--------------------------------------------------------------------------------
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 SEPTEMBER 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
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 October 31, 2000, there were 16,670,559 shares of the
registrant's common stock outstanding.
--------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NO.
----------------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Index to Financial Statements............................... 2
Balance Sheets as of September 30, 2000 and December 31, 3
1999......................................................
Statements of Operations and Comprehensive Loss for the 4
three months and nine months ended September 30, 2000 and
1999......................................................
Statement of Changes in Stockholders' (Deficit) Equity for
the nine months ended September 30, 2000.................. 5
Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999............................... 6
Notes to Financial Statements............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations...........................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 16
Item 2. Changes in Securities and Use of Proceeds....................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 17
SIGNATURES 17
</TABLE>
<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, September 30,
1999 1999 2000
--------------------------------------------
(unaudited) (unaudited)
Assets
Current assets
<S> <C> <C> <C>
Cash and cash equivalents....................................................... $ 6,603 $ 6,603 $ 24,002
Marketable securities........................................................... -- -- 22,591
Trade accounts receivable, less allowance for doubtful accounts ($57
in 1999 and $100 in 2000)..................................................... 2,900 2,900 6,300
Other accounts receivable....................................................... -- -- 302
Inventories..................................................................... 7,101 7,101 19,757
Net assets to be disposed of.................................................... 1,954 1,954 --
Other current assets............................................................ 170 170 877
--------------------------------------------
Total current assets........................................................ 18,728 18,728 73,829
Property, plant and equipment, net.............................................. 6,444 6,444 12,766
Intangible assets, net of accumulated amortization ............................. -- -- 216
Other assets.................................................................... 125 125 85
--------------------------------------------
Total assets................................................................ $ 25,297 $ 25,297 $ 86,896
============================================
Liabilities, Redeemable Preferred Stock and Stockholders' (Deficit) Equity
Current liabilities
Line of credit.................................................................. $ 500 $ 500 $ --
Accounts payable................................................................ 4,305 4,305 5,368
Customer prepayments............................................................ 285 285 429
Accrued expenses................................................................ 2,319 2,319 2,011
Current maturities of long-term debt............................................ 1,149 1,149 648
Current maturities of capital lease obligations................................. 982 982 1,525
--------------------------------------------
Total current liabilities................................................... 9,540 9,540 9,981
Long-term debt....................................................................... 1,578 1,578 1,311
Capital lease obligations............................................................ 807 807 2,336
--------------------------------------------
Total liabilities........................................................... 11,925 11,925 13,628
--------------------------------------------
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 22,368 -- --
(9,941,508 in 1999)...........................................................
--------------------------------------------
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 16,670,076 shares (843,872 shares in 1999)............. 8 113 167
Additional paid-in capital...................................................... 1,224 48,912 124,674
Notes receivable................................................................ (281) (281) (331)
Accumulated deficit............................................................. (35,205) (35,205) (51,072)
Deferred stock compensation..................................................... (167) (167) (170)
--------------------------------------------
Total stockholders' (deficit) equity........................................ (34,421) 13,372 73,268
--------------------------------------------
Total liabilities, redeemable preferred stock and stockholders' (deficit)
equity...................................................................... $ 25,297 $ 25,297 $ 86,896
============================================
</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 September 30, Nine months ended September 30,
---------------------------------------------------------------------------
1999 2000 1999 2000
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales....................................... $ 2,742 $ 8,095 $ 5,504 $ 23,142
Cost of sales............................... 2,291 10,225 5,103 25,282
---------------------------------------------------------------------------
Gross margin (loss)......................... 451 (2,130) 401 (2,140)
Operating expenses
Research and development, net.......... 1,192 2,425 3,368 6,907
