- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number 000-29053
TELAXIS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2751645
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 INDUSTRIAL DRIVE EAST
SOUTH DEERFIELD, MA 01373
(Address of principal executive offices)
(413) 665-8551
(Registrant's telephone number, including area code)
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 [ ]
As of May 1, 2000, there were 16,244,994 shares of the registrant's
common stock outstanding.
<PAGE>
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 2
Balance Sheets as of March 31, 2000 and
December 31, 1999............................................... 3
Statements of Operations and
Comprehensive Loss for the three months ended March 31, 2000
and March 31, 1999.............................................. 4
Statement of Changes in Stockholders' (Deficit) Equity.......... 5
Statements of Cash Flows for the three
months ended March 31, 2000 and March 31, 1999.................. 6
Notes to Financial Statements................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations...........................................
Item 3. Qualitative and Quantitative Disclosures About Market Risk...... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities and Use of Proceeds....................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 15
SIGNATURES 16
<PAGE>
PART I - FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q 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, future events or
performance, underlying assumptions and other statements which are other than
statements of historical facts. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "projects,"
"potential," "continue," and other similar terminology or the negative of these
terms. Forward-looking statements are only predictions and are subject to known
and unknown risks, uncertainties, assumptions, and other factors that may cause
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. Factors
that could cause or contribute to such differences include, without limitation,
dependence on a limited number of customers, manufacturing capacity constraints,
probable variability in our quarterly operating results, dependence on third
parties, changes in the market, new products and announcements from other
companies, changes in technology, and the impact of competitive products and
pricing. These and other risks and uncertainties are described in more detail in
our annual report on Form 10-K for the year ended December 31, 1999, filed with
the Securities and Exchange Commission. As a result, we cannot guarantee future
results, levels of activity, performance or achievements and there can be no
assurance that our expectations, beliefs or projections will result or be
achieved or accomplished. We undertake no obligation to update or revise any
forward-looking statement to reflect events, circumstances or new information
after the date of this Form 10-Q or to reflect the occurrence of unanticipated
events, and we disclaim any such obligation.
Item 1. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Page
----
Balance Sheets............................................... 3
Statements of Operations and Comprehensive Loss.............. 4
Statements of Changes in Stockholders' (Deficit) Equity...... 5
Statements of Cash Flows..................................... 6
Notes to Financial Statements ............................... 7
2
<PAGE>
<TABLE>
<CAPTION>
TELAXIS COMMUNICATIONS CORPORATION
BALANCE SHEETS
(in thousands, except share data)
Pro Forma
December 31, December 31, March 31,
1999 1999 2000
---------- -------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents ....................................................... $ 6,603 $ 6,603 $ 54,479
Marketable securities ........................................................... -- -- 13,246
Accounts receivable, less allowance for doubtful accounts ($57 in 1999 and $100 . 2,900 2,900 6,754
in 2000)
Inventories ..................................................................... 7,101 7,101 13,524
Net assets to be disposed of .................................................... 1,954 1,954 --
Other current assets ............................................................ 170 170 449
-------- ------- --------
Total current assets ........................................................ 18,728 18,728 88,452
Property, plant and equipment, net .............................................. 6,444 6,444 9,312
Other assets .................................................................... 125 125 101
-------- ------- --------
Total assets ................................................................ $ 25,297 $25,297 $ 97,865
======== ======= ========
Liabilities, Redeemable Preferred Stock and Stockholders' (Deficit) Equity
Current liabilities
Line of credit .................................................................. $ 500 $ 500 $ --
Accounts payable ................................................................ 4,305 4,305 8,554
Customer prepayments ............................................................ 285 285 310
Accrued expenses ................................................................ 2,280 2,280 2,841
Income taxes payable ............................................................ 39 39 39
