, 22,345,847 outstanding at December 31, 2004 and 14,179,882
issued and outstanding at December 31, 2003 ................................... 228 142
Additional paid-in capital ...................................................... 59,637 6,173
Retained earnings ............................................................... 7,277 8,673
Treasury stock .................................................................. (1,155) --
Accumulated other comprehensive income:
Net unrealized gain (loss) on available-for-sale securities ................... 4 1,197
---------- ----------
Total stockholders' equity .................................................. 65,991 16,185
---------- ----------
Total liabilities and stockholders' equity .................................. $ 77,284 $ 20,719
========== ==========
See accompanying notes to consolidated financial statements.
50
YDI WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except share and per share data)
YDI Wireless, YDI Wireless, Young
Inc. Inc. Design, Inc.
-------------------------------------------
2004 2003 2002
----------- --------- -----------
Revenues .......................................................................... $ 22,897 $ 27,241 $ 20,304
Cost of goods sold ................................................................ 13,414 15,714 12,376
----------- --------- -----------
Gross profit .................................................................. 9,483 11,527 7,928
Operating expenses:
Selling costs ................................................................. 2,557 2,204 2,366
Research and development ...................................................... 2,949 1,704 424
General and administrative .................................................... 9,976 7,090 3,640
--------- --------- ---------
Total operating expenses .................................................. 15,482 10,998 6,430
--------- --------- ---------
Operating income (loss) ........................................................... (5,999) 529 1,498
Other income (expenses):
Interest income ............................................................... 810 128 22
Interest expense .............................................................. (209) (149) (131)
Equity method loss from unconsolidated subsidiaries ........................... -- -- (181)
Contract cancellation income .................................................. -- -- 564
Gain on sale of Phazar stock .................................................. 3,882 -- --
Other income (expenses) ....................................................... 168 53 (10)
--------- --------- ---------
Total other income (expenses) ............................................. 4,651 32 264
--------- --------- ---------
Income (loss) before income taxes, extraordinary gain, cumulative effect of
accounting change, and minority interests ..................................... (1,348) 561 1,762
Provision (benefit) for income taxes .......................................... (2) 261 752
--------- --------- ---------
Income (loss) before extraordinary gain, cumulative effect of accounting change,
and minority interests ........................................................ (1,346) 300 1,010
Extraordinary gain (net of income taxes of $0) .................................... -- 4,347 89
Cumulative effect of accounting change (net of income taxes of $0) ................ -- -- 526
--------- --------- ---------
Income (loss) before minority interests ........................................... (1,346) 4,647 1,625
Minority interests in (gains) losses of subsidiaries .......................... -- -- (63)
--------- --------- ---------
Net income (loss) ................................................................. $ (1,346) $ 4,647 $ 1,562
========= ========= =========
Weighted average shares - basic ................................................... 19,792 12,571 9,375
========= ========= =========
Earnings (loss) per share, basic .............................................. $ (0.07) $ 0.37 $ 0.17
========= ========= =========
Weighted average shares - diluted ................................................. 19,792 12,841 9,375
========= ========= =========
Earnings (loss) per share, diluted ............................................ $ (0.07) $ 0.36 $ 0.17
========= ========= =========
Pro forma amounts assuming the new accounting method is applied retroactively:
Income (loss) before income taxes, extraordinary gain, cumulative effect
of accounting change and minority interests ................................... $ (1,346) $ 300 $ 1,010
========= ========= =========
Net income (loss) ................................................................. $ (1,346) $ 4,647 $ 1,123
========= ========= =========
Weighted average shares - basic ................................................... 19,792 12,571 9,375
========= ========= =========
Earnings (loss) per share, basic .............................................. $ (0.07) $ 0.37 $ 0.12
========= ========= =========
Weighted average shares - diluted ................................................. 19,792 12,841 9,375
========= ========= =========
Earnings (loss) per share, diluted ............................................ $ (0.07) $ 0.36 $ 0.12
========= ========= =========
See accompanying notes to consolidated financial statements.
51
YDI WIRELESS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Common Stock Additional Other
--------------------- Paid-in Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock (Loss) Income Total
---------- ------- ---------- ---------- --------- ------------- --------
Balances, December 31, 2001 .............. 9,375,000 $ 94 $ 357 $ 2,504 $ -- $ (47) $ 2,908
Comprehensive income:
Net income (loss) .................... -- -- -- 1,562 -- -- 1,562
Unrealized gain (loss) on investments -- -- -- -- -- 38 38
---------- ------- ---------- ---------- --------- ----------- --------
Total comprehensive income (loss) ..... -- -- -- 1,562 -- 38 1,600
---------- ------- ---------- ---------- --------- ----------- --------
Balances, December 31, 2002 .............. 9,375,000 $ 94 $ 357 $ 4,066 $ -- $ (9) $ 4,508
Merger with Telaxis ...................... 4,177,078 42 3,697 -- -- -- 3,739
Exercise of stock options and warrants ... 127,804 1 218 -- -- -- 219
Issuance of common stock, net of costs ... 500,000 5 1,901 -- -- -- 1,906
Distribution to Merry Fields members .... -- -- -- (40) -- -- (40)
Comprehensive income:
Net income (loss) .................... -- -- -- 4,647 -- -- 4,647
Unrealized gain (loss) on investments -- -- -- -- -- 1,206 1,206
---------- ------- ---------- ---------- --------- ----------- --------
Total comprehensive income (loss) ... -- -- -- 4,647 -- 1,206 5,853
---------- ------- ---------- ---------- --------- ----------- --------
Balances, December 31, 2003 .............. 14,179,882 $ 142 $ 6,173 $ 8,673 $ -- $ 1,197 $ 16,185
Stock issued for acquisitions ............ 12,609,237 126 59,552 -- -- -- 59,678
Treasury stock purchased ................. (4,683,183) (42) (6,458) -- (1,155) -- (7,655)
Distribution to Merry Fields members .... -- -- -- (50) -- -- (50)
Exercise of stock options and warrants ... 239,911 2 370 -- -- -- 372
Comprehensive income:
Net income (loss) .................... -- -- -- (1,346) -- -- (1,346)
Unrealized gain (loss) on investments,
net of reclassification adjustments -- -- -- -- -- (1,193) (1,193)
---------- ------- ---------- ---------- --------- ----------- --------
Total comprehensive income (loss) .. -- -- -- (1,346) -- (1,193) (2,539)
---------- ------- ---------- ---------- --------- ----------- --------
Balances, December 31, 2004 .............. 22,345,847 $ 228 $ 59,637 $ 7,277 $ (1,155) $ 4 $ 65,991
=========== ======= ========== ========== ========= =========== ========
See accompanying notes to consolidated financial statements.
52
YDI WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands)
YDI YDI Young
Wireless, Wireless, Design,
Inc. Inc. Inc.
---------- ---------- ----------
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) ............................................................... $ (1,346) $ 4,647 $ 1,562
Depreciation and amortization ................................................. 1,249 183 131
(Gain) loss on disposal of property and equipment ............................. (14) 24 --
Realized (gain) loss on trading and available-for-sale
securities .................................................................... (3,521) (92) 4
Loss on write-down of investment in unconsolidated subsidiary ................. -- 36 --
Equity method loss from unconsolidated subsidiaries ........................... -- -- 181
Cumulative effect of accounting change ........................................ -- -- (526)
Loss on write down of assets held for sale .................................... -- 200 --
Bad debts ..................................................................... 488 660 384
Deferred income tax ........................................................... -- 387 580
Extraordinary gain ............................................................ -- (4,347) (89)
Inventory allowance ........................................................... 400 -- --
Changes in assets and liabilities affecting operations:
Restricted cash ............................................................. 740 -- --
Accounts receivable, net .................................................... 153 (1,485) (1,189)
Inventory ................................................................... (1,748) (748) (794)
Deposits .................................................................... 2 (21) (3)
Prepaid expenses ............................................................ 143 697 (432)
Refundable income taxes ..................................................... 75 (226) --
Accounts payable and accrued expenses ....................................... (2,306) (71) 886
Deferred revenue ............................................................ 96 -- --
Contract deposit - nonrefundable ............................................ -- -- (551)
Customer order deposits ..................................................... -- (9) --
Minority interests .......................................................... -- -- 63
---------- ---------- ----------
Net cash provided by (used in) operating activities .................... (5,589) (165) 207
---------- ---------- ----------
Cash flows from investing activities:
Proceeds on disposal of property and equipment .................................. 964 425 --
Purchase of securities .......................................................... (790) (726) (686)
Purchase of property and equipment .............................................. (37) (30) (16)
Purchase of intangible assets ................................................... -- (585) --
Investment in capitalized software .............................................. (601) -- --
Sale of securities .............................................................. 34,616 242 11
Cash used for acquisitions ...................................................... (4,800) -- --
Cash received from acquisitions ................................................. 10,254 7,421 --
---------- ---------- ----------
Net cash provided by (used in) investing activities ......................... 39,606 6,747 (691)
---------- ---------- ----------
Cash flows from financing activities:
Distributions to Merry Fields members ........................................... (50) (40) --
Exercise of stock options ....................................................... 372 219 --
Issuance of common stock ........................................................ -- 1,906 --
Purchase of treasury stock ...................................................... (7,655) -- --
Issuance of notes payable ....................................................... -- 500 2,336
Repayment of notes payable ...................................................... (200) (1,116) (2,046)
Repayment of capital leases ..................................................... (106) -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities ......................... (7,639) 1,469 290
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ............................... 26,378 8,051 (194)
Cash and cash equivalents, beginning of period ..................................... 8,990 939 1,133
---------- ---------- ----------
Cash and cash equivalents, end of period ........................................... $ 35,368 $ 8,990 $ 939
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest .......................................................... $ 200 $ 149 $ 130
========== ========== ==========
Income taxes paid ............................................................... $ 4 $ 90 $ 163
========== ========== ==========
Stock issued in acquisitions .................................................... $ 59,678 $ 3,739 $ --
========== ========== ==========
See accompanying notes to consolidated financial statements.
