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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number 000-29053
YDI WIRELESS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2751645
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8000 LEE HIGHWAY
FALLS CHURCH, VA 22042
(Address of principal executive offices)
(703) 205-0600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of August 9, 2004, there were 26,938,091 shares of the registrant's
common stock outstanding.
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YDI WIRELESS, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ......................................................... 3
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 ...... 4
Consolidated Statements of Operations for the three and six months ended
June 30, 2004 and 2003 .................................................. 5
Consolidated Statement of Changes in Stockholders' Equity for the six
months ended June 30, 2004 .............................................. 6
Consolidated Statements of Cash Flows for the six months ended June 30,
2004 and 2003 ........................................................... 7
Notes to Consolidated Financial Statements ................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................... 20
Item 4. Controls and Procedures ...................................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................ 21
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities ................................................................... 22
Item 6. Exhibits and Reports on Form 8-K ............................................. 22
SIGNATURE ................................................................................. 22
2
PART I - FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements as
defined by federal securities laws. Forward-looking statements are predictions
that relate to future events or our future performance and are subject to known
and unknown risks, uncertainties, assumptions, and other factors that may cause
actual results, outcomes, levels of activity, performance, developments, or
achievements to be materially different from any future results, outcomes,
levels of activity, performance, developments, or achievements expressed,
anticipated, or implied by these forward-looking statements. Forward-looking
statements should be read in light of the cautionary statements and important
factors described in this Form 10-Q, including Part I, Item 2 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Safe
Harbor for Forward-Looking Statements. We undertake no obligation to update or
revise any forward-looking statement to reflect events, circumstances, or new
information after the date of this Form 10-Q or to reflect the occurrence of
unanticipated or any other subsequent events.
Item 1. Financial Statements.
3
YDI WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
June 30, December 31,
--------------------------
2004 2003
----------- -----------
Assets
Current assets:
Cash and cash equivalents .............................................. $ 15,285 $ 8,990
Restricted cash ........................................................ 5,176 --
Investment securities - available-for-sale ............................. 34,242 --
Accounts receivable, net ............................................... 3,106 2,511
Refundable income taxes ................................................ 150 226
Inventory .............................................................. 6,194 3,134
Assets held for sale ................................................... 874 790
Prepaid expenses ....................................................... 336 162
---------- ----------
Total current assets .............................................. 65,363 15,813
Property and equipment, net ............................................... 2,669 1,747
Other assets:
Investment securities - available-for-sale ............................. 1,824 2,627
Goodwill ............................................................... 15,454 --
Intangible assets, net ................................................. 4,536 483
Deposits ............................................................... 91 49
---------- ----------
Total other assets ................................................ 21,905 3,159
---------- ----------
Total assets ...................................................... $ 89,937 $ 20,719
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses .................................. $ 12,329 $ 3,023
Current maturities of notes payable .................................... 292 213
---------- ----------
Total current liabilities ......................................... 12,621 3,236
Notes payable, net of current maturities .................................. 3,927 1,298
---------- ----------
Total liabilities ................................................. 16,548 4,534
Commitments and contingencies ............................................. -- --
Stockholders' Equity
Preferred stock, $0.01 par value; authorized 4,500,000,
none issued at June 30, 2004 and December 31, 2003 ................... -- --
Common stock, $0.01 par value, 100,000,000 shares authorized,
26,640,424 and 14,179,882 issued and outstanding at June 30, 2004
and December 31, 2003, respectively .................................. 266 142
Additional paid-in capital ............................................. 64,762 6,173
Retained earnings ...................................................... 7,321 8,673
Accumulated other comprehensive income:
Net unrealized gain on available-for-sale securities ................. 1,040 1,197
---------- ----------
Total stockholders' equity ........................................ 73,389 16,185
---------- ----------
Total liabilities and stockholders' equity ........................ $ 89,937 $ 20,719
========== ==========
The accompanying notes are an integral part of these financial statements.