Selling, general and administrative.... 984 1,963 2,474 6,846
---------------------------------------------------------------------------
Total operating expenses............. 2,176 4,388 5,842 13,753
---------------------------------------------------------------------------
Operating loss.............................. (1,725) (6,518) (5,441) (15,893)
---------------------------------------------------------------------------
Other income (expense)
Interest and other expense............. (384) (207) (561) (597)
Interest and other income.............. 30 829 55 2,441
---------------------------------------------------------------------------
Total other income (expense)......... (354) 622 (506) 1,844
---------------------------------------------------------------------------
Loss from continuing operations before
income taxes............................. (2,079) (5,896) (5,947) (14,049)
Income tax benefit.......................... -- -- -- --
---------------------------------------------------------------------------
Loss from continuing operations............. (2,079) (5,896) (5,947) (14,049)
---------------------------------------------------------------------------
Discontinued operations:
Income (loss) from operations of MMWP
segment, net of taxes.................... (109) -- 258 --
Income (loss) on disposition of MMWP
segment.................................. -- 534 (1,900) 1,030
Stock compensation cost on disposition of
MMWP segment............................. -- -- -- (2,848)
---------------------------------------------------------------------------
Income (loss) from discontinued operations.. (109) 534 (1,642) (1,818)
---------------------------------------------------------------------------
Net loss and comprehensive loss............. $ (2,188) $ (5,362) $ (7,589) $ (15,867)
===========================================================================
Basic and diluted earnings (loss) per share from:
Continuing operations.................. $ (3.44) $ (0.36) $ (11.14) $ (0.99)
===========================================================================
Discontinued operations................ $ (0.18) $ .03 $ (3.07) $ (0.13)
===========================================================================
Net loss............................... $ (3.62) $ (0.32) $ (14.21) $ (1.12)
===========================================================================
Shares used in computing basic and diluted
earnings (loss) per share................ 604 16,526 534 14,191
===========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TELAXIS COMMUNICATIONS CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Notes 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...... 505,004 5 717 (50) -- -- 672
Exercise of common stock warrants..... 232,795 3 68 -- -- -- 71
Amortization of deferred stock
compensation....................... -- -- -- -- 42 -- 42
Offering costs........................ -- -- (6,330) -- -- -- (6,330)
Stock compensation costs.............. -- -- 305 -- (45) -- 260
Stock compensation cost on
discontinued operations............ -- -- 2,848 -- -- -- 2,848
Conversion of preferred stock......... 10,488,405 105 47,688 -- -- -- 47,793
Net loss.............................. -- -- -- -- -- (15,867) (15,867)
-----------------------------------------------------------------------------------------
Balances, September 30, 2000.......... 16,670,076 $ 167 $ 124,674 $ (331) $ (170) $ (51,072) $ 73,268
=========================================================================================
</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>
Nine months ended
September 30,
---------------------------
1999 2000
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities
<S> <C> <C>
Net loss..................................................................... $ (7,589) $ (15,867)
Adjustments to reconcile net loss to net cash utilized
by operating activities:
Depreciation and amortization.............................................. 2,072 2,518
Loss (gain) on disposition of MMWP segment................................. 1,900 (1,020)
Non-cash compensation expense.............................................. 225 3,140
Changes in assets and liabilities
Accounts receivable trade................................................ 229 (3,400)
Other accounts receivable................................................ -- (302)
Contracts in progress.................................................... 23 --
Inventories.............................................................. (3,577) (12,656)
Other current assets..................................................... (149) (743)
Accounts payable and accrued expenses.................................... 1,802 1,739
Customer prepayments..................................................... (10) 144
------------- -------------
Net cash utilized by operating activities................................ (5,074) (26,447)
------------- -------------
Cash flows from investing activities
Purchase of marketable securities............................................ -- (22,591)
Proceeds from sale of discontinued operations................................ -- 1,990
Additions to property and equipment.......................................... (1,487) (5,425)
(Increase) to other assets, intangibles...................................... (74) (208)
------------- -------------
Net cash utilized by investing activities................................ (1,561) (26,234)
------------- -------------
Cash flows from financing activities
Proceeds from note payable................................................... 2,000 --
Net (repayment) borrowing under line of credit............................... 500 (500)
Proceeds from long-term debt................................................. 1,420 --
Repayments of long-term debt and capital lease obligations................... (862) (2,034)