53
YDI WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Young Design, Inc. ("Young Design") was incorporated under the laws of the
Commonwealth of Virginia on February 28, 1986 to engage in the business of
manufacturing and selling equipment for use in transmission of data access on a
wireless basis.
On April 1, 2003, Young Design completed a strategic combination
transaction (the "combination") with Telaxis Communications Corporation
("Telaxis"), pursuant to a definitive strategic combination agreement. 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 since 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.
Merry Fields, LLC ("Merry Fields") was formed by certain shareholders of
Young Design under the laws of the State of Delaware on August 11, 2000. Merry
Fields owns the property and land leased to Young Design for its principal
operations. In accordance with FIN 46R, Merry Fields, LLC is a Variable Interest
Entity and therefore, the financial statements of Merry Fields are consolidated
with the financial statements of YDI Wireless, Inc. Fixed assets with a carrying
value of approximately $1.5 million secure the Merry Fields note payable of
approximately $1.1 million.
Effective May 13, 2004, the Company acquired KarlNet, Inc. ("KarlNet"), a
wireless software development company. Effective June 22, 2004, the Company
acquired Terabeam Corporation ("Terabeam"), a wireless telecommunications
equipment company. Effective June 25, 2004, the Company acquired Ricochet
Networks, Inc. ("Ricochet"), a wireless service provider. Each of these
acquisitions was accounted for using the purchase method of accounting and the
purchase price was allocated to the assets purchased and the liabilities assumed
based on the estimated fair values at the date of acquisition. The financial
results of these companies from and after the dates of acquisition are included
in the financial results reported for the Company.
During 2004, YDI began operating in two defferent business areas. The
first business is the historic operations of YDI as a designer, manufacturer,
and seller of wireless telecommunications equipment ("Equipment"). The second
business is as a wireless internet service provider ("Services") in several
major metropolitan cities. This business was acquired with the Ricochet Networks
acquisition during the second quarter of 2004. There are no significant
intercompany transactions which affect the revenue or expenses of either
business.
Summarized information as of December 31, 2004 and for year then ended is
as follows:
Equipment Services Total
Assets ................................. $ 73,312 $ 3,972 $ 77,284
Revenue ................................ $ 21,614 $ 1,283 $ 22,897
Operating income (loss) ................ $ (4,616) $ (1,383) $ (5,999)
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
54
Principles of Consolidation
The consolidated financial statements include the accounts of YDI Wireless
and its wholly owned subsidiaries and also Merry Fields, a consolidated
affiliate. Merry Fields is a Variable Interest Entity, and therefore the
financial statements of Merry Fields are consolidated with the financial
statements of YDI Wireless, Inc. All significant inter-company balances and
transactions have been eliminated in consolidation.
Asset Impairment
The Company periodically evaluates the carrying value of long-lived assets
when events and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than the carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, money market
accounts and investments with an original maturity of three months or less to be
cash or cash equivalents.
Restricted Cash
As part of the Terabeam acquisition, YDI Wireless acquired $5.9 million in
restricted cash. During 2004, $0.8 million was released as a result of contract
payments. As of December 31, 2004, the restricted cash consists of $0.1 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.
Investments
Investments consist of investments in corporate and various government
agency debt securities, most of which mature in approximately one year or less
and investments in marketable equity securities. The Company classifies the
investments as available-for-sale. Management has the intent and ability to sell
these securities for working capital purposes should the need arise. Such
securities are stated at fair value using published market prices, with any
material unrealized holding gains or losses reported, net of any tax effects, as
accumulated other comprehensive income (loss), which is a separate component of
stockholders' equity. Realized gains and losses and declines in value judged to
be other than temporary, if any, are included in operations.
As of December 31, 2003, the Company held unregistered common stock in a
public company. These investments were recorded at cost. These investments were
all sold as of December 31, 2004.
Accounts Receivable
The Company provides an allowance to account for amounts, if any, of its
accounts receivable, which are considered uncollectible. The Company bases its
assessment of the allowance for doubtful accounts on historical losses and
current economic conditions. In most cases, accounts receivable are determined
to be past due based on a contractual term of 30 days. The allowance for
doubtful accounts was approximately $590,000 and $205,000 as of December 31,
2004 and 2003, respectively. Bad debt expense was approximately $488,000,
$660,000, and $384,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.
Inventory
Inventory consists of electronic components and finished goods and is
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method.
55
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, which range from two to seven years for personal property and 39 years
for real property.
Purchase Price Accounting
The Company has grown considerably through combining with other
businesses. The Company 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. The
operations of the acquired entity are included in the Company's operations
following the date of acquisition.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the net
amounts assigned to assets acquired and liabilities assumed. Goodwill is not
amortized but is tested for impairment at least annually at the reporting unit
level, and more frequently if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount. As of December 31, 2004, no impairment losses have been
recognized on any of the Company's acquired goodwill.
Intangible Assets
Intangible assets are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible
Assets". Intangible assets with finite lives are amortized over the estimated
useful lives using the straight-line method. Intangible assets with finite lives
are reviewed for impairment. An impairment loss on such assets is recognized if
the carrying amount of an intangible asset is not recoverable and its carrying
amount exceeds its fair value. Intangible assets with indefinite useful lives
are not amortized but are tested for impairment at least annually, or more
frequently if there are indications that the asset is impaired. The impairment
test for these assets consists of a comparison of the fair value of the asset
with its carrying amount. If the carrying amount of an intangible asset with an
indefinite useful life exceeds its fair value, an impairment loss is recognized
in an amount equal to that excess. For either type of intangible asset, after an
impairment loss is recognized, the adjusted carrying amount of the intangible
asset becomes its new accounting basis. Subsequent reversal of a previously
recognized impairment loss is prohibited.
The Company's intangible assets include purchased technology and various
assets acquired in business combination transactions. Assets acquired in
business combination transactions include existing hardware technologies, trade
names, existing software technologies, customer relationships and patents. Some
of these assets have finite useful lives and some have indefinite useful lives.
As of December 31, 2004, no impairment losses have been recognized on any of the
intangible assets owned by the Company.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company
establishes a valuation allowance when necessary to reduce deferred tax assets
to the amount expected to be realized. The principal differences are net
operating loss carry forwards, property and equipment, allowance for doubtful
accounts, inventory reserves, and accruals.
Merry Fields is a limited liability company and is taxed as a partnership.
Accordingly, for Merry Fields, items of income, deductions, expenses and credits
pass through directly to its members and are reported on their tax returns.
56
Revenue Recognition
For the Equipment business, the Company recognizes revenue when a formal
purchase commitment has been received, shipment has been made to the customer,
collection is probable and, if contractually required, a customer's acceptance
has been received.
For the Services business, the Company recognizes revenue when the
customer pays for and then has access to our network for the current fiscal
period. Any funds the customer pays for future fiscal periods are treated as
deferred revenue and recognized in the future fiscal periods for which the
customer has access to our network.
Excess of Acquired Net Assets Over Cost
The excess of acquired net assets over cost, recognized in income in 2002,
resulted from the acquisition of Zeus in 2001. The acquisition was accounted for
using the purchase method of accounting and the purchase price was allocated to
the assets purchased and the liabilities assumed based on the estimated fair
values at the date of the acquisition. The Company recognized $526,000 of excess
acquired net assets over cost during 2002 as the cumulative effect of accounting
change in accordance with SFAS No. 141, "Business Combinations."
