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 JUNE 30, 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 Identification No.)
incorporation or organization)
20 INDUSTRIAL DRIVE EAST
SOUTH DEERFIELD, MA 01373
---------------------------------------
(Address of principal executive offices)
(Registrant's telephone number, including area code) (413) 665-8551
--------------
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 July 31, 2000, there were 16,558,322 shares of the registrant's
common stock outstanding.
<PAGE>
<TABLE>
<CAPTION>
INDEX
------
PAGE NO.
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Index to Financial Statements................................................ 2
Balance Sheets as of June 30, 2000 and December 31, 1999............... 3
Statements of Operations and Comprehensive Loss for the three months 4
and six months ended June 30, 2000 and 1999..........................
Statement of Changes in Stockholders' (Deficit) Equity for the six
months ended June 30, 2000........................................... 5
Statements of Cash Flows for the six months ended June 30, 2000 and
1999................................................................. 6
Notes to Financial Statements.......................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations...................................................................
Item 3. Qualitative and Quantitative Disclosures About Market Risk................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 15
Item 2. Changes in Securities and Use of Proceeds.................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.......................... 16
Item 6. Exhibits and Reports on Form 8-K............................................. 17
SIGNATURES 17
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking
statements as defined by federal securities laws. Forward-looking statements are
predictions that relate to future events or our future performance and are
subject to known and unknown risks, uncertainties, assumptions, and other
factors that may cause actual results, outcomes, levels of activity, performance
or achievements to be materially different from any future results, outcomes,
levels of activity, performance or achievements expressed, anticipated or
implied by these forward-looking statements. Forward-looking statements should
be read in light of the cautionary statements and important factors described in
this Form 10-Q, including Part I, Item 2.-- Management's Discussion and Analysis
of Financial Condition and Results of Operations, Safe Harbor for
Forward-Looking Statements. We undertake no obligation to update or revise any
forward-looking statement to reflect events, circumstances or new information
after the date of this Form 10-Q or to reflect the occurrence of unanticipated
events.
Item 1. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Page
--------
Balance Sheets.......................................................... 3
Statements of Operations and Comprehensive Loss......................... 4
Statement of Changes in Stockholders' (Deficit) Equity.................. 5
Statements of Cash Flows................................................ 6
Notes to Financial Statements .......................................... 7
2
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
December 31, December 31, June 30,
1999 1999 2000
-----------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents....................................................... $ 6,603 $ 6,603 $ 33,481
Marketable securities........................................................... -- -- 20,898
Accounts receivable, less allowance for doubtful accounts ($57 in 1999
and $100 in 2000)............................................................... 2,900 2,900 8,385
Inventories..................................................................... 7,101 7,101 19,102
Net assets to be disposed of.................................................... 1,954 1,954 --
Other current assets............................................................ 170 170 2,432
----------------------------------------
Total current assets....................................................... 18,728 18,728 84,298
Property, plant and equipment, net.............................................. 6,444 6,444 12,081
Other assets.................................................................... 125 125 85
-----------------------------------------
Total assets............................................................... $ 25,297 $ 25,297 $ 96,464
========================================
Liabilities, Redeemable Preferred Stock and Stockholders' (Deficit) Equity
Current liabilities
Line of credit.................................................................. $ 500 $ 500 $ --
Accounts payable................................................................ 4,305 4,305 8,691
Customer prepayments............................................................ 285 285 309
Accrued expenses................................................................ 2,280 2,280 2,577
Income taxes payable............................................................ 39 39 39
Current maturities of long-term debt............................................ 1,149 1,149 789
Current maturities of capital lease obligations................................. 982 982 1,653
----------------------------------------
Total current liabilities.................................................. 9,540 9,540 14,058
Long-term debt........................................................................ 1,578 1,578 1,440