Issuance of common stock upon exercise of options and warrants............... 184 744
Issuance of redeemable preferred stock....................................... 12,950 --
Issuance of common stock..................................................... -- 78,200
Stock issuance costs......................................................... (34) (6,330)
------------- -------------
Net cash provided by financing activities............................... 16,158 70,080
------------- -------------
Net increase in cash and cash equivalents....................................... 9,523 17,399
Cash and cash equivalents at beginning of period................................ 2,635 6,603
------------- -------------
Cash and cash equivalents at end of period...................................... $ 12,158 $ 24,002
============= =============
Supplemental disclosure of cash flow information
Non-cash investing and financing activities:
Equipment acquired under capital lease agreement........................... $ 438 $ 3,323
Conversion of redeemable preferred stock................................... -- 47,793
Issuance of preferred stock for subordinated promissory note............... 2,000 --
Notes received for issuance of common stock................................ 281 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 September 30, 2000 and for the three
months and nine months ended September 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 nine months ended September
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 its initial public offering
in accordance with its 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 September 30, 2000, the Company had
$22.6 million invested in securities with maturities from three to twelve
months.
Intangible Assets
Intangible assets are recorded at cost and are amortized using the
straight-line method over their expected useful life, which is five years.
Comprehensive Income
For the three months and nine months ended September 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"). The
application of FIN 44 did not have a material impact on the Company's financial
position or results of operations.
7
<PAGE>
Reclassification
Certain prior year 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, September 30,
1999 2000
---------------- -----------------
(unaudited)
Finished goods.................. $ 95 $ 1,846
Parts and subassemblies......... 3,257 14,311
Work-in process................. 3,749 3,600
---------------- -----------------
$ 7,101 $ 19,757
================ =================
The Company has recorded inventory reserves of $1.8 million and $3.4
million at December 31, 1999 and September 30, 2000, respectively, in order to
reflect the net realizable value of the inventory. Included in cost of sales for
the nine months ended September 30, 2000 was $1.9 million of expense related to
inventory reserves.
3. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
December 31, September 30,
1999 2000
-------------- ----------------
(unaudited)
Machinery and equipment............. $ 9,803 $ 15,233
Furniture and fixtures.............. 679 769
Leasehold improvements.............. 1,970 2,206
Equipment under capital leases...... 3,469 6,472
-------------- ----------------
15,921 24,680
Less accumulated depreciation
and amortization.... ............. (9,477) (11,914)
-------------- ----------------
$ 6,444 $ 12,766
============== ================
The net book value of equipment under capital leases was approximately
$1,296,000 and $4,567,000 at December 31, 1999 and September 30, 2000,
respectively.
Depreciation expense for the nine months ended September 30, 1999 and
2000 was $1,790,000 and $2,437,000, 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 Nine months ended
September 30, September 30,
(unaudited) (unaudited)
---------------------------------- --------------------------------
1999 2000 1999 2000
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Historical: (in thousands, except per share amounts)
Loss from continuing operations....................... $ (2,079) $ (5,896) $ (5,947) $ (14,049)
================ =============== =============== ===============
Weighted average shares of common stock outstanding... 604 16,526 534 14,191
================ =============== =============== ===============
Basic and diluted loss per share from continuing
operations............................................ $ (3.44) $ (0.36) $ (11.14) $ (0.99)
================ =============== =============== ===============
Income (loss) from discontinued operations............ $ (109) $ 534 $ (1,642) $ (1,818)
================ =============== =============== ===============
Weighted average shares of common stock outstanding... 604 16,526 534 14,191
================ =============== =============== ===============
Basic and diluted income (loss) per share from
discontinued operations.............................. $ (0.18) $ 0.03 $ (3.07) $ (0.13)
================ =============== =============== ===============
Net loss.............................................. $ (2,188) $ (5,362) $ (7,589) $ (15,867)
================ =============== =============== ===============
Weighted average shares of common stock outstanding... 604 16,526 534 14,191
================ =============== =============== ===============
Basic and diluted net loss per share.................. $ (3.62) $ (0.32) $ (14.21) $ (1.12)
================ =============== =============== ===============
</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 statement 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 Statement of
Operations for the nine months ended September 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 $1,030,000 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 $106,000 at September 30, 2000 related
to the MMWP segment.