The excess of acquired net assets over cost, recognized in 2003, resulted
from the acquisition of Telaxis. The acquisition was accounted for using the
purchase method of accounting and the purchase price was allocated to the assets
purchased and the liabilities assumed based on the estimated fair values at the
date of the acquisition. The Company recognized the entire $4,347,000 of excess
acquired net assets over cost as an extraordinary gain in the second quarter
2003 in accordance with SFAS No. 141, "Business Combinations" in conjunction
with completing the acquisition on April 1, 2003.
Research and Development
Research and development costs are expensed as incurred.
Stock based compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides for
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. The Company
continues to account for its stock-based employee compensation plans under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. APB No. 25 provides that compensation expense relative to a
company's employee stock options is measured based on the intrinsic value of the
stock options at the measurement date. Effective for interim periods beginning
after December 15, 2002, SFAS No. 148 also requires disclosure of pro-forma
results on a quarterly basis as if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for 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. No compensation expense has been
recognized in connection with options, as all options have been granted with an
exercise price equal 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, 2003 and 2002: risk-free interest rate of 3.67%,
2.37% and 2.21%, expected life of 5 years, volatility 205%, 284% and 101% and
dividend rate of zero percent, respectively. Using these assumptions, the fair
value of the stock options granted in 2004, 2003 and 2002 was between $2.42 -
$5.34, $0.96 - $5.29, and $1.21, 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:
57
(in thousands, except per share amounts) December 31,
------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Net income (loss) attributable to common stockholders,
as reported: ............................................. $ (1,346) $ 4,647 $ 1,562
Less: Total stock based employee compensation expense
determined under the fair value based method for all
awards ................................................... 563 1,213 185
----------- ----------- -----------
Pro forma net income (loss) attributable to common
stockholders ............................................. $ (1,909) $ 3,434 $ 1,377
=========== =========== ===========
Basic net income (loss) per common share, as reported ........ $ (0.07) $ 0.37 $ 0.17
=========== =========== ===========
Basic net income (loss) per common share, pro forma .......... $ (0.10) $ 0.27 $ 0.15
=========== =========== ===========
Diluted net income (loss) per common share, as reported ...... $ (0.07) $ 0.36 $ 0.17
=========== =========== ===========
Diluted net income (loss) per common share, pro forma ........ $ (0.10) $ 0.27 $ 0.15
=========== =========== ===========
Advertising costs
Advertising costs are expensed when incurred. Advertising expense totaled
approximately $43,000, $9,000 and $23,000 for 2004, 2003 and 2002, respectively.
Shipping and Handling Costs
Shipping and handling are charged to customers and included in both
revenue and costs of goods sold on the Consolidated Statements of Operations.
Comprehensive Income
The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." During the years ended December 31, 2004, 2003
and 2002, the Company had approximately $(1,193,000), $1,206,000 and $38,000,
respectively, of unrealized gains (losses) on available-for-sale investments,
net of income taxes of $0, $0 and $26,000. All of the $1,193,000 unrealized loss
for 2004 represents a reclassification adjustment for gains realized in net
income.
Corporate Structural Changes
On July 9, 2003, YDI effected a net reverse 1-for-4 split of its
outstanding common stock.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses, and notes payable approximate
fair value. Investment securities available for sale are recorded at estimated
fair value based on quoted market prices where available. As of December 31,
2003, the estimated fair value of investment securities - at cost was
approximately $1.0 million. This estimated fair value was calculated by using a
15% discount from the published market values for comparable registered stock.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R, a revision of SFAS 123,
"Accounting for Stock-based Compensation." SFAS 123R requires public companies
to recognize expense associated with share-based compensation arrangements,
including employee stock options, using a fair value-based option pricing model,
and eliminates the alternative to use Opinion 25's intrinsic value method of
accounting for share-based payments. In accordance with the new pronouncement,
the Company plans to begin recognizing the expense associated with its
share-based payments, as determined using a fair value-based method, in its
statement of operations beginning on July 1, 2005. Adoption of the expense
provisions of the statement may have a material impact on the Company's results
of operations. The standard allows three alternative transition methods for
public companies: modified prospective application without restatement of prior
interim periods in the year of adoption; modified retrospective application with
restatement of prior interim periods in the year of adoption; and modified
retrospective application
58
with restatement of prior financial statements to include the same amounts that
were previously included in pro forma disclosures. The Company has not
determined which transition method it will adopt.
During November 2004, the FASB issued SFAS No. 151 "Inventory Costs." This
statement clarifies the accounting for abnormal amounts of idle facility
expenses, freight, handling costs, and wasted material (spoilage). The statement
requires that these above-mentioned costs be accounted for as current period
charges. The adoption of this pronouncement had no material impact on the
Company's results of operations, financial position or cash flows in the
reported periods.
3. Investment 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.
The Company owned 199,618 unregistered shares and 270,632 registered
shares as December 31, 2003 and 184,618 unregistered shares and 238,893
registered shares as of December 31, 2002 of Phazar Corporation. All Phazar
shares were sold during the fourth quarter of 2004.
Cost basis of investments are determined for securities purchased through
a securities broker at cost of the security plus acquisition costs. Cost basis
of securities acquired with the purchase of a company, such as with Terabeam,
are based on quoted market prices on the date of acquisition. Gain or loss on
securities is computed using cost basis of First-in, First-out (FIFO) basis.
Investment securities are summarized as follows:
December 31,
-----------------------------------------------------------
(in thousands) 2004 2003
--------------------------- ---------------------------
Carrying Carrying
Cost Basis Value Cost Basis Value
----------- ----------- ----------- -----------
Available-for-sale:
Fixed income ............................... $ 5,221 $ 5,225 $ 600 $ 609
Equity investments ......................... 144 144 10 10
Phazar - registered ........................ -- -- 509 1,697
----------- ----------- ----------- -----------
5,365 5,369 1,119 2,316
At-cost:
Phazar - unregistered ...................... -- -- 311 311
----------- ----------- ----------- -----------
Total ...................................... $ 5,365 $ 5,369 $ 1,430 $ 2,627
=========== =========== =========== ===========
The net gains (losses) on investment securities included in earnings
are as follows:
(in thousands) 2004 2003 2002
----------- ----------- -----------
Equity securities .......................... $ 3,521 $ 92 $ 4
=========== =========== ===========
The gain of $3,521,000 for 2004 is net of a recorded loss of $236,000 due
to a decline in value deemed to be other than temporary on investment securities
- - available-for-sale. Proceeds from the sale of investment securities were
$34,616,000, $242,000, and $11,000 for the years ended December 31, 2004, 2003,
and 2002, respectively.
59
4. Inventory
Inventory consisted of the following (in thousands):
December 31,
--------------------------
2004 2003
---------- ----------
Raw Materials .............................................................. $ 1,968 $ 574
Work in process ............................................................ 124 26
Finished goods ............................................................. 5,950 2,734
---------- ----------
8,042 3,334
Allowance for excess and obsolescence ...................................... (600) (200)
---------- ----------
Net Inventory .............................................................. $ 7,442 $ 3,134
========== ==========
5. Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, which range from two to seven years for personal property and 39 years
for real property.
Property and equipment consisted of the following (in thousands):
December 31,
--------------------------
2004 2003
---------- ----------
Land ....................................................................... $ 522 $ 522
Building and improvements .................................................. 1,377 1,377
Automobiles ................................................................ -- 22
Equipment .................................................................. 1,056 146
---------- ----------
2,955 2,067
Less: accumulated depreciation ...................................... (444) (320)
---------- ----------
Property and equipment, net ................................................ $ 2,511 $ 1,747
========== ==========
Depreciation expense totaled approximately $240,000, $72,000, and
$120,000, respectively, for the periods ended December 31, 2004, 2003, and 2002.
6. Goodwill
As of December 31, 2004, goodwill consisted of the following (in
thousands):
Acquisition Amount
----------- ------
KarlNet .................................. $ 2,490
Terabeam* ................................ 3,382
Ricochet ................................. 200
---------
Goodwill ................................. $ 6,072
=========
*As of December 31, 2004, we have $3.3 million of contingent liabilities
remaining from the Terabeam acquisition valued at the net present value of
contractual lease payments. As these liabilities are settled, goodwill will be
adjusted to reflect the difference in the contingent liabilities during the one
year allocation period.
60
7. Intangibles
Schedule of Non-Amortizable Assets
During 2004, the Company capitalized $601,000 of costs related to
internally developed software that is technologically feasible but not yet
saleable. Prior to the KarlNet acquisition in 2004, YDI did not have any
internally developed software costs.