Current maturities of long-term debt ............................................ 1,149 1,149 930
Current maturities of capital lease obligations ................................. 982 982 795
-------- ------- --------
Total current liabilities ................................................... 9,540 9,540 13,469
Long-term debt ....................................................................... 1,578 1,578 1,566
Capital lease obligations ............................................................ 807 807 631
-------- ------- --------
Total liabilities ........................................................... 11,925 11,925 15,666
-------- ------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Redeemable Preferred Stock
Redeemable preferred stock, Class A, $.01 par value; $3.25 redemption value;
authorized 0 shares (3,090,323 in 1999); issued and outstanding 0 shares ...... 9,899 -- --
(3,045,696 in 1999)
Redeemable preferred stock, Class B, $.01 par value; $3.25 redemption value;
authorized 0 shares (789,677 in 1999); issued and outstanding 0 shares (789,677 2,566 -- --
in 1999)
Redeemable preferred stock, Class D, $.01 par value; $1.80 redemption value;
authorized 0 shares (7,200,000 in 1999); issued and outstanding 0 shares ...... 12,960 -- --
(7,200,000 in 1999)
Redeemable preferred stock, Class E, $.01 par value; $2.25 redemption value;
authorized 0 shares (11,000,000 in 1999): issued and outstanding 0 shares
(9,941,508 in 1999) ........................................................... 22,368 -- --
-------- ------- --------
47,793 -- --
Stockholders' (Deficit) Equity
Preferred stock, $.01 par value; authorized 0 shares (4,500,000 in 1999); none . -- -- --
issued
Common stock, $.01 par value; authorized 100,000,000 shares in 2000 and 1999;
issued and outstanding 16,171,636 shares (843,872 shares in 1999) ............. 8 113 161
Additional paid-in capital ...................................................... 1,224 48,912 124,122
Notes receivable ................................................................ (281) (281) (292)
Accumulated deficit ............................................................. (35,205) (35,205) (41,636)
Deferred stock compensation ..................................................... (167) (167) (156)
-------- ------- -------
Total stockholders' (deficit) equity ........................................ (34,421) 13,372 82,199
-------- ------- -------
Total liabilities, redeemable preferred stock and stockholders' (deficit)
equity ....................................................................... $ 25,297 $25,297 $ 97,865
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Three months ended March 31,
----------------------------
1999 2000
------- -------
(unaudited) (unaudited)
<S> <C> <C>
Sales ................................................................. $ 1,177 $ 6,316
Cost of sales ......................................................... 1,650 6,514
------- -------
Gross margin (loss) ................................................... (473) (198)
Operating expenses
Research and development, net .................................... 934 1,683
Selling and marketing ............................................ 318 588
General and administrative ....................................... 372 1,538
------- -------
Total operating expenses ....................................... 1,624 3,809
------- -------
Operating loss ........................................................ (2,097) (4,007)
------- -------
Other income (expense)
Interest and other expense ....................................... (68) (187)
Interest and other income ........................................ 17 611
------- -------
Total other income (expense) ................................... (51) 424
------- -------
Loss from continuing operations before income taxes ................... (2,148) (3,583)
Income tax benefit .................................................... -- --
------- -------
Loss from continuing operations ....................................... (2,148) (3,583)
------- -------
Discontinued operations:
Income from operations of MMWP segment, net of taxes ............. 358 --
Stock compensation cost on disposition of MMWP segment ........... -- (2,848)
------- -------
Income (loss) from discontinued operations ............................ 358 (2,848)
------- -------
Net loss and comprehensive loss ....................................... $(1,790) $(6,431)
======= =======
Basic and diluted earnings (loss) per share from:
Continuing operations ............................................ $ (4.34) $ (0.37)
======= =======
Discontinued operations .......................................... $ 0.72 $ (0.29)
======= =======
Net loss ......................................................... $ (3.62) $ (0.66)
======= =======
Shares used in computing basic and diluted earnings (loss) per share .. 495 9,739
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
TELAXIS COMMUNICATIONS CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands, except share data)
Common Stock Additional
------------------ Paid-in Note Deferred Stock Accumulated
Shares Amount Capital Receivable Compensation Deficit Total
------ ------ ------- ---------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 2000............. 843,872 $ 8 $ 1,224 $ (281) $ (167) $ (35,205) $ (34,421)