Sales for the MMWP segment were $0 for the three months ended September
30, 2000 ($1,828,000 in 1999) and $770,000 for the nine months ended September
30, 2000 ($6,517,000 in 1999).
9
<PAGE>
6. Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
Accrued payroll, commissions and related expenses.. $ 978 $ 1,128
Accrued warranty expense........................... 530 352
Accrued contract costs............................. 168 140
Accrued liabilities on discontinued operations..... 350 106
Other accrued expenses............................. 293 285
------------ -------------
$ 2,319 $ 2,011
============ =============
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 September
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. At September
30, 2000, the Company was not in compliance with the minimum revenue covenant
and subsequently obtained a waiver from the bank. At December 31, 1999, $500,000
was outstanding under this line of credit. At September 30, 2000, there were no
borrowings under this line of credit. The Company is currently negotiating a
renewal of the line of credit agreement with the bank.
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
10
<PAGE>
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. 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 engineering, research and
development, and sales and marketing. These increases in operating expenses are
not always apparent from our historical financial statements. This spending will
support expansion of our customer diversification and product development
efforts to address the continuing growth in the market for broadband wireless
access equipment.
For the three months and nine months ended September 30, 2000,
approximately 96% and 94% of our sales, respectively, were to a customer located
in Canada, and 4% and 6% of our sales, respectively, were to customers located
in the United States and Korea. For the three months and nine months ended
September 30, 1999, approximately 96% and 81% of our sales, respectively, were
to a customer located in Canada, 2% and 17% of our sales, respectively, were to
customers located in the United States, and 2% of our sales were to customers
located in England and Korea. 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 Nine Months Ended
September 30, September 30,
(unaudited) (unaudited)
-------------------------- ---------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................... 83.6 126.3 92.7 109.2
------------ ------------ ------------ ------------
Gross margin (loss).................................... 16.4 (26.3) 7.3 (9.2)
Operating expenses
Research and development, net...................... 43.5 30.0 61.2 29.8
Selling, general and administrative................ 35.9 24.2 44.9 29.6
Total operating expenses......................... 79.4 54.2 106.1 59.4
------------ ------------ ------------ ------------
Operating loss......................................... (62.9) (80.5) (98.9) (68.7)
Other income (expense)................................. (12.9) 7.7 (9.2) 8.0
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes.... (75.8) (72.8) (108.0) (60.7)
Income tax benefit..................................... (0.0) (0.0) (0.0) (0.0)
------------ ------------ ------------ ------------
Loss from continuing operations........................ (75.8)% (72.8)% (108.0)% (60.7)%
============ ============ ============ ============
</TABLE>
11
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Three Months and Nine Months Ended September 30, 1999 and 2000
Sales
Sales increased 195% to $8.1 million for the three months ended
September 30, 2000 from $2.7 million for the same period in 1999. Of this
increase, approximately $5.2 million was attributable to an increase in sales of
our planar products from $2.6 million to $7.8 million. Sales increased 320% to
$23.1 million for the nine months ended September 30, 2000 from $5.5 million for
the same period in 1999. Sales of our planar products have increased to $21.6
million for the nine months ended September 30, 2000 compared to $4.2 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 $7.9 million to $10.2 million
for the three months ended September 30, 2000 from $2.3 million for the same
period in 1999. Cost of sales increased $20.2 million to $25.3 million for the
nine months ended September 30, 2000 from $5.1 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 and an increase to inventory
reserves of approximately $1.9 million in the three months ended September 30,
2000 due to changing business requirements. Gross margins were negative 26.3% in
the three months ended September 30, 2000 and positive 16.4% in the same period
in 1999. Gross margins were negative 9.2% and positive 7.3%, respectively, for
the nine months ended September 30, 2000 and 1999. The decline in gross margin
as a percentage of sales is primarily due to the increase to inventory reserves
and reductions in average selling prices which exceeded the reductions in