4
YDI WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues .................................................... $ 4,733 $ 7,229 $ 10,750 $ 13,665
Cost of goods sold .......................................... 3,193 4,961 6,744 9,399
------------ ------------ ------------ ------------
Gross profit ........................................... 1,540 2,268 4,006 4,266
Operating expenses:
Selling costs .......................................... 480 536 920 1,003
General and administrative ............................. 2,180 2,395 3,907 3,553
Research and development ............................... 477 454 969 575
------------ ------------ ------------ ------------
Total operating expenses ........................... 3,137 3,385 5,796 5,131
------------ ------------ ------------ ------------
Operating loss .............................................. (1,597) (1,117) (1,790) (865)
Other income (expenses):
Interest income ........................................ 26 77 50 42
Interest expense ....................................... (34) (34) (63) (63)
Other income (expense) ................................. -- -- 503 --
------------ ------------ ------------ ------------
Total other income ................................. (8) 43 490 (21)
------------ ------------ ------------ ------------
Income (loss) before income taxes and extraordinary gain .... (1,605) (1,074) (1,300) (886)
Provision (benefit) for income taxes ................... -- (259) 2 (177)
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain ..................... (1,605) (815) (1,302) (709)
Extraordinary gain .................................... -- 4,347 -- 4,347
------------ ------------ ------------ ------------
Net income (loss) ........................................... $ (1,605) $ 3,532 $ (1,302) $ 3,638
============ ============ ============ ============
Weighted average shares - basic ............................. 15,799,225 13,508,001 15,016,816 11,452,918
============ ============ ============ ============
EPS, basic ............................................. $ (0.10) $ 0.26 $ (0.09) $ 0.32
============ ============ ============ ============
Weighted average shares - diluted ........................... 15,799,225 13,587,229 15,016,816 11,462,684
============ ============ ============ ============
EPS, diluted ........................................... $ (0.10) $ 0.26 $ (0.09) $ 0.32
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
5
YDI WIRELESS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(in thousands, except share data)
Accumulated
Common Stock Additional Other
-------------------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings (Loss) Income Total
----------- ----------- ----------- ----------- ----------- -----------
Balances, January 1, 2004 ................. 14,179,882 $ 142 $ 6,173 $ 8,673 $ 1,197 $ 16,185
Exercise of stock options and warrants .... 101,547 1 226 -- -- 227
Common stock and warrants issued in
acquisitions ........................... 12,358,995 123 58,363 -- -- 58,486
Distribution to Merry Fields members' .... -- -- -- (50) -- (50)
Comprehensive income
Net loss ............................... -- -- -- (1,302) -- (1,302)
Unrealized (loss) on investments ....... -- -- -- -- (157) (157)
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
(1,302) (157) (1,459)
----------- ----------- ----------- ----------- ----------- -----------
Balances, June 30, 2004 ................... 26,640,424 $ 266 $ 64,762 $ 7,321 $ 1,040 $ 73,389
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
6
YDI WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(in thousands)
(unaudited)
2004 2003
-------- --------
Cash flows from operating activities:
Net income(loss) ..................................................... $ (1,302) $ 3,638
Loss on write-down of investment in unconsolidated subsidiary ..... -- 36
Extraordinary gain ................................................ -- (4,347)
Bad debts ......................................................... 169 --
Depreciation and amortization ..................................... 286 40
Changes in assets and liabilities affecting operations (net of
assets acquired and liabilities assumed in acquisitions):
Decrease (increase) in restricted cash .......................... 700 (353)
Accounts receivable ............................................. 341 (921)
Other receivables ............................................... -- (439)
Refundable income taxes ......................................... 76 (275)
Inventory ....................................................... (100) 95
Prepaid expenses ................................................ 60 659
Deposits ........................................................ 2 (30)
Accounts payable and accrued expenses ........................... (5) 678
-------- --------
Net cash provided by (used in) operating activities ....... 227 (1,219)
-------- --------
Cash flows from investing activities:
Cash received from acquisitions ...................................... 10,252 7,421
Cash used in acquisitions ............................................ (4,800) --
Sale of securities ................................................... 633 --
Purchase of securities ............................................... -- (1,641)
Purchase of intangible asset ......................................... (121) (600)
Proceeds on disposal of assets held for sale ......................... 46 66
Purchase of property and equipment ................................... -- (5)
-------- --------
Net cash provided by (used in) investing activities ............. 6,010 5,241
-------- --------
Cash flows from financing activities:
Distributions to Merry Fields members ................................ (50) (40)
Exercise of stock options and warrants ............................... 227 1
Issuance of notes payable ............................................ -- 500
Repayment of notes payable ........................................... (119) (485)
-------- --------
Net cash provided by (used in) financing activities ............. 58 (24)
-------- --------
Net increase (decrease) in cash ......................................... 6,295 3,998
Cash, beginning of period ............................................... 8,990 939
-------- --------
Cash, end of period ..................................................... $ 15,285 $ 4,937
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................... $ 51 $ 62
======== ========
Income taxes paid .................................................... $ 2 $ 83
======== ========
The accompanying notes are an integral part of these financial statements.
7
YDI WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of Presentation
On April 1, 2003, Young Design completed a strategic combination
transaction (the "combination") with Telaxis Communications Corporation
("Telaxis"). On July 9, 2003, Telaxis reincorporated into Delaware and changed
its name to YDI Wireless, Inc. ("YDI Wireless" or the "Company").
For financial reporting purposes, Young Design was treated as the
acquiring company and the transaction was accounted for as a reverse merger.
Young Design had voting control and majority representation on the Board of
Directors after the merger with Telaxis. The financial statements contained
herein are those of Young Design carried forward at historical cost.
The consolidated financial statements of the Company for the three- and
six month periods ended June 30, 2004 and 2003 are unaudited and include all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position and results of operations for the periods then ended. All
such adjustments are of a normal recurring nature. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2003 filed with the Securities and
Exchange Commission.