Sale of common stock.................. 4,600,000 46 78,154 -- -- -- 78,200
Exercise of common stock options...... 199,359 2 243 (11) -- -- 234
Exercise of common stock warrants..... 40,000 -- 40 -- -- -- 40
Amortization of deferred stock
compensation....................... -- -- -- -- 11 -- 11
Offering costs........................ -- -- (6,075) -- -- -- (6,075)
Stock compensation cost on
discontinued operation............. -- -- 2,848 -- -- -- 2,848
Conversion of preferred stock......... 10,488,405 105 47,688 -- -- -- 47,793
Net loss.............................. -- -- -- -- -- (6,431) (6,431)
---------- ------ ---------- ---------- -------- ---------- ----------
Balances, March 31, 2000 (unaudited).. 16,171,636 $ 161 $ 124,122 $ (292) $ (156) $ (41,636) $ 82,199
========== ====== ========== ========== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended
March 31,
----------------------
1999 2000
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss .......................................................... $ (1,790) $ (6,431)
Adjustments to reconcile net loss to net cash utilized by operating
activities:
Depreciation and amortization ................................... 575 647
Non-cash compensation expense ................................... -- 2,859
Changes in assets and liabilities
Accounts receivable ........................................... 365 (3,854)
Contracts in process .......................................... (5) --
Inventories ................................................... 72 (6,423)
Other current assets .......................................... (2) (297)
Accounts payable and accrued expenses ......................... (521) 4,774
Customer prepayments .......................................... (79) 25
-------- --------
Net cash utilized by operating activities ..................... (1,385) (8,700)
-------- --------
Cash flows from investing activities
Purchase of marketable securities ................................. -- (13,246)
Proceeds from sale of discontinued operations ..................... -- 1,990
Additions to property and equipment ............................... (350) (3,476)
Reduction (addition) to other assets .............................. (9) 8
-------- --------
Net cash utilized by investing activities ..................... (359) (14,724)
-------- --------
Cash flows from financing activities
Repayment of line of credit ....................................... -- (500)
Repayments of long-term debt and capital lease obligations ........ (305) (599)
Issuance of common stock upon exercise of options and warrants .... 2 274
Issuance of common stock .......................................... -- 78,200
Stock issuance costs .............................................. -- (6,075)
-------- --------
Net cash provided (utilized) by financing activities .......... (303) 71,300
-------- --------
Net increase (decrease) in cash and cash equivalents ................. (2,047) 47,876
Cash and cash equivalents at beginning of period ..................... 2,635 6,603
-------- --------
Cash and cash equivalents at end of period ........................... $ 588 $ 54,479
======== ========
Supplemental disclosure of cash flow information
Non-cash investing and financing activities:
Conversion of redeemable preferred stock ........................ -- 47,793
Notes received for issuance of common stock ..................... -- 11
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The financial information as of March 31, 2000 and for the three months
ended March 31, 1999 and 2000 is unaudited. In the opinion of management, such
interim financial information includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the results for such
interim periods. The financial statements do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The statements should be read in conjunction with the
financial statements and footnotes as of and for the year ended December 31,
1999 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The December 31, 1999 balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. The results of operations
for the three months ended March 31, 2000 are not necessarily indicative of the
results to be expected for any future period.
Unaudited Pro Forma Balance Sheet
The outstanding shares of the Company's preferred stock class A, B, D
and E automatically convert to common stock upon a public offering resulting in
gross proceeds of at least $15,000,000 and with an offering price of at least
$4.50 per share. These conversions have been reflected in the unaudited pro
forma balance sheet as of December 31, 1999.
Marketable Securities
The Company has invested the proceeds from our initial public offering
in accordance with our corporate cash management policy. Marketable securities
are carried at cost plus accrued interest, which approximates fair value.
Investments are placed in instruments with institutions that have "Investment
Grade" ratings or better. The Company's investments consist of municipal and
government bonds, and commercial paper. At March 31, 2000, the Company had $8.7
million invested in securities with maturities from three to twelve months, and
$4.5 million invested with maturities greater than twelve months and through
June 2001.
Comprehensive Income
For the three months ended March 31, 1999 and 2000, comprehensive loss
equaled net loss.