product cost in the corresponding period. These declines in average selling
prices were driven by volume pricing for commercial deployments 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 72% to
$2.6 million in the three months ended September 30, 2000 from $1.5 million in
the same period in 1999. Gross research and development expenses increased 81%
to $7.4 million for the nine months ended September 30, 2000 from $4.1 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 33% to 77 at September 30, 2000 from 58 at
September 30, 1999. Research and development costs were partially offset by
customer funding of $181,000 and $320,000 for the three months ended September
30, 2000 and 1999, respectively. Customer funding was $536,000 and $746,000 for
the nine months ended September 30, 2000 and 1999, respectively. Net of customer
reimbursements, our research and development expenses increased 103% to $2.4
million in the three months ended September 30, 2000 from $1.2 million for the
same period in 1999. Net research and development costs increased 105% to $6.9
million for the nine months ended September 30, 2000 from $3.4 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 99% to $2.0 million for the three months ended
September 30, 2000 from $984,000 for the same period in 1999. Selling, general
and administrative expenses increased 177% to $6.8 million for the nine months
ended September 30, 2000 from $2.5 million for the same period in 1999. These
increases were due primarily to an increase in personnel in these functional
areas to 42 at September 30, 2000 from 30 at September 30, 1999 to support the
Company's growth and operation as a public company. Expenses relating to
recruitment of additional technical personnel increased 18% to $431,000 for the
nine months ended September 30, 2000 from $367,000 for the same period in 1999.
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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 $622,000 in income for the
three months ended September 30, 2000 from $354,000 in expense for the same
period in 1999. Total other income (expense) changed to $1.8 million in income
for the nine months ended September 30, 2000 from $506,000 in expense for the
same period in 1999. Interest expense for the three months ended September 30,
2000 was $177,000 lower than the same period in 1999 and $36,000 higher for the
nine months ended September 30, 2000 compared to the same period in 1999 due
primarily to additional equipment financing. Interest income increased by
$799,000 to $829,000 for the three months ended September 30, 2000 from $30,000
for the same period in 1999. Interest income increased $2.4 million to
approximately $2.4 million for the nine months ended September 30, 2000 from
$55,000 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 September 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 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, 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 September 30, 2000, we had cash and cash equivalents of $24.0
million and marketable securities of $22.6 million. At September 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 9.50% at September 30,
2000).
The increase in accounts receivable from $2.9 million at December 31,
1999 to $6.3 million at September 30, 2000, the increase in inventories from
$7.1 million to $19.8 million, and the increase in accounts payable from $4.3
million to $5.4 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 September 30, 2000, we had approximately $2.0 million in long-term
debt, of which approximately $253,000 is due through September 2001 with an
interest rate of 10%, and approximately $1,761,000 is due through June 2003 with
interest rates ranging from 10% to 12%.
At September 30, 2000, we had approximately $3.9 million in capital
lease obligations, which are due through 2003.
Cash used in operating activities in the nine months ended September
30, 2000 was $26.5 million compared to $5.1 million for the same period in 1999.
For both of these periods, cash used in operating activities has primarily
represented funding of our net losses and inventory build to meet expected
future production requirements.
Cash used in investing activities in the nine months ended September
30, 2000 was $26.2 million compared to $1.6 million for the same period in 1999.
In the nine months ended September 30, 2000 these amounts related primarily to
purchase of equipment and the purchase of marketable securities. In the nine
months ended September
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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 nine months ended
September 30, 2000 was $70.1 million compared to $16.2 million for the same
period in 1999. The financing activities for the nine months ended September 30,
2000 consisted primarily of the proceeds from our initial public offering. The
financing activities for the nine months ended September 30, 1999 consisted
primarily of proceeds from the issuance of redeemable preferred stock.