Effective May 13, 2004, the Company acquired KarlNet, Inc., a wireless
software development company. Effective June 22, 2004, the Company acquired
Terabeam Corporation, a wireless telecommunications company. Effective June 25,
2004, the Company acquired Ricochet Networks, Inc., a wireless service provider.
The financial results of these companies from and after the dates of acquisition
are included in the financial results reported for the Company.
The results of operations for any interim period are not necessarily
indicative of the results of operations for any other interim period or for a
full fiscal year.
2 Stock Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), but applied the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25, for employee stock based
compensation. No compensation expense has been recognized in connection with
options, as all options have been granted with an exercise price equal to the
fair value of the Company's common stock on the date of grant. The fair value of
each option grant has been estimated as of the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions for 2004 and 2003: risk-free interest rate of 3.67% and 2.37%,
expected life of 5 years and 5 years, volatility 205% and 284% and dividend rate
of zero percent, respectively. Using these assumptions, the company has
calculated the fair value of each stock option granted in 2004 and 2003 to be
$5.34 and $0.96, respectively, which would be amortized as compensation expense
over the vesting period of the options.
If the Company had elected to recognize compensation expense based on the
fair value at the grant dates, consistent with the method prescribed by SFAS No.
123, net income per share would have been changed to the pro forma amount
indicated below:
8
(in thousands, except per share amounts)
June 30,
---------------------
2004 2003
-------- --------
Net income (loss) attributable to common stockholders, as reported: .... $ (1,302) $ 3,638
Less: Total stock based employee compensation expense determined
under the fair value based method for all awards ................... 14 987
-------- --------
Pro forma net income (loss) attributable to common stockholders ........ $ (1,316) $ 2,651
======== ========
Basic and diluted net income (loss) per common share, as reported ...... $ (0.09) $ 0.32
======== ========
Basic and diluted net income (loss) per common share, pro forma ........ $ (0.09) $ 0.23
======== ========
3 Comprehensive Income
The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." During the six months ended June 30, 2004, and
2003, the Company had comprehensive income (loss) of $(1,459,000) and
$3,784,000, respectively, including approximately $(157,000) and $146,000
(unaudited), respectively, of unrealized (losses) gains on available-for-sale
investments, net of income taxes of $0, and $0.
4 Inventory
(in thousands) (unaudited)
June 30, December 31,
---------------------------
2004 2003
----------- ------------
Raw materials ............................ $ 1,155 $ 574
Work in process .......................... 68 26
Finished goods ........................... 5,571 2,734
---------- ----------
6,794 3,334
Allowance for excess and obsolescence .... (600) (200)
---------- ----------
Net inventory ............................ $ 6,194 $ 3,134
========== ==========
5 Earnings per share:
The following table presents the calculation of basic and diluted net income
(loss) per share:
9
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator
Income (loss) before extraordinary gain .... $ (1,605) $ (815) $ (1,302) $ (709)
============ ============ ============ ============
Extraordinary gain ......................... -- 4,347 -- 4,347
============ ============ ============ ============
Net income (loss) .......................... $ (1,605) $ 3,532 $ (1,302) $ 3,638
============ ============ ============ ============
Denominator - weighted average shares
Denominator for basic earnings per share ... 15,799,225 13,508,001 15,016,816 11,452,918
============ ============ ============ ============
Basic and dilutive earnings (loss) per share
before extraordinary gain .................. $ (0.10) $ (0.06) $ (0.09) $ (0.06)
============ ============ ============ ============
Extraordinary gain - basic and diluted ..... -- 0.32 -- 0.38
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (0.10) $ 0.26 $ (0.09) $ 0.32
============ ============ ============ ============
For the six-month period ended June 30, 2004 and 2003, stock options and
warrants to purchase approximately 2,713,000 and 685,000, respectively, shares
of common stock were outstanding but were not included in the calculation of
diluted net income per share because they would have been anti-dilutive.
For the three-month periods ended June 30, 2004 and 2003, stock options
and warrants to purchase approximately 2,475,000 and 503,000, respectively,
shares of common stock were outstanding, but were not included in the
computation of diluted net income per share because the exercise price of the
stock options was greater than the average share price of the Company's stock
for the applicable period so the effect would have been anti-dilutive.
6 Acquisitions
Telaxis
On April 1, 2003, Young Design merged with Telaxis. For financial
reporting purposes, Young Design was treated as the acquiring company and the
transaction was accounted for as a reverse merger. Young Design had voting
control and majority representation on the Board of Directors after the merger
with Telaxis. Young Design merged with Telaxis for various strategic reasons
including the fact that Telaxis was a publicly traded vehicle providing a
potential source of capital and liquidity.