Capital lease obligations............................................................. 807 807 2,620
----------------------------------------
Total liabilities.......................................................... 11,925 11,925 18,118
----------------------------------------
Redeemable Preferred Stock
Redeemable preferred stock, Class A, $.01 par value; $3.25 redemption
value; authorized 0 shares (3,090,323 in 1999); issued and outstanding 0
shares (3,045,696 in 1999)...................................................... 9,899 -- --
Redeemable preferred stock, Class B, $.01 par value; $3.25 redemption value;
authorized 0 shares (789,677 in 1999); issued and outstanding 0 shares
(789,677 in 1999)............................................................... 2,566 -- --
Redeemable preferred stock, Class D, $.01 par value; $1.80 redemption value;
authorized 0 shares (7,200,000 in 1999); issued and outstanding 0 shares
(7,200,000 in 1999)............................................................. 12,960 -- --
Redeemable preferred stock, Class E, $.01 par value; $2.25 redemption value;
authorized 0 shares (11,000,000 in 1999): issued and outstanding 0
shares (9,941,508 in 1999)...................................................... 22,368 -- --
----------------------------------------
47,793 -- --
Stockholders' (Deficit) Equity
Preferred stock, $.01 par value; authorized 4,500,000 shares in 2000 and
1999; none issued............................................................... -- -- --
Common stock, $.01 par value; authorized 100,000,000 shares in 2000 and
1999; issued and outstanding 16,317,943 shares (843,872 shares in 1999)......... 8 113 163
Additional paid-in capital...................................................... 1,224 48,912 124,419
Notes receivable................................................................ (281) (281) (348)
Accumulated deficit............................................................. (35,205) (35,205) (45,709)
Deferred stock compensation..................................................... (167) (167) (179)
----------------------------------------
Total stockholders' (deficit) equity....................................... (34,421) 13,372 78,346
----------------------------------------
Total liabilities, redeemable preferred stock and stockholders'
equity..................................................................... $ 25,297 $ 25,297 $ 96,464
========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-----------------------------------------------------------------------------
1999 2000 1999 2000
-----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales.............................................. $ 1,585 $ 8,731 $ 2,762 $ 15,047
Cost of sales...................................... 1,162 8,543 2,812 15,057
-----------------------------------------------------------------------------
Gross margin (loss)................................ 423 188 (50) (10)
Operating expenses
Research and development, net................ 1,242 2,799 2,176 4,482
Selling, general and administrative.......... 800 2,756 1,490 4,882
-----------------------------------------------------------------------------
Total operating expenses................... 2,042 5,555 3,666 9,364
-----------------------------------------------------------------------------
Operating loss..................................... (1,619) (5,367) (3,716) (9,374)
-----------------------------------------------------------------------------
Other income (expense)
Interest and other expense................... (109) (203) (177) (390)
Interest and other income.................... 8 1,001 25 1,612
-----------------------------------------------------------------------------
Total other income (expense)............... (101) 798 (152) 1,222
-----------------------------------------------------------------------------
Loss from continuing operations before income taxes
(1,720) (4,569) (3,868) (8,152)
Income tax benefit................................. -- -- -- --
-----------------------------------------------------------------------------
Loss from continuing operations.................... (1,720) (4,569) (3,868) (8,152)
-----------------------------------------------------------------------------
Discontinued operations:
Income from operations of MMWP segment, net of taxes 9 58 367 58
Income (loss) on disposition of MMWP
segment......................................... (1,900) 438 (1,900) 438
Stock compensation cost on disposition of MMWP
segment......................................... -- -- -- (2,848)
-----------------------------------------------------------------------------
Income (loss) from discontinued operations......... (1,891) 496 (1,533) (2,352)
-----------------------------------------------------------------------------
Net loss and comprehensive loss.................... $ (3,611) $ (4,073) $ (5,401) $ (10,504)
=============================================================================
Basic and diluted earnings (loss) per share from:
Continuing operations........................ $ (3.44) $ (0.28) $ (7.78) $ (0.63)
=============================================================================
Discontinued operations...................... $ (3.78) $ .03 $ (3.08) $ (0.18)
=============================================================================
Net loss..................................... $ (7.22) $ (0.25) $ (10.87) $ (0.81)
============================================================================
Shares used in computing basic and diluted earnings
(loss) per share................................ 500 16,283 497 13,011