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 sales
orders and 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 subject to risks and
uncertainties, many of which are out of our control. Actual results could vary
materially as a result of a number of factors, including those discussed above
under "Part I - Financial Information" and below under "Safe Harbor for
Forward-Looking Statements."
As of September 30, 2000, we had cash and cash equivalents of $24.0
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 September 30, 2000, we had marketable securities of $22.6 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,
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
14
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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; inability to obtain additional customers; the time and costs
associated with obtaining additional 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.
The integration of the former Newbridge Networks into Alcatel continues
to be a factor that could affect our future results, outcomes, levels of
activity, performance or achievements. For the quarter ended September 30, 2000,
Alcatel accounted for 96% of our sales. Prior to the acquisition of Newbridge by
Alcatel, each company had its own business practices and procedures. We believe
the process of integrating the different business practices and procedures is
ongoing and the result will be different practices and procedures being applied
in some areas of our relationship with Alcatel than applied in our relationship
with Newbridge. For example, Alcatel is presently implementing its approval
processes relating to product development and production, which are different
from those that Newbridge employed. Although we continue to work closely with
Alcatel concerning the integration of the different business practices and
procedures, we do not know all the changes that may occur or the extent to which
we might be affected by these changes. Application of new or different practices
and procedures could result in delays in developing, producing and/or shipping
our products which could reduce our sales, negatively impact our gross margin,
and increase our net loss.
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not currently a party to any material legal proceedings.
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 September 30, 2000:
o An aggregate of 135,000 shares of common stock at $1.00 per
share in July 2000 to an option holder upon the exercise of
options held by that individual and issued in connection with
the divestiture of a line of business by the Company in 1996.
o An aggregate of 18,824 shares of common stock at $1.00 per
share in July 2000 to a warrant holder upon the exercise of
warrants on a cashless basis (3,398.5 shares of common stock
were withheld by the Company as payment for the aggregate
exercise price of the warrants).
o An aggregate of 68,535 shares of common stock at $1.00 per
share in July 2000 to a warrant holder upon the exercise of
warrants on a cashless basis (3,465 shares of common stock
were withheld by the Company as payment for the aggregate
exercise price of the warrants).
o An aggregate of 18,437 shares of common stock at $1.00 per
share in August 2000 to a warrant holder upon the exercise of
warrants on a cashless basis (3,785.5 shares of common stock
were withheld by the Company as payment for the aggregate
exercise price of the warrants).
o An aggregate of 27,847 shares of common stock at $1.00 per
share in August 2000 to a warrant holder upon the exercise of
warrants on a cashless basis (2,153 shares of common stock
were withheld by the Company as payment for the aggregate
exercise price of the warrants).
The foregoing numbers relating to the Company's 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 outstanding preferred stock were automatically converted into one share of
common stock upon the closing of the 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
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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.
Pending such use, 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 September
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 through September 30, 2000 for operating
activities totaled $24.5 million.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------- -----------
10.1 Agreement and License between the Company and California Amplifier,
Inc. dated as of August 25, 2000
10.2 Supplemental Agreement between the Company and Alcatel Networks
Corporation dated September 14, 2000*
10.3 Form of Indemnification Agreement dated as of September 18, 2000, a
substantially similar version of which was entered between the Company
and each of Mssrs. Doyle, Fleming, Paladino, Norbury, Youngblood,
Renauld, Reynolds, and Stempel
27.1 Financial Data Schedule
----------------------
* Certain portions of this exhibit have been omitted pursuant to a
request for confidential treatment filed with the Securities and
Exchange Commission.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 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: November 14, 2000 By: /s/ Dennis C. Stempel
--------------------------------------------
Dennis C. Stempel,
Chief Financial Officer, Principal Financial
Officer, Principal Accounting Officer and
Duly Authorized Officer