(in thousands) December 31,
-----------------------------
2004 2003
----------- -----------
Capitalized software - not placed in service .............................. $ 681 $ --
Trade names - no identifiable useful life ................................. 3,750 --
----------- -----------
$ 4,431 $ --
=========== ===========
Schedule of Amortizable Assets
(in thousands) December 31,
-----------------------------
2004 2003
----------- -----------
Capitalized software - placed in service ............................... $ 1,225 $ --
Patents, customer relationships and other technologies with
identifiable useful lives ....................................... 7,394 594
----------- -----------
8,619 594
Less: accumulated amortization .................................. (1,131) (111)
----------- -----------
Amortizable intangible assets, net ..................................... $ 7,488 $ 483
=========== ===========
Amortization is computed using the straight-line method over the estimated
useful life, based on the Company's assessment of technological obsolescence, of
the respective assets. Amortization expense for the years ended December 31,
2004, 2003, and 2002 totaled approximately $1,020,000, $111,000, and $11,000,
respectively.
8. Notes Payable
Notes payable consisted of the following at December 31:
(in thousands) 2004 2003
----------- -----------
In May 2002, Merry Fields executed a loan consolidation and
refinance agreement with a financial institution for a term
loan of $1,565,374 collateralized by the building and land
with a book value of $1,527,362 in Falls Church, Virginia. The
loan requires monthly payments of $18,781 consisting of
principal and interest. The loan bears interest at 7.34% per
annum and matures on May 31, 2012 ............................ $ 1,241 $ 1,406
The Company assumed convertible notes as part of the Terabeam
acquisition. The convertible notes' aggregate principal amount
totals $2.5 million. The notes mature on July 12, 2005, with
interest only payments before then at an annual rate of 6.75%
in quarterly installments. 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 in the
aggregate. 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 ............................... 2,542 --
In June 2003, the Company issued a $300,000 note as part of
the consideration for the acquisition of Ricochet Networks.
The loan requires monthly payments of interest and principal
of $9,401. The note bears interest at 8.00% per annum and
matures on June 1, 2007 ...................................... 255 --
Other ........................................................... 131 105
----------- -----------
4,169 1,511
Current portion ........................................ (2,899) (213)
----------- -----------
$ 1,270 $ 1,298
=========== ===========
61
Future principal payments are as follows:
2005............... $ 2,899
2006............... 248
2007............... 228
2008............... 207
2009............... 249
Thereafter......... 338
----------
$ 4,169
==========
9. Income Taxes
The provision (benefit) for income taxes is summarized as
follows (in thousands):
December 31,
----------------------------------------------
2004 2003 2002
---------- ---------- ----------
Current tax expense (benefit)
Federal .............................. $ -- $ (112) $ 145
State ................................ (2) (14) 27
---------- ---------- ----------
(2) (126) 172
---------- ---------- ----------
Deferred tax expense (benefit)
Federal .............................. -- 344 489
State ................................ -- 43 91
---------- ---------- ----------
-- 387 580
---------- ---------- ----------
$ (2) $ 261 $ 752
========== ========== ==========
The components of the net deferred tax assets (liabilities)
at December 31, 2004 and 2003 are as follows (in thousands):
December 31,
----------------------------
2004 2003
---------- ----------
Current net deferred tax assets (liabilities):
Allowance for doubtful accounts ................... $ 230 $ 82
Inventory valuation allowance ..................... 234 80
Unrealized (gain) loss on investments ............. -- (482)
Accruals .......................................... 407 270
Net operating loss carryforwards .................. 712 177
---------- ----------
1,583 127
Valuation allowance ................................... (1,583) (127)
---------- ----------
$ -- $ --
========== ==========
Non-current net deferred tax assets (liabilities):
Intangible and depreciable assets ................. $ (69) $ (93)
Accruals .......................................... -- 93
---------- ----------
(69) --
Valuation allowance ................................... 69 --
---------- ----------
$ -- $ --
========== ==========
62
The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate to income before
income taxes, extraordinary gain, cumulative effect of accounting change and
minority interests. The items causing this difference are as follows (in
thousands):
2004 2003 2002
--------- --------- ---------
Tax expense (benefit) at U.S. statutory rate ............ $ (472) $ 191 $ 599
State income taxes ...................................... (54) 22 70
Equity method loss ...................................... -- -- 69
Merry Fields, LLC income ................................ (55) (49) (28)
Change in valuation allowance ........................... 1,387 127 --
Permanent tax differences ............................... (780) -- --
Other differences ....................................... (28) (30) 42
--------- --------- ---------
Provision (benefit) for income taxes .................... $ (2) $ 261 $ 752
========= ========= =========
The income tax benefit for the year relates to minimum state tax payments.
The Company is in a tax loss position and cannot accurately predict when it will
generate taxable income to utilize these tax assets. The Company has
approximately $50.1 million in net operating losses available through 2023.
10. Commitments and Contingencies
Leases
The Company has various operating leases for equipment, office and
production space. These leases generally provide for renewal or extension at
market prices.
In August 2000, Merry Fields executed a lease agreement with Young Design
for the lease of the building in Falls Church, Virginia. The lease commenced on
January 1, 2001 and terminates on December 31, 2010. The lease provides for base
monthly rent payments of $20,625 with a 3% fixed annual increase after the base
year. All intercompany rental income and expense under the lease agreement have
been eliminated in consolidation.
Rent expense, excluding rent paid to Merry Fields, for the years ended
December 31, 2004, 2003, and 2002 was approximately $753,000, $463,000, and
$151,000, respectively.
Schedule of Commercial Commitments
Aggregate maturities of the operating leases, exclusive of the Merry
Fields lease, are as follows as of December 31, 2004 (in thousands):
2005.............. $ 1,486
2006.............. 1,102
2007.............. 814
2008.............. 309
2009.............. 304
Thereafter........ 313
-----------
$ 4,328
===========
In addition, the Company has accrued liabilities of $3.4 million relating
to real estate leases for currently unutilized space. Substantially all of this
amount relates to the real estate leases acquired in connection with the
acquisition of Terabeam. The Company acquired 27 Terabeam real estate leases
with aggregate payments due under those leases as of June 22, 2004 of $6.6
million. The Company has been negotiating the termination of those leases (see
Note 6). The Company settled eight of those leases during 2004 for one-time
payments.
11. 401(k) - Retirement Plan
The Company has a 401(k) retirement plan covering all employees who meet
certain minimum eligibility requirements. Each year employees can elect to defer
the lesser of 15% of earned compensation or the maximum
63
amount permitted by the Internal Revenue Code. The Company makes contributions
to the plan at its discretion. The Company made no contribution to the plan for
the periods ended December 31, 2004, 2003, or 2002.
12. Stockholders' Equity
The warrant and option numbers shown in this footnote reflect the
adjustments to those warrants and options due to the April 1, 2003 combination
of Young Design and Telaxis and the reverse stock split effected on July 9,
2003.
Stock Warrants
Prior to the Telaxis IPO, Telaxis issued warrants in conjunction with
several debt offerings. Of the warrants issued, 389,626 remain outstanding as of
December 31, 2004.
During June 2004, YDI issued 50,000 warrants with a purchase price of
$4.75. The warrants expire in June 2005. All of these warrants were outstanding
as of December 31, 2004.
In conjunction with the Terabeam acquisition, YDI assumed 574,706 warrants
with purchase prices ranging from $0.40 to $17.05. The expiration dates of these
warrants were between August 2004 and May 2008. Of the warrants assumed, 401,839
were outstanding as of December 31, 2004.
In summary, the Company has issued warrants for its common stock as
follows:
Warrants Outstanding
-----------------------------------
Per Share
Number of Shares Exercise Price
---------------- ---------------
Outstanding warrants December 31, 2002 -- $ --
Telaxis warrants ......................... 432,338 $ 2.08 - 8.64
Warrants exercised ....................... (18,498) $ 2.08
Warrants expired/canceled ................ (22,421) $ 2.08 - 8.64
Outstanding December 31, 2003 ................. 391,419 $ 2.08
Warrants issued........................... 624,706 $ 0.40 - 17.05
Warrants exercised ....................... (57,713) $ 0.40 -2.27
Warrants expired/canceled ................ (116,947) $ 0.40 - 5.68
------------- --------------
Outstanding December 31, 2004 ................. 841,465 $ 0.40 - 17.05
============= ==============
Expiration dates of warrants are as follows:
Number of
Expiration Date Warrants
----------------------- -------------
2005................... 335,721
2006................... 308,278
2007................... 142,466
2008................... 55,000
Stock Options Issued
The Company has stock option plans that provide for the granting of
options to employees, directors, and consultants. The plans permit the granting
of options to purchase a maximum of 1,150,000 shares of common stock at various
prices and require that the options be exercisable at the prices and at the
times as determined by the Board of Directors, not to exceed ten years from date
of issuance. As of December 31, 2004, 621,250 options are available for issuance
under these plans.