The cost of the April 1, 2003 acquisition consisted of 4,177,078 shares of
common stock and 695,976 options valued at $3.7 million and acquisition costs of
approximately $0.1 million. On April 1, 2003, Telaxis had net assets with a fair
market value of $8.1 million. Accounting for the transaction as a reverse merger
resulted in an excess of net assets over book value of $4.3 million. The assets
and liabilities of Telaxis were recorded at fair value under the purchase method
of accounting. As the fair value of the assets acquired exceeded the purchase
price, the long-lived assets were reduced to zero and negative goodwill was
recorded. The valuation of the stock was based on the average closing price for
the five days preceding the announcement of the acquisition.
Following is Telaxis' condensed balance sheet at fair market value:
10
(in thousands) April 1, 2003
-------------
Cash and cash equivalents ................... $ 7,421
Property and equipment (held for sale) ...... 1,405
Other assets ................................ 426
Liabilities ................................. (1,166)
---------
Net assets acquired ......................... $ 8,086
=========
KarlNet
On May 13, 2004, YDI Wireless acquired KarlNet, a private software
company. YDI Wireless acquired KarlNet for various strategic reasons including
the fact that KarlNet was a key supplier to YDI Wireless.
The cost of the May 13, 2004 acquisition consisted of 1,000,000
shares of common stock valued at $4.3 and $1.8 million in cash. On May 13, 2004,
KarlNet had net assets with a fair market value of $3.6 million. The KarlNet
assets and liabilities were recorded at fair value under the purchase method of
accounting. As the cost of the acquisition exceeded the fair value of the assets
acquired, goodwill was recorded in the amount of $2.5 million. The valuation of
the stock was based on the May 13, 2004 which was the day the definitive
agreement was signed and the deal closed.
Following is KarlNet's condensed balance sheet at fair market value:
(in thousands) May 13, 2004
------------
Cash and cash equivalents ................... $ 99
Accounts receivable ......................... 790
Inventory ................................... 650
Property and equipment ...................... 99
Intangible assets ........................... 2,305
Other assets ................................ 9
Liabilities ................................. (372)
---------
Net assets acquired ......................... $ 3,580
=========
The table includes the final value of intangibles. The value was
determined by an unrelated party.
Terabeam
On June 22, 2004, YDI Wireless acquired Terabeam, a private
telecommunications equipment manufacturer. YDI Wireless acquired Terabeam for
various strategic reasons including the fact that Terabeam had significant
liquid assets.
The cost of the June 22, 2004 acquisition consisted of 11.6 million shares
of common stock valued at $55.1 million and 574,406 warrants valued at $132,000.
On June 22, 2004, Terabeam had net assets with a fair market value of $42.2
million. The Terabeam assets and liabilities were recorded at fair value under
the purchase method of accounting. The Company has recorded some contingent
liabilities connected with the Terabeam acquisition which may change over the
next twelve months. As the cost of the acquisition exceeded the fair value of
the assets, acquired goodwill was recorded in the amount of $13.0 million. The
valuation of the stock was based on the average closing price of the stock 5
days before and after April 13, 2004 which was the day the definitive agreement
was signed.
Following is Terabeam's condensed balance sheet at fair market value:
11
(in thousands) June 22, 2004
-------------
Cash and cash equivalents ................... $ 10,085
Restricted cash ............................. 5,876
Marketable securities - trading ............. 34,229
Accounts receivable ......................... 300
Inventory ................................... 1,310
Assets held for sale ........................ 130
Property and equipment ...................... 101
Other assets ................................ 197
Liabilities ................................. (10,000)
---------
Net assets acquired ......................... $ 42,228
=========
Ricochet Networks
On June 25, 2004, YDI Wireless acquired Ricochet Networks, Inc.
("Ricochet"), a private wireless internet service provider. YDI Wireless
acquired Ricochet for various strategic including the fact that it allows YDI to
enter the wireless internet service business.
The cost of the June 25, 2004 acquisition consisted of approximately
42,000 shares of common stock valued at approximately $217,000, $3 million in
cash, and a $300,000 note payable over 3 years. On June 25, 2004, Ricochet had
net assets with a fair market value of $3.5 million. The Ricochet assets and
liabilities were recorded at fair value under the purchase method of accounting.
The valuation of the stock was based on the closing price of the stock on June
25, 2004 which was the day the definitive agreement was signed and the
acquisition closed.
Following is Ricochet's condensed balance sheet at fair market value:
(in thousands) June 25, 2004
-------------
Cash and cash equivalents ................... $ 70
Inventory ................................... 1,000
Intangible property ......................... 1,850
Property and equipment ...................... 785
Other assets ................................ 87
Liabilities ................................. (275)
---------
Net assets acquired ......................... $ 3,517
=========
The table includes the final value of intangibles. The value was
determined by an unrelated party.