2. Inventories
Inventories are stated at the lower of cost (standard cost which
approximates actual) or market and consist of the following (in thousands):
<PAGE>
December 31, March 31,
1999 2000
----------- ------------
(unaudited)
Parts and subassemblies............ $ 3,257 $ 7,348
Work-in process.................... 3,844 6,176
----------- ------------
$ 7,101 $ 13,524
=========== ============
7
<PAGE>
3. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
-------------- --------------
(unaudited)
<S> <C> <C>
Machinery and equipment.......................... $ 9,803 $ 13,204
Furniture and fixtures........................... 679 696
Leasehold improvements........................... 1,970 2,023
Equipment under capital leases................... 3,469 3,474
-------------- -------------
15,921 19,397
Less accumulated depreciation and amortization... (9,477) (10,085)
-------------- -------------
$ 6,444 $ 9,312
============== =============
</TABLE>
The net book value of equipment under capital leases was approximately
$1,296,000 and $2,757,000 at December 31, 1999 and March 31, 2000, respectively.
Depreciation expense for the three months ended March 31, 1999 and 2000
was $575,000 and $608,000 respectively.
4. Earnings Per Share
Earnings per share have been computed by dividing the loss from
continuing operations, income (loss) from discontinued operations and net loss
by the weighted average common shares outstanding. No effect has been given to
the exercise of common stock options, stock warrants, and outstanding redeemable
preferred stock, since the effect would be antidilutive on continuing operations
for all reporting periods.
<PAGE>
<TABLE>
<CAPTION>
Three Months ended
March 31,
(unaudited)
---------------------
1999 2000
------- --------
<S> <C> <C>
Historical:
Loss from continuing operations ........................... $(2,148) $ (3,583)
======= =========
Weighted average shares of common stock outstanding ....... 495 9,739
======= =========
Basic and diluted loss per share from continuing operations $ (4.34) $ (0.37)
Income (loss) from discontinued operations ................ $ 358 $ (2,848)
======= =========
Weighted average shares of common stock outstanding ....... 495 9,739
======= =========
Basic and diluted income (loss) per share from discontinued
operations ................................................ $ 0.72 $ (0.29)
======= =========
Net loss .................................................. $(1,790) $ (6,431)
======= =========
Weighted average shares of common stock outstanding ....... 495 9,739
======= =========
Basic and diluted net loss per share ...................... $ (3.62) $ (0.66)
======= =========
</TABLE>
8
<PAGE>
5. Discontinued Operations
In August 1999, the Board of Directors voted and authorized management
to dispose of the Company's millimeter-wave products (MMWP) business segment.
This segment consists of the development and manufacture of millimeter-wave
components and assemblies, including antennas and quasi-optical products,
multiplexer products, and passive waveguide products. On February 8, 2000 the
Company completed the sale of substantially all of the assets of the MMWP
segment to Millitech LLC for approximately $3.6 million.
Accordingly, the Company has restated its historical financial
statements to present the MMWP segment's operating results as a discontinued
operation. The results of the MMWP operations have been segregated from
continuing operations and reported as a separate line item in the statement of
operations and comprehensive loss.
As a result of the sale, the Company received cash proceeds of $2.0
million and recorded a subordinated note for $1.2 million with interest on the
principal at 12%. The principal shall be payable in five equal semi-annual
payments of $50,000 beginning on July 1, 2002 through December 31, 2004. On
December 31, 2004, the entire remaining principal balance of $960,000 plus
accrued interest shall be due. Interest shall be payable semi-annually on the
first day of January and July of each year during the term of the note,
beginning July 1, 2000. The Company has fully reserved this subordinated note.
The Company recorded in the Statement of Operations for the three months ended
March 31, 2000, stock compensation expense totaling $2.8 million as a result of
accelerated vesting of incentive stock options for employees who left the
Company and were hired by Millitech LLC.
The assets and liabilities of the MMWP segment at December 31, 1999,
consisting primarily of accounts receivable, inventories, equipment, accounts
payable and accrued expenses, have been segregated as net assets to be disposed
of in the amount of $1,954,000 in the accompanying balance sheet. The Company
has accrued liabilities of approximately $646,000 at March 31, 2000 related to
the MMWP segment.
Sales for the MMWP segment were $2,650,000 and $770,000 for the three
months ended March 31, 1999 and 2000, respectively.