64
A summary of the option activity is as follows:
Options Outstanding
---------------------------------------
Per Share Exercise
Number of Shares Price
---------------- ------------------
Outstanding December 31, 2002 ................................ 444,688 $ 1.60
Options granted and assumed in conjunction with merger... 766,432 $ 1.60 - 161.00
Options exercised ....................................... (119,204) $ 0.92 - 5.30
Options expired/canceled ................................ (322,187) $ 1.52 - 4.00
-------------- ----------------
Outstanding December 31, 2003 ................................ 769,729 $ 0.92 - 161.00
Options granted ......................................... 815,350 $ 2.47 - 6.99
Options exercised ....................................... (182,198) $ 0.96 - 5.76
Options expired/canceled ................................ (231,247) $ 1.32 - 161.00
-------------- ----------------
Outstanding December 31, 2004 ................................ 1,171,634 $ 0.92 - 161.00
=== ==== ============== ================
A summary of the stock options outstanding and exercisable as of December
31, 2004 is as follows:
Options Outstanding Options Exercisable
- ----------------------------------------------------------- -------------------------
Weighted
Average Weighted-
Weighted Remaining Weighted- Average
Average Number Life Average Number Exercise
Exercise Price Outstanding (years) Exercise Price Outstanding Price
- ----------------------------------------------------------- -------------------------
$ 0.00 - 2.00 156,754 2.59 $ 1.46 149,924 $ 1.48
$ 2.01 - 4.00 706,782 4.96 $ 2.63 256,782 $ 2.82
$ 4.01 - 6.00 108,951 5.44 $ 5.00 79,781 $ 5.06
$ over 6.00 199,147 4.36 $ 14.19 76,347 $ 26.46
- ----------------------------------------------------------- -------------------------
65
13. Earnings (Loss) per Share:
(in thousands except per share data) December 31,
-------------------------------------------
2004 2003 2002
---------- ---------- ----------
Numerator
Income (loss) from continuing operations ............................ $ (1,346) $ 300 $ 947
Extraordinary item .................................................. -- 4,347 89
Change in accounting ................................................ -- -- 526
---------- ---------- ----------
Net income (loss) ................................................... $ (1,346) $ 4,647 $ 1,562
========== ========== ==========
Denominator - weighted average shares:
Denominator for basic earnings (loss) per share ..................... 19,792 12,571 9,375
Dilutive effect of stock options .................................... -- 270 --
---------- ---------- ----------
Denominator for diluted earnings (loss) per share ................... 19,792 12,841 9,375
========== ========== ==========
Basic earnings (loss) per share from continuing
operations ......................................................... $ (0.07) $ 0.02 $ 0.10
Basic earnings per share - Extraordinary item ....................... -- 0.35 0.01
Basic earnings per share - change in accounting ..................... -- -- 0.06
---------- ---------- ----------
Basic earnings (loss) per share ..................................... $ (0.07) $ 0.37 $ 0.17
========== ========== ==========
Diluted earnings (loss) per share before
extraordinary item and change in accounting ......................... $ (0.07) $ 0.02 $ 0.10
Diluted earnings per share- Extraordinary item ...................... -- 0.34 0.01
Diluted earnings per share- Extraordinary item and
change in accounting ................................................ -- -- 0.06
---------- ---------- ----------
Diluted earnings (loss) per share ................................... $ (0.07) $ 0.36 $ 0.17
========== ========== ==========
14. Concentrations
The Company maintains its cash, cash equivalent, and restricted cash
balances in several banks. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000 per bank. At December 31, 2004, and 2003,
the uninsured portion totaled approximately $41.4 million and $8.8 million,
respectively.
As of December 31, 2004, accounts receivable from one customer totaled
approximately $590,000, which represents 16% of total accounts receivable. As of
December 31, 2003, no customers owed more than 10% of the total accounts
receivable.
During the years ended December 31, 2004, 2003, and 2002, no customers
accounted for more than 10% of sales.
For the years ended December 31, 2004, 2003, and 2002 sales to customers
outside of the United States and Canada accounted for approximately 18%, 16%,
and 10%, respectively, of revenues. As of December 31, 2004, the Company had a
single employee and minor assets located outside of the United States.
% of Company Sales
-----------------------------------------
Region 2004 2003 2002
--------------------------------------------- ---------- --------- --------
North America (US and Canada) ............... 82% 84% 90%
Latin America (Mexico, Central, South
America, and Caribbean) ................... 4% 7% 4%
Asia Pacific (China, Taiwan, Japan, other
Pacific territories, Australia, New
Zealand) .................................. 4% 2% 1%
Europe (Western, Eastern, Russia) ........... 5% 3% 2%
Middle East and Africa (a.k.a. E.M.E.A.) .... 5% 4% 3%
66
15. Acquisitions
Telaxis
On April 1, 2003, Young Design merged with Telaxis. For accounting and
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.
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. The valuation of the stock was based on the average closing price for
the five days preceding the announcement of the acquisition.
Telaxis' condensed balance sheet at fair value is as follows:
(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
The Company acquired 100% ownership of KarlNet, Inc., a wireless software
development company. The purchase price consisted of $1.8 million in cash and
1,000,000 shares of YDI stock. The shares were valued at $4.27 each, which was
the average share price from May 12 - 14, 2004. The definitive acquisition
agreement was signed and the acquisition was completed on May 13, 2004. Prior to
the acquisition, KarlNet was an important supplier to YDI. YDI decided to
purchase KarlNet to secure access to KarlNet's software source code used in
YDI's current products as well as help us reduce our future costs of goods sold.
The operations of KarlNet are included in the consolidated statement of
operations after the acquisition date.
The cost of the acquisition is as follows:
(in thousands)
Cash .............................. $ 1,800
YDI stock ......................... 4,270
------------
Total consideration ............... $ 6,070
============
In addition, the definitive agreement for the acquisition of KarlNet
provided 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 December 31,
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.
67
The final purchase price allocation is based on the fair value of
KarlNet's balance sheet as of May 13, 2004 and is summarized as follows:
(in thousands)
Cash................................ $ 99
Accounts receivable, net............ 750
Inventory........................... 650
Property and equipment.............. 99
Other assets........................ 50
Identifiable intangible assets...... 2,305
Goodwill............................ 2,490
Liabilities......................... (373)
------------
Total consideration................. $ 6,070
============
The amount allocated to identifiable intangible assets was based on the
present value of estimated future cash flows of the specific identifiable
intangible assets.
Intangible assets, with finite lives, are being amortized over their
useful life, after they are placed in service.
(in thousands)
Goodwill................... $ 2,490 Not amortizable for financial or tax purposes
Software in development.... 80 Amortizable after placed in service
Customer relationships..... 1,000 4 years
Developed software......... 1,225 4 years
The table includes the final value of intangibles other than goodwill. The
goodwill from the KarlNet acquisition has been associated with the equipment
business.
Terabeam
The Company acquired 100% ownership of Terabeam Corporation, a wireless
telecommunications equipment company. The purchase price consists of 11,567,132
shares of YDI stock and the assumption of 574,706 warrants. The YDI shares were
valued at $4.76 per share, which was the average share price from April 5 - 20,
2004. The definitive agreement was signed on April 14, 2004. The warrants were
valued using the Black-Scholes method using actual remaining lives of each
warrant and exercise price of each warrant, volatility of 205%, risk-free rate
of interest of 3.67%, 0% dividend yield, and current stock price of $4.25. YDI
acquired Terabeam for its strong balance sheet, its complementary product lines
relating to YDI's own millimeter wave product offerings, and its component
chipsets. The operations of Terabeam are included in the consolidated statement
of operations following the acquisition on June 22, 2004.
The cost of the acquisition is as follows:
(in thousands)
YDI stock......................... $ 55,059
Warrants.......................... 132
----------
Total consideration............... $ 55,191
==========
68
The purchase price allocation as of December 31, 2004 is based on the fair
value of Terabeam's assets and liabilities are as follows:
(in thousands)
Cash ....................................... $ 10,085
Cash, restricted ........................... 5,876
Marketable securities available-for-sale ... 34,229
Accounts receivable, net ................... 300
Inventory .................................. 1,310
Property and equipment ..................... 101
Other assets ............................... 870
Identifiable intangible assets ............. 7,700
Goodwill ................................... 3,382
Liabilities ................................ (8,662)
----------
Total consideration ........................ $ 55,191
==========
The amount allocated to identifiable intangible assets was based on the
present value of estimated future cash flows of the specific identifiable
intangible asset.