12
Pro-forma Combined Statement of Operations
For the six months ended June 30, 2004
(in thousands, except for per share data)
Terabeam Ricochet
-------- --------
KarlNet For the For the
------- ------- -------
YDI For the period period from period from
--- -------------- ----------- -----------
For the six from January 1, January 1, January 1,
----------- --------------- ---------- ----------
months ended 2004 to 2004 to 2004 to
------------ ------- ------- -------
June 30, 2004 May 13, 2004 June 22, 2004 June 25, 2004 Adjustments Pro Forma
------------- ------------ ------------- ------------- ----------- ---------
Revenue ................. $ 10,750 $ 2,103 $ 650 $ 1,424 $ (75) (1) $ 14,852
Cost of goods sold ...... 6,744 837 5,247 843 (75) (2) 13,796
200 (3)
---------------------------------------------------------------------------- ------------
Gross profit (loss) ..... 4,006 1,266 (4,597) 581 (200) 1,056
---------------------------------------------------------------------------- ------------
Operating expense:
Selling expense ...... 920 145 2,419 180 150 (4) 3,814
General and
administrative ....... 3,907 741 4,163 1,546 185 (5) 10,542
Research and
development .......... 969 725 1,017 -- -- 2,711
---------------------------------------------------------------------------- ------------
Total operating
expenses ........... 5,796 1,611 7,599 1,726 335 17,067
---------------------------------------------------------------------------- ------------
Operating income (loss) . (1,790) (345) (12,196) (1,145) (535) (16,011)
---------------------------------------------------------------------------- ------------
Other income (expenses):
Interest income ...... 50 4 -- -- -- 54
Interest expense ..... (63) -- -- -- -- (63)
Other income ......... 503 1 -- 542 -- 1,046
---------------------------------------------------------------------------- ------------
Total other income . 490 5 -- -- -- 1,037
---------------------------------------------------------------------------- ------------
Income (loss) from
continued operations . (1,300) (340) (12,196) (603) (535) (14,947)
---------------------------------------------------------------------------- ------------
Weighted average shares -
basic and diluted ....... 15,016,816 15,016,816
Earnings (loss) per share
- - basic and diluted ..... $ (0.09) $ (1.00)
Adjustments
KarlNet
(1) Revenue (eliminating intercompany sales)................................ $ (75)
(2) Cost of goods sold (eliminating intercompany purchases)................. (75)
(3) Cost of goods sold (amortization on intangible assets acquired) ........ 200
(4) Selling expense (amortization on intangible assets acquired)............ 150
Ricochet
(5) Amortization on intangible intellectual property acquired............... $ 185
7 Convertible debt
The Company assumed convertible notes as part of the Terabeam acquisition.
The convertible notes' aggregate principal amount totals $2.5 million. The notes
mature in July 2005, with interest only payments at an
13
annual rate of 6.75% in quarterly installments, with the principal balance
maturing July 12, 2005. At the discretion of holders of the notes, the notes are
convertible into shares of the Company's common stock beginning in July 2004,
based on a value of $27.27 per share of common stock or 91,675 shares. If the
conversion option is not elected prior to July 12, 2005, the holders will
receive the principal of $2.5 million in cash on the maturity date. The Company
has classified the convertible notes as a long-term liability on the
accompanying balance sheet as of June 30, 2004.
8 Proposed Merger
On October 31, 2003, YDI Wireless signed a definitive merger agreement to
acquire Phazar Corp (Nasdaq:ANTP). Under the terms of the agreement, Phazar
stockholders would receive 1.2 shares of YDI Wireless common stock for each
share of Phazar common stock. This exchange ratio will not be adjusted for
changes in the price of either YDI Wireless common stock or Phazar common stock.
Based on shares outstanding on the date the merger agreement was signed, YDI
Wireless stockholders would own approximately 87% of the combined entity and
Phazar stockholders would own approximately 13%. One member of Phazar's board of
directors would join YDI Wireless' board of directors. The agreement is subject
to the approval of Phazar shareholders and other conditions set forth in the
merger agreement. While the Company currently expects this transaction to be
completed in the fourth quarter of 2004, there can be no assurance that this
transaction will be completed at all or on the terms described above.
9 Restricted Cash
As part of the Terabeam acquisition, YDI Wireless acquired $5.2 million in
restricted cash. The restricted cash consists of $0.2 as collateral for letters
of credit relating to lease obligations and $5.0 million held in an
indemnification trust for the benefit of former Terabeam directors and officers.
This trust was established by Terabeam in January 2002, and the funds are
managed by an unrelated trustee. To date, no claims have been asserted against
the trust funds. The trust expires in 2007 and any remaining funds will be
distributed to the Company.
10 Marketable securities
As part of the Terabeam acquisition, YDI Wireless acquired approximately
$34.2 million in marketable securities. These securities are fixed income bonds
from corporate and United States government sponsored entities (GSEs). It is the
Company's intention to use these securities as needed to meet our cash needs.