=============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
5
TELAXIS COMMUNICATIONS CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
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 .......... 286,514 3 460 (67) -- -- 396
Exercise of common stock warrants ......... 99,152 1 70 -- -- -- 71
Amortization of deferred stock compensation -- -- -- -- 33 -- 33
Offering costs ............................ -- -- (6,330) -- -- -- (6,330)
Stock compensation costs .................. -- -- 305 -- -- -- 305
Stock compensation cost on discontinued
operations ............................. -- -- 2,848 -- (45) -- 2,803
Conversion of preferred stock ............. 10,488,405 105 47,688 -- -- -- 47,793
Net loss .................................. -- -- -- -- -- (10,504) (10,504)
---------- ------ --------- ------ -------- ---------- ----------
Balances, June 30, 2000 ................... 16,317,943 $ 163 $ 124,419 $ (348) $ (179) $ (45,709) $ 78,346
========== ====== ========= ====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------
1999 2000
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss ...................................................................... $ (5,401) $(10,504)
Adjustments to reconcile net loss to net cash utilized by operating activities:
Depreciation and amortization .............................................. 1,185 1,522
Loss (gain) on disposition of MMWP segment ................................. 1,900 (496)
Non-cash compensation expense .............................................. 88 3,140
Changes in assets and liabilities
Accounts receivable ...................................................... 625 (5,485)
Contracts in progress .................................................... (11) --
Inventories .............................................................. (1,273) (12,001)
Other current assets ..................................................... (156) (2,298)
Accounts payable and accrued expenses .................................... (264) 5,143
Customer prepayments ..................................................... 17 24
Income taxes payable ..................................................... 9 --
-------- --------
Net cash utilized by operating activities ................................ (3,281) (20,955)
-------- --------
Cash flows from investing activities
Purchase of marketable securities ............................................. -- (20,898)
Proceeds from sale of discontinued operations ................................. -- 1,990
Additions to property and equipment ........................................... (708) (3,900)
Decrease (increase) to other assets ........................................... (39) 8
-------- --------
Net cash utilized by investing activities ................................ (747) (22,800)
-------- --------
Cash flows from financing activities
Proceeds from note payable .................................................... 1,000 --
Repayment of line of credit ................................................... -- (500)
Proceeds from long-term debt .................................................. 1,416 --
Repayments of long-term debt and capital lease obligations .................... (624) (1,205)
Issuance of common stock upon exercise of options and warrants ................ 6 468
Issuance of common stock ...................................................... -- 78,200
Stock issuance costs .......................................................... -- (6,330)
-------- --------
Net cash provided by financing activities ............................... 1,798 70,633
-------- --------
Net increase (decrease) in cash and cash equivalents ............................. (2,230) 26,878
Cash and cash equivalents at beginning of period ................................. 2,635 6,603
-------- --------
Cash and cash equivalents at end of period ....................................... $ 405 $ 33,481
======== ========
Supplemental disclosure of cash flow information
Non-cash investing and financing activities:
Equipment acquired under capital lease agreement ........................... $ 125 $ 3,181
Conversion of redeemable preferred stock ................................... -- 47,793
Notes received for issuance of common stock ................................ -- 67
</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 June 30, 2000 and for the three
months and six months ended June 30, 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 and six months ended June 30, 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 June 30, 2000, the
Company had $16.3 million invested in securities with maturities from three to
twelve months, and $4.5 million invested with maturities greater than twelve
months and through June 2001.
Comprehensive Income
For the three months and six months ended June 30, 1999 and 2000,
comprehensive loss equaled net loss.
Recent accounting pronouncements
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 "Accounting for certain Transactions Involving Stock
Compensation-an interpretation of APB Opinion No. 25"("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25, including the following: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000, but certain conclusions in FIN 44 cover specific events that occurred
after either December 15, 1998 or January 12, 2000. The Company does not expect
the application of FIN 44 to have a material impact on the Company's financial
position or results of operations.
7
<PAGE>
Reclassification
Certain prior years amounts have been reclassified to conform to
current year's presentation.