6. Accrued Expenses
Accrued expenses consist of the following (in thousands):
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31,
------------ ---------
1999 2000
------ ------
<S> <C> <C>
Accrued payroll, commissions and related expenses...... $ 978 $1,043
Accrued warranty expense............................... 530 465
Accrued contract costs................................. 168 240
Accrued liabilities on discontinued operations......... 350 646
Other accrued expenses................................. 254 447
------ ------
$2,280 $2,841
====== ======
</TABLE>
7. Initial Public Offering
On February 7, 2000 the Company made available 4,600,000 shares of
common stock to the general public under the terms and conditions contained in
an underwriting agreement dated February 1, 2000 with various underwriters. The
initial public offering resulted in the Company receiving approximately $71.2
million of net proceeds primarily for general corporate purposes.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
We develop and supply broadband point-to-multipoint wireless access
equipment used by network service providers to deliver integrated voice, video
and data services to business and residential subscribers. We sell our products
primarily to network system integrators, which include our products in broadband
wireless systems sold to network service providers. We have developed two
families of broadband point-to-multipoint wireless access products. Our modular
hubs and customer premises equipment can be rapidly tailored for competitive
site demonstrations and initial commercial deployments. These modular products
address a network service provider's need to offer new services and enter new
markets quickly, which is often referred to as "accelerated time-to-market." Our
planar hubs and customer premises equipment, based on a printed circuit board
design, can be mass-produced using low-cost, highly automated manufacturing
techniques. These planar products address a network service provider's need for
cost-effective deployment to many subscribers.
We commenced operations in 1982 and have derived the significant
majority of our sales from our millimeter-wave products business segment.
Millimeter waves are electromagnetic waves having wavelengths between one and
ten millimeters. In August 1999, we adopted a plan to focus all of our resources
on our broadband point-to-multipoint wireless access business segment and to
dispose of the millimeter-wave products segment. We decided to dispose of this
segment because it would have required us to reallocate financial and management
resources from the more attractive broadband point-to-multipoint wireless access
business segment. The segment was sold on February 8, 2000. As a result, we have
presented the operations of the millimeter-wave products segment as a
discontinued operation in our financial statements. The following management's
discussion and analysis focuses on our ongoing broadband point-to-multipoint
wireless access business.
Our first prototype broadband point-to-multipoint wireless access
equipment was evaluated in a trial in 1995. Before receiving our first volume
order for equipment in June 1999, virtually all of our shipments of products
were for site demonstrations and initial commercial deployments. Through March
31, 2000 we have assembled all of our products in-house. In the future, we
intend to use third-party manufacturers to supplement our manufacturing
capacity.
We intend to increase expenditures in all areas, including
manufacturing and engineering, research and development, and sales and
marketing. These increases in operating expenses are not always apparent from
our historical financial statements. As our sales continue to grow, we
anticipate that our operating expenses as a percentage of sales will decrease
even though we anticipate that will significantly increase amounts spent on
research and development, selling and marketing, and general and administrative.
This spending will support expansion of our production and design areas, greater
recruiting efforts, and a larger customer support organization to address the
continuing growth in the market for broadband wireless access equipment.
For the three months ended March 31, 2000, approximately 93% of our
sales were to a customer located in Canada, and 7% of our sales were to
customers located in the United States. For the three months ended March 31,
1999, approximately 53% of our sales were to a customer located in Canada, 42%
of our sales were to customers located in the United States, and 5% of our sales
were to customers located in England. We expect that sales to customers located
outside the United States will continue to be significant.
10
<PAGE>
Result of Operations
The following table provides continuing operations data as a percentage
of sales for the periods presented. The percentages may not add due to rounding.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(unaudited)
-----------------
1999 2000
----- -----
<S> <C> <C>
Sales .................................................. 100.0% 100.0%
Cost of sales .......................................... 140.2 103.1
----- -----
Gross margin (loss) .................................... (40.2) (3.1)
Operating expenses
Research and development, net ...................... 79.4 26.6
Selling and marketing .............................. 27.0 9.3
General and administrative ......................... 31.6 24.4
Total operating expenses ......................... 138.0 60.3
----- -----
Operating loss ......................................... (178.2) (63.4)
Other income (expense) ................................. (4.3) 6.7
----- -----
Loss from continuing operations before income taxes .... (182.5) (56.7)
Income tax benefit ..................................... (0.0) (0.0)
----- -----
Loss from continuing operations ........................ (182.5)% (56.7)%
===== =====
</TABLE>
Three Months Ended March 31, 1999 and 2000
Sales
Sales increased 437% from $1.2 million for the three months ended March
31, 1999 to $6.3 million for the three months ended March 31, 2000. Of this
increase, approximately $5 million was attributable to an increase in sales of
our planar products from $558,000 to $5.6 million. The remaining increase
resulted from an increase in sales of our modular products.