These bonds mature within the next year.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
We are a designer and manufacturer of broadband wireless equipment and
systems in the license-free wireless communications industry. These
point-to-point (PTP) and point-to-multipoint (PTM) systems are primarily used by
wireless operators to connect their base stations to other base stations and to
existing wire line networks. We continually invest in the development and
introduction of wireless products in the marketplace in an effort to provide
customers with the best price/performance ratio for license-free wireless
communications. We believe that our diverse and expanding customer base as well
as our market and industry experience makes us a strong competitor in the
wireless communications market. In addition, we are an experienced designer of
turnkey long distance wireless systems for applications such as wireless
Internet, wireless video, wireless local area networks (LANs), wireless wide
area networks (WANs), and wireless virtual private networks (VPNs).
On April 1, 2003, Telaxis Communications Corporation ("Telaxis") closed a
strategic combination transaction with Young Design, Inc., a privately-held
Virginia corporation ("Young Design"). In that transaction, Telaxis formed a
subsidiary that merged with and into Young Design and each outstanding share of
Young Design common stock was converted into the right to receive 2.5 shares of
Telaxis common stock. Telaxis was the continuing corporation, Telaxis
stockholders continued to hold Telaxis common stock following the transaction,
and Young Design became a wholly owned subsidiary of Telaxis. On July 9, 2003,
Telaxis reincorporated into Delaware and changed its name to YDI Wireless, Inc.
("YDI Wireless" or the "Company").
For accounting purposes, Young Design is treated as the acquirer since it
had voting control and majority representation on the Board of Directors after
the merger with Telaxis. The financial statements presented are those of Young
Design carried at historical cost. The assets and liabilities of Telaxis had a
fair value of $8.1 million as of April 1, 2003. The cost of the acquisition
consisted of 4,177,078 shares of common stock and 695,976 options valued at $3.7
million and acquisition costs of approximately $0.1 million. Accounting for the
transaction as a reverse merger resulted in an excess of net assets over book
value of $4.3 million in the second quarter of 2003. The valuation of the stock
was based on the average closing price for the five days preceding the
acquisition.
Effective May 13, 2004, the Company acquired KarlNet, Inc., a wireless
software development company. Effective June 22, 2004, the Company acquired
Terabeam Corporation, a wireless telecommunications company. Effective June 25,
2004, the Company acquired Ricochet Networks, Inc., a wireless service provider.
The financial results of these companies from and after the dates of acquisition
are included in the financial results reported for the Company.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect: the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements; and the reported amounts of revenues and
expenses during the reporting periods. We are required to make judgments and
estimates about the effect of matters that are inherently uncertain. Actual
results could differ from our estimates. The most significant areas involving
our judgments and estimates are described below.
Inventory Valuation
Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out basis. Provisions are made to reduce excess or obsolete
inventory to its estimated net realizable value. The process for evaluating the
value of excess and obsolete inventory often requires us to make subjective
judgments and estimates concerning future sales levels, quantities and prices at
which such inventory will be able to be sold in the normal course of business.
Accelerating the disposal process or incorrect estimates of future sales
potential may necessitate future adjustments to these provisions.
15
Accounts Receivable Valuation
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability or unwillingness of our customers to make required
payments. If the financial condition of our customers were to deteriorate
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Capitalized Software
We have capitalized software costs of approximately $2.5 million related
to software products available for sale and we are amortizing those costs over
the expected lives of the products. The annual amortization will be the greater
of the amount computed using (a) the ratio that current gross revenues for a
product bear to the total current and anticipated future gross revenues for that
product or (b) the straight-line method over the remaining estimated economic
life of the product including the period being reported on. In addition, we
capitalize software costs for projects from the time the project is determined
to be technologically feasible until the project is salable. When the project
becomes salable, we will cease capitalizing costs and begin amortizing costs
previously capitalized over the expected salable life of the project.
Approximately $201,000 of software related cost was capitalized this quarter.
Intangible Assets
Our intangible assets are comprised of 4 categories. (1) Capitalized
software includes costs for software that has been determined to be
technologically feasible but not yet salable. (2) Intangible assets acquired
with an acquisition of a company. All assets in this category are valued by an
unrelated third party and are amortized straight-line over their estimated
lives. We periodically review each asset to determine if the estimated
discounted cash flows are greater than or equal to the remaining book value. (3)
Intangible assets purchased at arms-length. These assets are amortized over the
estimated life of the product. (4) Goodwill. We periodically review all
intangible assets for impairment to determine if the current capitalized cost
exceeds the future estimated gross revenue.
Results of Operations
For the three months ended June 30, 2004 and 2003
The following table provides statement of operations data as a percentage
of sales for the periods presented.