2. Inventories
Inventories are stated at the lower of cost or market and consist of
the following (in thousands):
December 31, June 30,
1999 2000
----------------------------
(unaudited
Parts and subassemblies..............$ 3,257 $ 14,036
Work in process...................... 3,844 5,066
---------------------------
$ 7,101 $ 19,102
===========================
3. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---------------------------
(unaudited)
<S> <C> <C>
Machinery and equipment............................... $ 9,803 $ 13,452
Furniture and fixtures................................ 679 707
Leasehold improvements................................ 1,970 2,193
Equipment under capital leases........................ 3,469 6,650
-------------------------
15,921 23,002
Less accumulated depreciation and amortization........ (9,477) (10,921)
-------------------------
$ 6,444 $ 12,081
==========================
</TABLE>
The net book value of equipment under capital leases was
approximately $1,296,000 and $5,366,000 at December 31, 1999 and June 30, 2000,
respectively.
Depreciation expense for the six months ended June 30, 1999 and 2000
was $1,159,000 and $1,444,000, respectively.
4. Earnings Per Share
Earnings per share has been computed by dividing the loss from
continuing operations, income (loss) from discontinued operations and net loss
by the weighted average common shares outstanding. No effect has been given to
the exercise of common stock options, stock warrants, and outstanding redeemable
preferred stock, since the effect would be antidilutive on continuing operations
for all reporting periods.
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(unaudited) (unaudited)
-----------------------------------------------------------
1999 2000 1999 2000
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Historical:
Loss from continuing operations................................ $ (1,720) $ (4,569) $ (3,868) $ (8,152)
==========================================================
Weighted average shares of common stock outstanding............ 500 16,283 497 13,011
==========================================================
Basic and diluted loss per share from continuing operations.... $ (3.44) (0.28) (7.78) $ (0.63)
==========================================================
Income (loss) from discontinued operations..................... $ (1,891) $ 496 $ (1,533) $ (2,352)
==========================================================
Weighted average shares of common stock outstanding............ 500 16,283 497 13,011
==========================================================
Basic and diluted income (loss) per share from discontinued
operations.................................................... $ ( 3.78) $ 0.03 $ (3.08) $ (0.18)
==========================================================
Net loss....................................................... $ (3,611) $ (4,073) $ (5,401) $ (10,504)
==========================================================
Weighted average shares of common stock outstanding............ 500 16,283 497 13,011
==========================================================
Basic and diluted net loss per share........................... $ (7.22) $ (0.25) $ (10.87) $ (0.81)
==========================================================
</TABLE>
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 consisted of the development and manufacture of
millimeter-wave components and assemblies, including antennas and quasi-optical
products, multiplexer products, and passive waveguide products. On February 8,
2000 the Company completed the sale of substantially all of the assets of the
MMWP segment to Millitech LLC for approximately $3.6 million.
Accordingly, the Company has restated its historical financial
statements to present the MMWP segment's operating results as a discontinued
operation. The results of the MMWP operations have been segregated from
continuing operations and reported as a separate line item in the statements of
operations and comprehensive loss.
As a result of the sale, the Company received cash proceeds of $2.0
million and a subordinated note for $1.2 million with interest on the principal
at 12%. The principal is payable in five equal semi-annual payments of $50,000
beginning on July 1, 2002 through July 1, 2004. On December 31, 2004, the entire
remaining principal balance of $960,000 plus accrued interest is due. Interest
is payable semi-annually on the first days of January and July of each year
during the term of the note, beginning July 1, 2000. The Company has fully
reserved this subordinated note. The Company recorded in the Statements of
Operations and Comprehensive Loss for the six months ended June 30, 2000, stock
compensation expense of $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, and a gain on disposition of approximately $438,000 as a result
of reassessing the net realizable value of certain assets and liabilities
related to the divestiture.
The assets and liabilities of the MMWP segment at December 31, 1999,
consisting primarily of accounts receivable, inventories, equipment, accounts
payable and accrued expenses, have been segregated as net assets to be disposed
of in the amount of $1,954,000 in the accompanying balance sheet. The Company
has accrued liabilities of approximately $630,000 at June 30, 2000 related to
the MMWP segment.