Cost of Sales
Cost of sales consists of component and material costs, direct labor
costs, overhead related to manufacturing our products and customer support
costs. Cost of sales increased $4.8 million from $1.7 million for the three
months ended March 31, 1999 to $6.5 million for the three months ended March 31,
2000. The increase in cost of sales was attributable primarily to increased
shipments of our planar products. Gross margins were a negative 40% in the three
months ended March 31, 1999 and a negative 3% in the three months ended March
31, 2000. The improvement in gross margin is primarily due to the shipment of
our higher margin planar products despite a delay in reaching product cost
reduction targets.
<PAGE>
Research and Development Expenses
Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. These include
costs for development and extension of products and components, test equipment
and related facilities. Gross research and development expenses increased 100%
from $1.0 million in the three months ended March 31, 1999 to $2.0 million in
the three months ended March 31, 2000. The increase reflected significant
investments to develop our planar products and adapt our modular products for
additional frequency ranges. These activities required us to substantially
increase the size of our research and development staff by 72%, from 39
personnel at March 31, 1999 to 67 at March 31, 2000. Research and development
costs were
11
<PAGE>
partially offset by customer funding of $120,000 and $357,000 in the three
months ended March 31, 1999 and 2000, respectively. Net of customer
reimbursements, our research and development expenses increased 80% from
$934,000 in the three months ended March 31, 1999 to $1.7 million in the three
months ended March 31, 2000.
Selling and Marketing Expenses
Selling and marketing expenses consist of employee salaries and
benefits, consultant fees, and expenses for advertising, travel, technical
assistance, trade shows, and promotional and demonstration materials. Selling
and marketing expenses increased 85% from $318,000 in the three months ended
March 31, 1999 to $588,000 in the three months ended March 31, 2000. The
increase was attributable to our hiring of two additional personnel in our
customer support group, and increased consulting support along with expenses
related to planned attendance at two additional trade shows aimed at enhancing
our relationships with major customers and prospects. Our selling and marketing
expenses as a percentage of sales decreased significantly from 27% for the three
months ended March 31, 1999 to 9.3% for the same period in 2000. This was the
result of increasing sales while only adding three people to our selling and
marketing organization.
General and Administrative Expenses
General and administrative expenses consist primarily of executive,
administrative, human resources, quality assurance, management information
systems and finance related costs. General and administrative expenses increased
313% from $372,000 for the three months ended March 31, 1999 to $1.5 million for
the three months ended March 31, 2000. The increase in general and
administrative expenses was primarily attributable to staffing increases to
support the Company's operation. The company added several senior management
positions and additional support for finance and administration. As a result of
the initial public offering, the Company has also incurred expenses for investor
and public relations consulting firms. Expenses associated with the recruiting
of additional technical personnel have increased from $82,000 for the three
months ended March 31, 1999 to $160,000 for the same period in 2000.
Other Income (Expense)
Other income (expense) consists of interest earned on cash and cash
equivalents offset by interest expense and miscellaneous non-operating expenses.
Total other expense changed from $51,000 in expense for the three months ended
March 31, 1999 to $424,000 in income for the three months ended March 31, 2000.
Interest expense for the three months ended March 31, 2000 was $119,000 higher
than the same period in 1999 due primarily to additional equipment financing.
Interest income increased by $594,000 from $17,000 for the three months ended
March 31, 1999 to $611,000 for the same period in 2000 as a result of increased
cash balances from our initial public offering in February 2000.
<PAGE>
Liquidity and Capital Resources
We have financed our operations primarily through the sale of
redeemable preferred stock, from cash generated by our discontinued operations,
and from proceeds of our initial public offering in February 2000. We have also
issued subordinated notes and used equipment lease financing and bank lines of
credit to provide cash. Our line of credit and long term debt agreements in
effect at March 31, 2000 contain certain financial covenants of which the most
restrictive are the maintenance of a minimum debt-to-equity ratio and various
profitability requirements. We raised net proceeds of $12.9 million in 1999 from
the issuance of redeemable preferred stock.