2004 2003
------ ------
Sales ...................................... 100% 100%
Cost of goods sold ......................... 68 69
------ ------
Gross profit ............................... 32 31
Operating expenses
Selling costs .......................... 10 7
General and administrative ............. 46 33
Research and development ............... 10 7
------ ------
Total operating expenses ........... 66 47
------ ------
Operating (loss) income .................... (34) (16)
Other income (expenses) .................... -- 1
Income tax expense (benefit) ............... -- (4)
Extraordinary gain ......................... -- 60
------ ------
Net income ................................. (34)% 49%
====== ======
Sales
Sales for the three months ended June 30, 2004 were $4.7 million as
compared to $7.2 million for the same period in 2003 for a decrease of $2.5
million or 35%. There were a number of reasons for the revenue decline. First
16
was the receipt of significant orders in 2003 from a major telecommunications
carrier for their "Hot Spot" trial build-out in a major metropolitan area, which
was not replicated in 2004. Second, increased competition caused some of our
other large customers to reduce their purchase orders to us during the first
half of 2004 compared to 2003. Third, we believe the overall United States
wireless market (where we currently sell most of our products) was generally
soft, particularly in the second quarter of 2004. Finally, we completed three
strategic acquisitions in the first half of 2004. While we expect to receive
benefits from those transactions in the future, we believe those transactions
may have adversely impacted our financial results due to market uncertainty
concerning our business model and focus and our senior management's focus on
these transactions in the first half of 2004.
Our industry's pricing pressures continue to escalate and we are reviewing
all of our products' costs and list prices as well as the discounting structure
applicable by market and by sales channel to insure that we are offering
competitively priced products while maintaining acceptable margins.
In the second quarter of 2004, management initiated significant changes
within the company. We added a new Senior Vice President of Sales and Marketing,
promoted a Chief Engineer to focus on product development and enhancement, and
dramatically restructured our sales force to better enable them to close
solution-based sales in addition to our core equipment sales strategy.
For the quarters ending June 30, 2004 and 2003, international sales,
excluding Canada, approximated 12.6% and 14.3%, respectively, of total sales.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the three months ended June 30,
2004 were $3.2 million and $1.5 million, respectively. For the same period in
2003, costs of goods sold and gross profit were $5.0 million and $2.3 million,
respectively. Gross profit margin, as a percentage of sales, for the three
months ended June 30, 2004 and 2003 was 32% and 31%, respectively. There was an
increase in the actual margins for the products shipped during this quarter over
last year. However, we increased our allowance for inventory obsolescence and
slow moving items by $300,000 in the recent quarter due to lower revenue and
acquisitions made during the quarter.
Our challenge is to make sure that our new product development and
introduction cycles are our main focus for the remainder of 2004 and beyond. Our
senior management team has been tasked to ensure that there is a steady flow of
new products with adequate sales training to help ensure margins are kept at an
optimum level without endangering our revenue growth or operating results. We
expect that the introduction of new products will help us maintain and hopefully
increase our weighted average gross margins even if we have to succumb to the
pricing pressures within the wireless industry for products that are later in
their product life cycle.
In addition to the development of new products, we continuously review our
existing products to try to reduce their costs while trying to enhance their
features to help stave off the downward price pressures from our competitors. On
the manufacturing side, we use a number of different contract manufacturers to
get the benefits of reduced costs resulting from our volume production and
continue to explore the possibility of off-shore manufacturing that has the
potential of additional savings.
Sales and Marketing Expenses
Selling and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, and customer support. Selling and
marketing expenses remained basically the same for the three months ended June
30, 2004 and 2003 at approximately $0.5 million. Even though we increased our
tradeshow attendance as well as our customer training sessions in the second
quarter of 2004 versus the same period in 2003, overall expenses stayed level.
Any additional costs incurred as a result of increased marketing efforts,
customer training or product awareness were offset by reduction in sales
commissions due to lower revenues, performance-related reduction of sales
headcount, and increased tightening of other related sales and marketing support
costs, especially related to travel and entertainment.
17
In the second quarter, we made changes to our sales and marketing efforts
along with our new product development processes. We added senior sales
management personnel to expand upon our current core equipment sales efforts and
also to train existing sales personnel and hire new personnel to begin selling
system solutions as well. Additionally, we realigned our international sales
department in order to strengthen our focus in the international arena. We hope
to grow our international sales, which typically have not constituted a large
part of our overall sales. In conjunction with our increased international
focus, we are continuing to have more of our products certified by selected
in-country regulatory authorities to improve our products' acceptance in these
regions.
General and Administrative Expenses
General and administrative expenses consist primarily of employee
salaries, benefits and associated costs for information systems, finance, legal,
and administration of a public company. General and administrative expenses
decreased $0.2 million to $2.2 million for the three months ended June 30, 2004
from $2.4 million for the three months ended June 30, 2003. The slight decrease
in costs during this quarter compared to the same period in 2003 is made up of
numerous insignificant variances in a multitude of accounts. We expect that our
general and administrative expenses will be higher in the second half of 2004
due to the three acquisitions we completed in the latter part of the second
quarter of 2004 but we expect those expenses to begin to decline late in the
fourth quarter 2004 as we integrate the acquisitions into our operation and
realize any synergies that would result in reducing any duplicate expenses
previously incurred.