Sales for the MMWP segment were $0 for the three months ended June
30, 2000 ($2,039,000 in 1999) and $770,000 for the six months ended June 30,
2000 ($4,689,000 in 1999).
9
<PAGE>
6. Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------
1999 2000
--------------------------
<S> <C> <C>
Accrued payroll, commissions and related expenses......... $ 978 $ 1,215
Accrued warranty expense.................................. 530 321
Accrued contract costs.................................... 168 140
Accrued liabilities on discontinued operations............ 350 630
Other accrued expenses.................................... 254 271
-------------------------
$ 2,280 $ 2,577
=========================
</TABLE>
7. Lines of Credit
In August 1999, the Company entered into a revolving line of credit
agreement with a bank. The agreement provided for an initial borrowing of up to
$1,000,000, which was increased by $500,000 upon the Company's raising an
additional $3,000,000 in stockholders' equity and increased by $500,000 upon
receipt of a machinery and equipment appraisal, for a total amount available of
$2,000,000. On June 9, 2000, the Company revised the agreement with the bank to
increase the line of credit to $5,000,000 and extend the expiration of the line
from August 19, 2000 to November 30, 2000. Interest is payable on the
outstanding balance of the line at prime plus 1%. Prime was 9.5% at June 30,
2000. The line is collateralized by substantially all of the assets of the
Company. The agreement requires the Company to comply with certain covenants
including minimum working capital, tangible net worth, and revenue. The Company
was in compliance with all covenants at June 30, 2000. At December 31, 1999,
$500,000 was outstanding under this line of credit. At June 30, 2000, there were
no borrowings under this line of credit.
8. 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 $71.1
million of net proceeds to be used primarily for general corporate purposes.
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
10
<PAGE>
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. To date, we
have assembled the majority of our products in-house. In the quarter ending June
30, 2000, C-MAC Industries began production of some of our products for us. In
the future, we intend to continue 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 expect
that our operating expenses as a percentage of sales will decrease even though
we 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 both the three months and six months ended June 30, 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 and Korea. For the
three months and six months ended June 30, 1999, approximately 76% and 66% of
our sales, respectively, were to a customer located in Canada, 24% and 32% of
our sales, respectively, were to customers located in the United States, and 0%
and 2% of our sales, respectively, were to customers located in England. We
expect that sales to customers located outside the United States will continue
to be significant.
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 Six Months Ended
June 30, June 30,
(unaudited) (unaudited)
--------------------------------------------------------
1999 2000 1999 2000
--------------------------------------------------------
<S> <C> <C> <C> <C>
Sales...................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................................. 73.3 97.8 101.8 100.1
--------------------------------------------------------
Gross margin (loss)........................................ 26.7 2.2 (1.8) (0.1)
Operating expenses
Research and development, net.......................... 78.4 32.1 78.8 29.8
Selling, general and administrative.................... 50.5 31.6 53.9 32.4
Total operating expenses............................ 128.8 63.6 132.7 62.2
--------------------------------------------------------
Operating loss............................................. (102.1) (61.5) (134.5) (62.3)
Other income (expense)..................................... (6.4) 9.1 (5.5) 8.1
--------------------------------------------------------
Loss from continuing operations before income taxes........ (108.5) (52.3) (140.0) (54.2)
Income tax benefit......................................... (0.0) (0.0) (0.0) (0.0)
--------------------------------------------------------
Loss from continuing operations............................ (108.5)% (52.3)% (140.0)% (54.2)%
========================================================
</TABLE>
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Three Months and Six Months Ended June 30, 1999 and 2000
Sales
Sales increased 451% to $8.7 million for the three months ended June
30, 2000 from $1.6 million for the same period in 1999. Of this increase,
approximately $7 million was attributable to an increase in sales of our planar
products from $1.1 million to $8.2 million. Sales increased 445% to $15.0
million for the six months ended June 30, 2000 from $2.8 million for the same
period in 1999. Sales of our planar products have increased to $13.8 million for
the six months ended June 30, 2000 compared to $1.6 million for the same period
in 1999.