On February 7, 2000 the Company completed an initial public offering of
4,600,000 shares of its common stock at $17.00 per share under the terms and
conditions contained in an underwriting agreement dated February 1,
12
<PAGE>
2000 with various underwriters. We received net proceeds from our initial public
offering of approximately $71.2 million, after underwriting discounts and
commission and estimated offering costs, to be used primarily for general
corporate purposes.
At March 31, 2000, we had cash and cash equivalents of $54.5 million
and marketable securities of $13.2 million. At March 31, 2000, we had no bank
borrowings under our line of credit facility. This line of credit is
collateralized by substantially all of our assets and interest is payable on the
outstanding balance at a rate of prime plus 1% (prime was 9.0% at March 31,
2000).
The increase in accounts receivable from $2.9 million at December 31,
1999 to $6.7 million at March 31, 2000, the increase in inventories from $7.1
million to $13.5 million, and the increase in accounts payable from $4.3 million
to $8.6 million over the comparable period reflects the net working capital
buildup resulting from the significant increase in production and sales of our
broadband wireless access equipment.
At March 31, 2000, we had approximately $2.6 million in long-term debt,
of which $559,400 is due through December 2000 with an interest rate of 10%,
$225,000 is due through June 2003 with an interest rate of 10%, and $1,776,000
is due through April 2003 with an interest rate of 12%.
At March 31, 2000, we had approximately $1.4 million in capital lease
obligations, which are due through 2002.
Cash used in operating activities in the three months ended March 31,
2000 was $8.7 million compared to $1.4 million for the same period in 1999. For
the three months ended March 31, 2000, cash used in operating activities has
primarily represented funding of our net losses and inventory build to meet
production requirements. For the three months ended March 31, 1999, cash used in
operating activities primarily represented funding of our net losses.
Cash used in investing activities in the three months ended March 31,
2000 was $14.7 million compared to $359,000 for the same period in 1999. In the
three months ended March 31, 2000 these amounts related primarily to purchase of
equipment and the purchase of marketable securities. In the three months ended
March 31, 1999, these amounts related primarily to the purchase of equipment
used in our manufacturing and research and development activities.
Cash provided by financing activities in the three months ended March
31, 2000 was $71.3 million compared to cash used of $303,000 for the same period
in 1999. The financing activities for the three months ended March 31, 2000
consisted primarily of the proceeds from our initial public offering. The
financing activities for the three months ended March 31, 1999 consisted
primarily of capital lease and debt repayments.
Our future cash requirements will depend upon a number of factors,
including the timing and level of research and development activities and sales
and marketing campaigns, and our ability to significantly increase our
manufacturing volumes. We believe that our cash and cash equivalent balances and
the proceeds from this offering will provide sufficient capital to fund our
operations for at least 12 months. Thereafter, we may require additional capital
to fund our operations. In addition, from time to time we evaluate opportunities
to acquire complementary technologies or companies. Should we identify any of
these opportunities, we may need to raise additional capital to fund the
acquisitions and our operations. There can be no assurance that financing will
be available to us on favorable terms or at all.
<PAGE>
Disclosures About Market Risk
The following discusses our exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are exposed to risks and
uncertainties, many of which are out of our control. Actual results could vary
materially as a result of a number of factors, including those discussed above
under "Part I - Financial Information."
13
<PAGE>
As of March 31, 2000, we had cash and cash equivalents of $54.5
million. Substantially all of these amounts consisted of highly liquid
investments with remaining maturities at the date of purchase of less than 90
days. These investments are exposed to interest rate risk and will decrease in
value if market interest rates increase. A hypothetical increase or decrease in
market interest rates by 10 percent from the December 31, 1999 rates would cause
the fair value of these short-term investments to decline by an insignificant
amount. Due to the short duration of these investments, an immediate increase in
interest rates would not have a material effect on our financial condition or
results of operations. Declines in interest rates over time will, however,
reduce our interest income. As of March 31, 2000, we had marketable securities
of $13.2 million which consisted of municipal and government bonds and
commercial paper with maturities through June 2001.
We do not own any significant equity investments. Therefore, we do not
currently have any direct equity price risk.