The goodwill from the Terabeam acquisition has been associated with the
equipment business. As of December 31, 2004, there were $3.3 million of net
present value contingent lease liabilities still outstanding for the Terabeam
acquisition. As these lease liabilities are settled, any difference between the
net present value amount and final settlement amount will be booked to goodwill
during the one year allocation period. These $3.3 million of contingent
liabilities are included in our accrued expenses on the December 31, 2004
balance sheet.
Intangible assets, with finite lives, are being amortized over their
useful life, after they are placed in service.
(in thousands)
Goodwill.................. $ 3,382 Not amortizable for financial or tax purposes
Trade name................ 3,600 Indefinite life - not amortizable
Technology product........ 900 6 years
Technology product........ 3,200 9 years
Ricochet Networks
On June 25, 2004, YDI Wireless acquired 100% of Ricochet Networks, Inc., a
private wireless internet service provider. The purchase price consisted of
approximately 42,000 shares of YDI stock, $3.0 million in cash, and a $300,000
note to the seller. The YDI shares were valued at $5.15 per share, which was the
closing share price from on June 25, 2004 - the date the definitive agreement
was signed. YDI acquired Ricochet to enter the wireless services business with
an established subscriber base. In addition, Ricochet has considerable patents
and other intellectual properties related to wireless mesh network equipment
both from a manufacturing and network operations standpoint. The operations of
Ricochet are included in the consolidated statement of operations after June 25,
2004.
The cost of the acquisition is as follows:
(in thousands)
Cash ................................... $ 3,000
YDI stock .............................. 217
Note payable ........................... 300
-----------
Total consideration .................... $ 3,517
===========
69
The final purchase price allocation is based on the fair market value of
Ricochet's assets and liabilities as of June 25, 2004.
(in thousands) June 25, 2004
-------------
Cash and cash equivalents .................... $ 70
Inventory .................................... 1,000
Identifiable intangible assets ............... 1,850
Property and equipment ....................... 785
Goodwill ..................................... 200
Other assets ................................. 87
Liabilities .................................. (475)
------------
Net assets acquired .......................... $ 3,517
============
The amount allocated to identifiable intangible assets was based on the
present value of estimated future cash flows of the specific identifiable
intangible asset.
Intangible assets, with finite lives, are being amortized over their
useful life, after they are placed in service.
(in thousands)
Goodwill.................. $ 200 Not amortizable for financial or tax purposes
Trade name................ 150 Indefinite life - not amortizable
Patented technology....... 1,700 5 years
The table includes the final value of intangibles other than goodwill. The
goodwill from the Ricochet acquisition has been associated with the service
business.
Unaudited pro forma results of operations for the two years ended December
31, 2004 and 2003 are included below. Such pro forma information assumes that
the above acquisitions had occurred as of January 1, 2004 and 2003,
respectively. This summary is not necessarily indicative of what the Company's
results of operations would have been if the Company had been a combined entity
during such periods, nor does it purport to represent results of operations for
any future periods. For the year ended December 31, 2003, Ricochet has been
excluded from the pro forma due to the fact that no separate results are
available because it was one of many divisions of a company.
Pro-forma Combined Statement of Operations
For the twelve months ended December 31, 2004
(in thousands, except for per share data)
(unaudited)
YDI Terabeam Ricochet
For the KarlNet For the For the
twelve For the period from period from
months period from January 1, January 1,
ended January 1, 2004 to 2004 to
December 2004 to May June 22, June 25,
31, 2004 13, 2004 2004 2004 Adjustments Pro Forma
-------- -------- ---- ---- ----------- ---------
Revenue .......................... $ 22,897 $ 2,103 $ 1,408 $ 2,236 $ (100) (1) $ 28,544
---------------------------------------------------------------- --------
Income (loss) before ............. (3)
extraordinary items and ........ --
accounting changes ............. (1,348) (340) (17,616) (398) (785) (6) (20,487)
---------------------------------------------------------------- --------
Net income (loss) ................ $ (1,346) $ (340) $(17,445) $ (398) (785) $(20,314)
================================================================ ========
Weighted average shares .......... 19,792 1,000 11,567 42 (6,724) (7) 25,677
================================================================ ========
Loss per share ................... $ (0.07) $ (0.79)
======== ========
70
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
Terabeam
- --------
(6) Amortization on intangible intellectual property acquired.................. $ 250
Weighted average shares
- -----------------------
(7) To remove the effect of issuing the shares mid-year........................ (6,724)
Pro-forma Combined Statement of Operations
For the Year Ended December 31, 2003
(in thousands, except for per share data)
(unaudited)
Telaxis
for the
three
YDI months KarlNet Terabeam
December ended September December
31, 2003 3/31/03 30, 2003 31, 2003 Adjustments Pro Forma
-------- ------- -------- -------- ----------- ---------
Revenue .......................... $ 27,241 $ 5 $ 3,842 $ 5,172 $ (175) (1) $ 36,085
Income (loss) before extraordinary (2)
items and accounting changes .... 300 (2,320) (277) (63,514) (1,200) (3) (67,011)
Net income (loss) ................ $ 4,647 $ (2,320) $ (277) $(63,514) $ (1,200) $(62,664)
================================================================
Weighted average shares .......... 12,571 4,177 1,000 11,567 (3,136) (4) 26,179
================================================================
Earnings (loss) per share from
continued operations- basic and
diluted .......................... $ 0.37 $ (2.39)
======== ========
Adjustments
-----------
KarlNet
- -------
(1) Revenue (eliminating intercompany sales)............................................. $ (175)
(2) Eliminating intercompany purchases and amortization on intangible assets acquired.... 700
Terabeam
- --------
(3) Amortization on intangible intellectual property acquired............................ 500
Weighted average shares
- -----------------------
(4) To remove the effect of issuing the shares mid-year.................................. $ (3,136)
16. Quarterly Financial Data (unaudited)
Quarter
(in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------
2004 First Second Third Fourth
- ------------------------------------------------ --------- --------- --------- ---------
Revenue ........................................ $ 6,017 $ 4,733 $ 6,370 $ 5,777
Gross profit ................................... 2,466 1,540 2,688 2,789
Net income (loss) .............................. 303 (1,605) (2,351) 2,307
Basic and diluted earnings (loss) per share .... $ 0.02 $ (0.10) $ (0.09) $ 0.10
- ----------------------------------------------------------------------------------------------------------------------
71
Quarter
(in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------
2003 First Second Third Fourth
- ---------------------------------------------------------- ---------- ---------- ---------- ----------
Revenue ................................................ $ 6,436 $ 7,229 $ 8,029 $ 5,547
Gross profit ........................................... 1,998 2,268 4,288 2,973
Income (loss) from continuing
operations ............................................ 106 (815) 1,053 (44)
Extraordinary gain ..................................... -- 4,347 -- --
Net income (loss) ...................................... 106 3,532 1,053 (44)
Basic earnings (loss) per share from
continuing operations ................................. 0.01 (0.06) 0.08 0.00
Basic earnings per share -
extraordinary item .................................... -- 0.32 -- --
Basic earnings per share ............................... 0.01 0.26 0.08 0.00
Diluted earnings (loss) per share from
continuing operations ................................. 0.01 (0.06) 0.07 0.00
Diluted earnings per share -
extraordinary item .................................... -- 0.32 -- --
Diluted earnings per share ............................. $ 0.01 $ 0.26 $ 0.07 $ 0.00
- -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share calculations for each of the quarters are based
on the weighted average shares outstanding for each period. The sum of the
quarters may not necessarily be equal to the full year earnings per share
amounts.
17. Contingencies
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. We understand that a large majority of
the other issuer defendants have also elected to participate in this
72
proposed settlement. If ultimately approved by the court, this proposed
settlement would result in the 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.
Consummation of the proposed settlement remains conditioned on, among
other things, receipt of both preliminary and final court approval. Formal
settlement documents were submitted to the court in June 2004, together with a
motion asking the court to preliminarily approve the form of settlement. Certain
underwriters who were named as defendants in the settling cases, and who are not
parties to the proposed settlement, opposed preliminary approval of the proposed
settlement of those cases. On February 15, 2005, the court issued an order
preliminarily approving the proposed settlement in all respects but one. The
plaintiffs and the issuer defendants are in the process of assessing whether to
proceed with the proposed settlement, as modified by the court. If the
plaintiffs and the issuer defendants elect to proceed with the proposed
settlement, as modified by the court, they will submit revised settlement
documents to the court. The underwriter defendants may then have an opportunity
to object to the revised settlement documents. 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.