Cost of Sales
Cost of sales consists of component and material costs, direct labor
costs, warranty costs, overhead related to manufacturing our products and
customer support costs. Cost of sales increased $7.3 million to $8.5 million for
the three months ended June 30, 2000 from $1.2 million for the same period in
1999. Cost of sales increased $12.3 million to $15.1 million for the six months
ended June 30, 2000 from $2.8 million for the same period in 1999. The increase
in cost of sales in each comparative period was attributable primarily to
increased shipments of our products. Gross margins were 2.2% in the three months
ended June 30, 2000 and 26.7% in the same period in 1999. Gross margins were
negative 0.1% and negative 1.8%, respectively, for the six months ended June 30,
2000 and 1999. The decline in gross margin as a percentage of sales is primarily
due to a reduction in average selling prices. Average selling prices for the
three months and six months ended June 30, 2000 decreased by approximately 60%
and 64%, respectively, from the same periods in 1999. These declines were driven
by volume pricing as we delivered significantly higher volumes to support
customer requirements.
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 97% to
$3.1 million in the three months ended June 30, 2000 from $1.5 million in the
same period in 1999. Gross research and development expenses increased 86% to
$4.8 million for the six months ended June 30, 2000 from $2.6 million for the
same period in 1999. The increases reflected significant investments to develop
our products for additional frequency ranges and network interfaces. To support
the increase in these activities, we substantially increased the size of our
research and development staff by 30% to 82 at June 30, 2000 from 63 at June 30,
1999. In addition, we incurred significant material costs for development
projects in the three months ended June 30, 2000. Research and development costs
were partially offset by customer funding of $252,000 and $306,000 for the three
months ended June 30, 2000 and 1999, respectively. Customer funding was $356,000
and $426,000 for the six months ended June 30, 2000 and 1999, respectively. Net
of customer reimbursements, our research and development expenses increased 125%
to $2.8 million in the three months ended June 30, 2000 from $1.2 million for
the same period in 1999. Net research and development costs increased 106% to
$4.5 million for the six months ended June 30, 2000 from $2.2 million for the
same period in 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of
employee salaries and associated costs for selling, marketing, customer support,
information systems, finance, legal, and administration. Selling, general and
administrative expenses increased 245% to $2.8 million for the three months
ended June 30, 2000 from $800,000 for the same period in 1999. Selling, general
and administrative expenses increased 228% to $4.9 million for the six months
ended June 30, 2000 from $1.5 million for the same period in 1999. These
increases were due primarily to a increase in personnel in these functional
areas to 42 at June 30, 2000 from 22 at June 30, 1999 to support the Company's
growth and operation as a public company. Expenses relating to recruitment of
additional technical personnel increased 98% to $367,000 for the six months
ended June 30, 2000 from $185,000 for the same period in 1999. In the three
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months ended June 30, 2000, we also recorded a $261,000 non-recurring charge for
the accelerated vesting of stock options on the retirement of a long-time,
valued employee.
Other Income (Expense)
Other income (expense) consists of interest earned on cash and
marketable securities offset by interest expense and miscellaneous non-operating
expenses. Total other income/expense changed to $798,000 in income for the three
months ended June 30, 2000 from $101,000 in expense for the same period in 1999.
Total other expense changed to $1.2 million in income for the six months ended
June 30, 2000 from $152,000 in expense for the same period in 1999. Interest
expense for the three months ended June 30, 2000 was $94,000 higher than the
same period in 1999 and $213,000 higher for the six months ended June 30, 2000
compared to the same period in 1999 due primarily to additional equipment
financing. Interest income increased by $993,000 to $1 million for the three
months ended June 30, 2000 from $8,000 for the same period in 1999. Interest
income increased $1.6 million to approximately $1.6 million for the six months
ended June 30, 2000 from $25,000 for the same period in 1999. The increases were
a result of increases in invested cash and marketable securities subsequent to
our initial public offering in February 2000.