Currently, all sales to international customers are denominated in
United States dollars and, accordingly, we are not currently exposed to foreign
currency exchange rate risks.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
See Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations, Disclosures about Market Risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Conversion of Preferred Stock into Common Stock
In January 2000, there were approximately 20,977,000 shares of the
Company's preferred stock outstanding. In accordance with the terms of the
Company's Restated Articles of Organization, those shares of preferred stock
automatically converted into shares of common stock upon the closing of the
initial public offering of the Company's common stock in February 2000. The
preferred stock converted into common stock at a ratio of one share of common
stock for two shares of preferred stock. This ratio was the result of the
reverse one for two split of the Company's common stock effected in December
1999. There was no amendment or modification of the Company's Restated Articles
of Organization in connection with this conversion.
Recent Sales of Unregistered Securities
The Company has issued or sold the following unregistered securities in
the three months ended March 31, 2000:
o An aggregate of 102,750 shares of common stock at prices ranging
from $1.00 to $8.00 per share through March 31, 2000 to our
employees upon the exercise of options held by those individuals
and issued under one or more of our stock plans.
o An aggregate of 40,000 shares of common stock at $1.00 per share
in March 2000 to a warrant holder upon the exercise of warrants.
14
<PAGE>
The foregoing numbers relating to our common stock have been adjusted
to reflect the one for two reverse stock split which became effective on
December 16, 1999. As a result of the reverse stock split, every two shares of
our outstanding preferred stock were automatically converted into one share of
our common stock upon the closing of our initial public offering of common stock
on February 7, 2000.
Each of the sales described above were completed without registration
under the Securities Act in reliance upon one or more of the following
exemptions:
o Section 4(2) of the Securities Act or Rule 506 of Regulation D
promulgated under the Securities Act for transactions not
involving a public offering; or
o Rule 701 promulgated under the Securities Act with respect to
certain of the options and shares of common stock issued to the
Company's employees, directors and consultants.
None of the sales of the unregistered securities issued by the Company
described above have involved the use of an underwriter, and no commissions were
paid in connection with the sale of any of the unregistered securities issued by
the Company described above.
Use of Proceeds from Registered Offerings
Common Stock. On February 1, 2000, the Securities and Exchange
Commission declared effective a Form S-1 Registration Statement (File No.
333-87885) filed by the Company in connection with an initial public offering of
4,600,000 shares of its Common Stock, par value $.01 per share. The offering of
Common Stock commenced on February 2, 2000 and closed on February 7, 2000 with
all of the 4,600,000 shares sold at a price of $17.00 per share for an aggregate
price of $78.2 million. All shares were sold by the Company; there were no
selling stockholders. Credit Suisse First Boston was the lead managing
underwriter of the offering and Banc of America Securities LLC and CIBC World
Markets Corp. were co-managers of the offering.
The gross proceeds of the offering were approximately $78.2 million.
The Company incurred approximately $7.0 million of expenses in connection with
the offering, of which approximately $5.5 million represented underwriting
discounts and commission, and an estimated $1.5 million represented offering
costs, including legal fees, accounting fees, underwriters' out-of-pocket
expenses and printing expenses.
The Company received approximately $71.2 million of net proceeds from
the offering. Those net proceeds will be used for general corporate purposes and
for potential acquisitions. Pending such uses, the net proceeds have been
invested in short-term, interest-bearing, investment grade securities or direct
or guaranteed obligations of the U.S. government. From the time of receipt
through March 31, 2000, the Company has applied its net proceeds from the
offering toward working capital, financing capital expenditures, and funding
operating losses. Net cash used from the offering for operating activities
totaled $4.4 million.
<PAGE>
Item 3. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on February 8, 2000 to report that the
Company had sold its Millitech Division to MMW Acquisition, LLC (to be renamed
Millitech, LLC) ("Millitech") pursuant to an Asset Purchase Agreement, dated as
of that date (the "Asset Purchase Agreement"). The Millitech Division contained
the millimeter-wave components and assemblies business as well as the military
satellite communications antenna business of Telaxis.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Telaxis Communications Corporation
Date: May 12, 2000 By: /s/ Dennis C. Stempel
---------------------
Dennis C. Stempel,
Chief Financial Officer, Principal Financial
Officer, Principal Accounting Officer and
Duly Authorized Officer
16
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