73
Schedule II
Valuation and Qualifying Accounts
For the years ended December 31, 2004, 2003 and 2002
(in thousands)
Balance at the Balance at the
beginning of end of the
period Additions Deductions period
-------------- ---------- ---------- --------------
December 31, 2002:
Allowance for uncollectible accounts ............ $ 71 $ 384 $ (270) $ 185
Inventory allowance ............................. 264 11 (99) 176
Deferred tax allowance .......................... -- -- -- --
---------- ---------- ---------- ----------
December 31, 2003:
Allowance for uncollectible accounts ............ $ 185 $ 769 $ (749) $ 205
Inventory allowance ............................. 176 24 -- 200
Deferred tax allowance .......................... -- 127 -- 127
---------- ---------- ---------- ----------
December 31, 2004:
Allowance for uncollectible accounts ............ $ 205 $ 1,544 $ (1,159) $ 590
Inventory allowance ............................. 200 400 -- 600
Deferred tax allowance .......................... 127 1,387 -- 1,514
---------- ---------- ---------- ----------
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures
Based on their evaluation as of December 31, 2004, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were effective as of that date to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC's rules and forms. In coming to this
conclusion, our Chief Executive Officer and Chief Financial Officer considered
the matters described under the next heading.
Internal control over financial reporting
Under current SEC regulations, we are not currently required to evaluate
or provide a report on our internal control over financial reporting. However,
we have begun our analysis on that subject to better prepare us for the time
when we will be required to evaluate and provide a report on our internal
control over financial reporting. Our independent auditors did provide us with
its unqualified audit opinion contained in this annual report on Form 10-K
relating to our financial statements for the years ended December 31, 2004 and
2003. In connection with its annual audit and review procedures, our independent
auditor considered and provided input to us relating to our internal control
over financial reporting. Our auditor expressed concern that certain of our
internal control procedures regarding the reliability of financial reporting and
the preparation of our financial statements have two material weaknesses. Upon
discovery of these concerns, our auditors performed numerous additional audit
procedures relating to our financial statements for the years ended December 31,
2004 and 2003 before rendering their audit opinion.
74
The two material weaknesses consisted of the following:
o Weaknesses in period-end financial reporting process
o General. We do not have a well-defined and organized
closing process. The result was a delay in producing
financial reports and schedules needed for the audit
process, numerous errors in various schedules prepared
for the audit, the need for a number of significant and
material adjusting entries that were identified during
the audit process, and the incursion of extra audit fees
to perform the additional work.
o Documentation of the closing process. We do not use a
checklist to manage the closing process documenting who
will perform each procedure, who will review each
procedure, and when completion and review of each
procedure is due and is accomplished. We do not have an
organized process for saving schedules and
reconciliations to identify and calculate pre-audit
adjusting entries and support amounts in the basic
financial statements, in the financial statement
footnotes, and in other parts of our annual report on
Form 10-K.
o Controls over non-routine and non-systematic
transactions. We need better control over non-routine
and non-systematic transactions that are often more
complex when it comes to accounting and valuation
issues. We need to better research and carefully
document the accounting principles and procedures to be
followed when these non-routine transactions occur.
o Review of the allowance for doubtful accounts. We
currently adjust our allowance for doubtful accounts
based on percentages applied to each aging group. While
we believe this provides a reasonable basis to begin
evaluating the allowance, we need to assess other
factors when considering the allowance for doubtful
accounts.
o Weaknesses in the review and approval of the accounting function
o General. Many of the accounting functions have been done
by a single person. There is no documented process for
the review of the work product of that person by a
member of management. Significant and material adjusting
entries were identified during the audit process that
appeared to be due to errors made by the single person.
o Journal entry support and approval. Many of our journal
entries lacked proper support and approval by a
responsible employee. Also, many of the explanations
accompanying the entries were inadequate.
In addition to the material weaknesses identified above, our auditors also
identified other internal control significant deficiencies that were not
concluded to constitute material weaknesses.
Changes in internal control over financial reporting
There was no change in our internal control over financial reporting
during our fourth fiscal quarter ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. Given the inputs from our auditor described above and
our own analysis relating to our internal control over financial reporting, we
expect to make changes to those internal controls in the near future.
Item 9B. Other Information.
Not applicable.
75
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information appearing under the captions "Board of Directors, Executive
Officers, and Key Employees" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in our definitive proxy statement for our 2005 annual meeting of
stockholders (the "2005 Proxy Statement") responsive to this Item is hereby
incorporated by reference.
Code of Ethics
We have adopted a statement of business conduct and code of ethics that
applies to all of our directors, officers, and employees, including our
principal executive officer, principal financial officer, and principal
accounting officer and controller. This statement has been posted on our website
(http://www.terabeam.com/corporate/ethics.php) and was filed as an exhibit to
our Annual Report on Form 10-K for the year ended December 31, 2003.
Item 11. Executive Compensation.
Information appearing under the caption "Executive Compensation" in our
2005 Proxy Statement responsive to this Item is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Our Directors and Management" responsive to this Item in
our 2005 Proxy Statement is hereby incorporated by reference.
Information relating to our equity compensation plans as of December 31,
2004 appears above under Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities in this Annual
Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions
Information appearing under the caption "Material Relationships and
Related Party Transactions" in our 2005 Proxy Statement responsive to this Item
is hereby incorporated by reference.
Item 14. Principal Accountant Fees and Services
Information appearing under the caption "Independent Public Accountants"
in our 2005 Proxy Statement responsive to this Item is hereby incorporated by
reference.
76
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
See Index to Financial Statements under Item 8--Financial Statements and
Supplementary Data.
2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other financial statement schedules have been omitted because they are
not required, not applicable, or the information to be included in the financial
statement schedules is included in the financial statements or the notes
thereto.
3. Exhibits
See Exhibit Index.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, YDI Wireless has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
YDI WIRELESS, INC.
Date: March 31, 2005 By: /s/ Robert E. Fitzgerald
-------------------------------
Robert E. Fitzgerald,
Chief Executive Officer
Each person whose signature appears below hereby constitutes and appoints
Robert E. Fitzgerald and Patrick L. Milton his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his own name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing as
he could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of YDI Wireless
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert E. Fitzgerald Chief Executive Officer and Director March 31, 2005
- --------------------------- (principal executive officer)
Robert E. Fitzgerald
Chief Financial Officer and Treasurer March 31, 2005
/s/ Patrick L. Milton (principal financial and accounting
- --------------------------- officer)
Patrick L. Milton
/s/ Daniel A. Saginario
- --------------------------- Chairman of the Board of Directors March 31, 2005
Daniel A. Saginario
/s/ John W. Gerdelman
- --------------------------- Director March 31, 2005
John W. Gerdelman
/s/ Daniel R. Hesse
- --------------------------- Director March 31, 2005
Daniel R. Hesse
/s/ Gary E. Rieschel
- --------------------------- Director March 31, 2005
Gary E. Rieschel
/s/ Robert A. Wiedemer
- --------------------------- Director March 31, 2005
Robert A. Wiedemer
78
EXHIBIT INDEX
Exhibit
Number Description of Document
-------
2.1 Agreement and Plan of Merger by and among the Registrant, T-Rex
Acquisition Corporation, and Terabeam Corporation dated as of
April 14, 2004 (1)
2.2 Agreement and Plan of Merger by and among the Registrant, KFire
Merger Corporation, KarlNet, Inc., Douglas J. Karl, and Elise L.