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 June 30, 2000 contain certain financial covenants including minimum
working capital, tangible net worth, and revenue. We raised net proceeds of
$12.9 million in 1999 from the issuance of redeemable preferred stock.
On February 7, 2000 we completed an initial public offering of
4,600,000 shares of our common stock at $17.00 per share under the terms and
conditions contained in an underwriting agreement dated February 1, 2000 with
various underwriters. We received net proceeds from our initial public offering
of $71.1 million, after underwriting discounts and commission and offering
costs, to be used primarily for general corporate purposes.
At June 30, 2000, we had cash and cash equivalents of $33.5 million
and marketable securities of $20.9 million. At June 30, 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 9.5% at June 30,
2000).
The increase in accounts receivable from $2.9 million at December 31,
1999 to $8.4 million at June 30, 2000, the increase in inventories from $7.1
million to $19.1 million, and the increase in accounts payable from $4.3 million
to $8.7 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 June 30, 2000, we had approximately $2.2 million in long-term
debt, of which $406,250 is due through December 2000 with an interest rate of
10%, $200,000 is due through June 2003 with an interest rate of 10%, and
$1,683,000 is due through April 2003 with an interest rate of 12%.
At June 30, 2000, we had approximately $4.3 million in capital lease
obligations, which are due through 2003.
Cash used in operating activities in the six months ended June 30,
2000 was $21.0 million compared to $3.3 million for the same period in 1999. For
the six months ended June 30, 2000, cash used in operating activities has
primarily represented funding of our net losses and inventory increase to meet
future production requirements. For the six months ended June 30, 1999, cash
used in operating activities primarily represented funding of our net losses.
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Cash used in investing activities in the six months ended June 30,
2000 was $22.8 million compared to $747,000 for the same period in 1999. In the
six months ended June 30, 2000 these amounts related primarily to purchase of
equipment and the purchase of marketable securities. In the six months ended
June 30, 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 six months ended June
30, 2000 was $70.6 million compared to $1.8 million for the same period in 1999.
The financing activities for the six months ended June 30, 2000 consisted
primarily of the proceeds from our initial public offering. The financing
activities for the six months ended June 30, 1999 consisted primarily of
proceeds from a note payable and additional debt partially offset by 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 and improve our gross margin. We believe that our cash and
cash equivalent balances 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.
Disclosures About Market Risk
The following discusses our exposure to market risk related to
changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are exposed to risks
and uncertainties, many of which are out of our control. Actual results could
vary materially as a result of a number of factors, including those discussed
below in "Safe Harbor for Forward-Looking Statements."
As of June 30, 2000, we had cash and cash equivalents of $33.5
million. Substantially all of these amounts consisted of highly liquid
investments with remaining maturities at the date of purchase of less than 90
days. As of June 30, 2000, we had marketable securities of $20.9 million which
consisted of municipal and government bonds and commercial paper with maturities
through June 2001. These investments are exposed to interest rate risk and will
decrease in value if market interest rates increase. 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.
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.
Safe Harbor for Forward-Looking Statements
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. From time to time, we may publish or otherwise make available
forward-looking statements of this nature. All such forward-looking statements,
14
<PAGE>
whether written or oral, and whether made by us or on our behalf, are expressly
qualified by the cautionary statements described in this Form 10-Q, including
those set forth below, and any other cautionary statements which may accompany
the forward-looking statements. In addition, we undertake no obligation to
update or revise any forward-looking statement to reflect events, circumstances
or new information after the date of this Form 10-Q or to reflect the occurrence
of unanticipated events, and we disclaim any such obligation.
We believe that the forward-looking statements included in this Form
10-Q have a reasonable basis.
However, forward-looking statements are only predictions that relate to future
events or our future performance and are subject to known and unknown risks,
uncertainties, assumptions, and other factors that may cause actual results,
outcomes, levels of activity, performance or achievements to be materially
different from any future results, outcomes, levels of activity, performance or
achievements expressed, anticipated or implied by these forward-looking
statements. As a result, we cannot guarantee future results, outcomes, levels of
activity, performance or achievements, and there can be no assurance that our
expectations, intentions, anticipations, beliefs or projections will result or
be achieved or accomplished.
In addition to other factors and matters discussed elsewhere in this
Form 10-Q, some of the important factors that, in our view, could cause actual
results to differ materially from those discussed in the forward-looking
statements include, without limitation, dependence on a limited number of
customers; difficulty in obtaining necessary components and raw materials when,
at the cost and in the quantities needed; failure of our customers to sell
broadband wireless access solutions that include our products; manufacturing
capacity constraints; difficulty in obtaining satisfactory performance from
third-party manufacturers; inability to achieve cost reductions and
technological improvements; difficulties in managing our expansion; loss of key
personnel; inability to protect our proprietary technology; probable variability
in our quarterly operating results; dependence on third parties; changes in the
market; lack of market acceptance of broadband wireless technology and products;
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 and in our other periodic reports and filings made from time to time
with the Securities and Exchange Commission.
Another factor that could affect our future results, outcomes, levels
of activity, performance or achievements is the recent acquisition of Newbridge
Networks by Alcatel. That acquisition was consummated on May 25, 2000. Prior to
the acquisition, Newbridge was our largest customer, accounting for 88% of our
sales for the year ended December 31, 1999 and 93% of our sales for the quarter
ended March 31, 2000. For the quarter ended June 30, 2000, Alcatel/Newbridge
accounted for 93% of our sales. Prior to the acquisition, Alcatel provided its
own transmitter/receiver equipment for its broadband wireless access efforts.
The process and results of integrating the two companies are still not complete.
Therefore, we are not certain what effect, if any, the acquisition of Newbridge
will have on our business. The acquisition could result in our shipments of
product to Alcatel decreasing or being delayed with resulting reduction in
revenue. In particular, it is likely that sales of our products to Alcatel for
the remainder of 2000 may be reduced. The acquisition could present us with
opportunities to develop additional products for Alcatel and to assist in the
technological development and supply of their current products. However, these
opportunities and sales to other customers may not compensate for any potential
reduction in sales of our current products to Alcatel.
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.
15
<PAGE>
Item 2. Changes in Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
The Company has issued or sold the following unregistered securities
in the three months ended June 30, 2000:
o An aggregate of 28,552 shares of common stock at $1.00 per share
in April 2000 to a warrant holder upon the exercise of warrants
on a cashless basis (752 shares of common stock were withheld by
the Company as payment for the aggregate exercise price of the
warrants).
o An aggregate of 30,600 shares of common stock at $1.00 per share
in May 2000 to two warrant holders upon the exercise of
warrants.
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 the exemptions contained in Section
4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the
Securities Act for transactions not involving a public offering.
None of the sales of the 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 securities issued by the Company
described above.
Use of Proceeds from Registered Offerings
On February 1, 2000, the Securities and Exchange Commission declared
effective a Form S-1 Registration Statement (File No. 333-87885) filed by 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 $7.1 million of expenses in connection with
the offering, of which approximately $5.5 million represented underwriting
discounts and commission, and $1.6 million represented offering costs, including
legal fees, accounting fees, underwriters' out-of-pocket expenses and printing
expenses.
The Company received approximately $71.1 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 June 30, 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 $16.7 million.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on June 21, 2000.
In connection with that meeting, beginning May 12, 2000, the Company distributed
a definitive proxy statement to its stockholders of record as of May 1, 2000. At
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that meeting, the following two nominees were each elected to serve a three-year
term as Directors of the Company:
BOARD'S NOMINEES FOR AGAINST
---------------- --- -------
Allan M. Doyle, Jr. 12,952,250 34,467
Robert C. Fleming 12,952,550 34,167
The terms of office of each of Albert E. Paladino, David A. Norbury,
and John L. Youngblood as a director of the Company continued after the June 21,
2000 annual meeting of stockholders.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
June 30, 2000.
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: August 11, 2000 By: Dennis C. Stempel
----------------------------------
Dennis C. Stempel
Chief Financial Officer, Principal Financial
Officer, Principal Accounting Officer and
Duly Authorized Officer