Karl dated as of May 13, 2004 (2)
2.3 Agreement and Plan of Merger by and between Telaxis
Communications Corporation and Young Design, Inc. dated as of
March 17, 2003 (3)
2.4 Agreement and Plan of Merger and Reincorporation by and between
Telaxis Communications Corporation and YDI Wireless, Inc. dated
as of June 23, 2003 (4)
3.1 Certificate of Incorporation of the Registrant as filed with the
Delaware Secretary of State on May 5, 2003 (5)
3.2 Certificate of Merger of Telaxis Communications Corporation with
and into YDI Wireless, Inc. as filed with the Delaware Secretary
of State on July 7, 2003 (5)
3.3 By-laws of the Registrant (5)
4.1 Form of certificate evidencing ownership of common stock of the
Registrant (5)
4.2 Rights Agreement by and between the Registrant and Registrar and
Transfer Company, as Rights Agent dated as of May 18, 2001 (6)
4.3 Amendment No. 1 to Rights Agreement by and between the
Registrant and Registrar and Transfer Company, as Rights Agent
dated as of September 9, 2002 (7)
4.4 Amendment No. 2 to Rights Agreement by and between the
Registrant and Registrar and Transfer Company, as Rights Agent
dated as of March 17, 2003 (3)
4.5 Amendment No. 3 to Rights Agreement by and between the
Registrant and Registrar and Transfer Company, as Rights Agent
dated as of May 15, 2003 (8)
10.1* Incentive Stock Option Plan of 1986 of the Registrant (9)
10.2* 1987 Stock Plan of the Registrant (9)
10.3* 1996 Stock Plan of the Registrant (9)
10.4* Amendment No. 1 to 1996 Stock Plan of the Registrant (10)
10.5* 1997 Stock Plan of the Registrant (9)
10.6* Amendment No. 1 to 1997 Stock Plan of the Registrant (10)
10.7* 1999 Stock Plan of the Registrant (9)
10.8* Amendment No. 1 to 1999 Stock Plan of the Registrant (10)
10.9* 2001 Nonqualified Stock Plan of the Registrant (11)
10.10* Amendment No. 1 to 2001 Nonqualified Stock Plan of the
Registrant (10)
10.11* Young Design, Inc. 2002 Stock Incentive Plan (12)
10.12* 2004 Stock Plan of the Registrant (10)
10.13* Form of Non-Qualified Stock Option Agreement to be issued to
Directors of the Registrant upon Initial Election or Appointment
to Board of Directors (13)
10.14* Form of Non-Qualified Stock Option Agreement to be issued to
Incumbent Directors of the Registrant on an Annual Basis (13)
10.15* Form of Incentive Stock Option Agreement for Executive Officers
(13)
79
Exhibit
Number Description of Document
-------
10.16* Form of Indemnification Agreement, a substantially similar
version of which was entered between the Registrant and each of
Messrs. Fitzgerald, Saginario, Wiedemer, Milton, and Renauld
(14)
10.17* Policy Statement Concerning the Compensation of Directors of the
Registrant who are not Insiders, dated February 9, 2005 (13)
10.18* Employment Agreement between the Registrant and Robert E.
Fitzgerald dated as of February 9, 2005 (13)
10.19* Non-Qualified Stock Option Agreement between the Registrant and
Robert E. Fitzgerald dated as of February 9, 2005 (13)
10.20* Employment Agreement between the Registrant and Thomas Bennett
dated as of December 13, 2004 (15)
10.21* Employment Agreement by and between Young Design, Inc. and
Michael F. Young dated as of March 1, 1999 (8)
10.22* Employment Agreement by and between the Registrant and David L.
Renauld dated as of December 19, 2000 (16)
10.23* Amendment 1 to Employment Agreement by and between the
Registrant and David L. Renauld dated as of August 29, 2002 (17)
10.24* Amendment 2 to Employment Agreement by and between the
Registrant and David L. Renauld dated as of January 24, 2003
(18)
10.25 Secured Promissory Note from KarlNet, Inc. in favor of the
Registrant dated May 13, 2004 (2)
10.26 Security Agreement between KarlNet, Inc. and the Registrant
dated as of May 13, 2004 (2)
10.27 Stock Purchase Agreement between the Registrant and Michael F.
Young dated as of September 14, 2004 (19)
10.28 Indemnification Agreement by and among the Registrant, Merry
Fields, LLC, Concorde Equity, LLC, and Michael F. Young dated as
of March 17, 2003 (3)
10.29 Form of Convertible Promissory Note of Terabeam Corporation, a
substantially similar version of which has been offered to
various former stakeholders of Harmonix Corporation, reflecting
indebtedness in the aggregate principal amount of $2,500,000
10.30 Lease Agreement by and between Young Design, Inc. and Merry
Fields, LLC dated as of August 24, 2000 (8)
10.31 Lease by and between the Registrant and O'Leary-Vincunas LLC
dated November 1, 2000 (16)
10.32 First Amendment to Lease by and between the Registrant and
O'Leary-Vincunas LLC dated January 20, 2003 (18)
10.33 Lease by and between the Registrant and The Irvine Company dated
as of March 1, 2004 (20)
10.34 Office Lease by and between Ricochet Networks, Inc. and 1400
Glenarm Place Venture dated as of February 1, 2005, with related
Guaranty by the Registrant in favor of 1400 Glenarm Place
Venture
10.35 Metro I Standard Office Lease by and between KarlNet, Inc. and
CB Partners Limited Partnership dated as of January 30, 2001
10.36 First Amendment and Extension of Lease Agreement by and between
KarlNet, Inc. and CB Partners Limited Partnership dated November
14, 2002
10.37 Second Amendment and Extension of Lease Agreement by and between
KarlNet, Inc. and CB Partners Limited Partnership dated
September 22, 2003
10.38 Third Amendment and Extension of Lease Agreement by and between
KarlNet, Inc. and CB Partners Limited Partnership dated January
28, 2004
80
Exhibit
Number Description of Document
-------
21.1 Subsidiaries of the Registrant (21)
23.1 Consent of Fitzgerald, Snyder & Co., P.C.
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)
99.1 Stockholder Agreement by and among the Registrant and Mobius
Technology Ventures VI, L.P., Mobius Technology Ventures
Advisors Fund VI, L.P., Mobius Technology Ventures Side Fund VI,
L.P., Softbank US Ventures VI, L.P., Softbank Technology
Ventures Advisors Fund V, L.P., Softbank Technology Ventures
Entrepreneurs Fund V, L.P., and Softbank Technology Ventures V,
L.P. dated as of April 14, 2004 (1)
99.2 Stockholder Agreement by and among the Registrant and SOFTBANK
Capital Partners, L.P., SOFTBANK Capital LP, and SOFTBANK
Capital Advisors Fund LP. dated as of April 14, 2004 (1)
99.3 Lock-up Agreement by and among the Registrant and Mobius
Technology Ventures VI, L.P., Mobius Technology Ventures
Advisors Fund VI, L.P., Mobius Technology Ventures Side Fund VI,
L.P., Softbank US Ventures VI, L.P., Softbank Technology
Ventures Advisors Fund V, L.P., Softbank Technology Ventures
Entrepreneurs Fund V, L.P., and Softbank Technology Ventures V,
L.P. dated as of April 14, 2004 (1)
99.4 Lock-up Agreement by and among the Registrant and SOFTBANK
Capital Partners, L.P., SOFTBANK Capital LP, and SOFTBANK
Capital Advisors Fund LP. dated as of April 14, 2004 (1)
99.5 Form of Noncompetition Agreement, a substantially similar
version of which was entered between the Registrant and each of
Douglas J. Karl and Elise L. Karl dated as of May 13, 2004 (2)
99.6 Stock Purchase Agreement by and between the Registrant and
Ricochet Investments, LLC dated as of June 25, 2004 (22)
99.7 Promissory Note in the amount of $300,000 from the Registrant
and its subsidiaries in favor of Ricochet Investments, LLC dated
June 25, 2004 (22)
99.8 Non-Competition and Confidentiality Agreement by and among
Victor Mitchell, Ricochet Networks, Inc., and the Registrant
dated as of June 25, 2004 (22)
99.10 Guarantee from Victor Mitchell in favor of the Registrant dated
as of June 25, 2004 (22)
- ----------
All non-marked exhibits are filed herewith.
* Management contract or compensatory plan.
(1) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on April 16, 2004.
(2) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on May 20, 2004.
(3) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on March 20, 2003.
(4) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on July 16, 2003.
(5) Incorporated herein by reference to the same-numbered exhibit to
Form 10-Q filed with the SEC on August 14, 2003.
(6) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on May 21, 2001.
(7) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on September 12, 2002.
(8) Incorporated herein by reference to the exhibits to Form 10-Q
filed with the SEC on August 14, 2003.
(9) Incorporated herein by reference to the exhibits to Form S-1
filed with the SEC on September 27, 1999 (File No. 333-87885).
(10) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on September 15, 2004.
(11) Incorporated herein by reference to the exhibits to Form 10-Q
filed with the SEC on August 10, 2001.
(12) Incorporated herein by reference to the exhibits to Form S-8
filed with the SEC on April 11, 2003 (File
81
No. 333-104481).
(13) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on February 15, 2005.
(14) Incorporated herein by reference to the exhibits to Form 10-Q
filed with the Commission on November 14, 2000.
(15) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on December 27, 2004.
(16) Incorporated herein by reference to the exhibits to Form 10-K
filed with the SEC on March 28, 2001.
(17) Incorporated herein by reference to the exhibits to Form 10-Q
filed with the SEC on November 14, 2002.
(18) Incorporated herein by reference to the exhibits to Form 10-K
filed with the SEC on March 31, 2003.
(19) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on September 21, 2004.
(20) Incorporated herein by reference to the exhibits to Form S-2
filed with the SEC on April 5, 2004 (File No. 333-114208).
(21) Incorporated herein by reference to the exhibits to Form S-4/A
filed with the SEC on October 28, 2004 (File No. 333-111110).
(22) Incorporated herein by reference to the exhibits to Form 8-K
filed with the SEC on July 8, 2004.
82