Research and Development Expenses
Research and development expenses consist primarily of personnel salaries
and fringe benefits and related costs associated with our product development
efforts. Other related items included in this category are costs associated with
the development and introduction of new products and components, sustaining
engineering on existing products, test equipment, and related facilities costs.
Research and development expenses held steady at just under $0.5 million for the
three months ended June 30, 2004 and 2003.One significant event during the
quarter was the resignation of our President/Chief Technical Officer in the
first week of June 2004. This did not have any significant effect on costs
during the reporting period.
Income Taxes
As of June 30, 2004, we cannot accurately predict when sufficient taxable
income will be generated to justify recognition of deferred tax assets without a
valuation allowance. Benefit for income taxes for the three months ended June
30, 2003 in the amount of $259,000 relates to an a projected income tax benefit
for prior income taxes paid.
Extraordinary gain
The extraordinary gain during the second quarter of 2003 was due to the
immediate recognition into income of the negative goodwill of $4.3 million
related to the Telaxis combination in accordance with SFAS No. 141. None of our
three acquisitions during the later part of the second quarter of 2004 resulted
in negative goodwill, which would necessitate compliance with SFAS No. 141
during the period.
18
For the six-months ended June 30, 2004 and 2003
The following table provides statement of operations data as a percentage
of sales for the periods presented.
2004 2003
------ ------
Sales ..................................... 100% 100%
Cost of goods sold ........................ 63 69
------ ------
Gross profit .............................. 37 31
Operating expenses
Selling costs ......................... 9 7
General and administrative ............ 36 26
Research and development .............. 9 4
------ ------
Total operating expenses .......... 54 37
------ ------
Operating (loss) income ................... (17) (6)
Other income (expenses) ................... 5 --
Income tax expense (benefit) .............. -- (1)
Extraordinary gain ........................ -- 32
------ ------
Net income ................................ (12)% 27%
====== ======
Sales
Sales for the six months ended June 30, 2004 were $10.8 million as
compared to $13.7 million for the same period in 2003 for a decrease of $2.9
million or 21%. There were a number of reasons for the revenue decline. First
was the receipt of significant orders in 2003 from a major telecommunications
carrier for their "Hot Spot" trial build-out in a major metropolitan area, which
was not replicated in 2004. Second, increased competition caused some of our
other large customers to reduce their purchase orders to us during the first
half of 2004 compared to 2003. Third, we believe the overall United States
wireless market (where we currently sell most of our products) was generally
soft, particularly in the second quarter of 2004. Finally, we completed three
strategic acquisitions in the first half of 2004. While we expect to receive
benefits from those transactions in the future, we believe those transactions
may have adversely impacted our financial results due to market uncertainty
concerning our business model and focus and our senior management's focus on
these transactions in the first half of 2004.
Our industry's pricing pressures continue to escalate and we are reviewing
all of our products' costs and list prices as well as the discounting structure
applicable by market and by sales channel to insure that we are offering
competitively priced products while maintaining acceptable margins.
In the first half of 2004, management initiated significant changes within
the company. We added a new Senior Vice President of Sales and Marketing,
promoted a Chief Engineer to focus on product development and enhancement, and
dramatically restructured our sales force to better enable them to close
solution-based sales in addition to our core equipment sales strategy.
For the six months ending June 30, 2004 and 2003, international sales,
excluding Canada, approximated 13.8% and 15.6%, respectively, of total sales.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the six months ended June 30, 2004
were $6.7 million and $4.0 million, respectively. For the same period in 2003,
costs of goods sold and gross profit were $9.4 million and $4.3 million,
respectively. Gross profit margin, as a percentage of sales, for the six months
ended June 30, 2004 and 2003 was 37% and 31%, respectively.
Gross profits as a percentage of revenue improved significantly from last
year's comparative period by about 6% due primarily to the following three
factors: (1) our efforts to maintain our products' pricing levels by
19
emphasizing our products' unique features and functions where competition or
market conditions warrant; (2) the introduction of several enhanced core
products that included improved software capabilities and upgrades that not only
improved product functionality but also reduced our products' cost; and (3) the
introduction of our V Band wireless data communication product which added
upwards of 2% to our gross margins for the six months ended June 30, 2004. Our
gross margin increased even though we increased our allowance for inventory
obsolescence and slow moving items by $300,000 in the second quarter of 2004 due
to lower revenue and acquisitions made during the quarter.
Our challenge is to make sure that our new product development and
introduction cycles are our main focus for the remainder of 2004 and beyond. Our
senior management team has been tasked to ensure that there is a steady flow of
new products with adequate sales training to help ensure margins are kept at an
optimum level without endangering our revenue growth or operating results. We
expect that the introduction of new products will help us maintain and hopefully
increase our weighted average gross margins even if we have to succumb to the
pricing pressures within the wireless industry for products that are later in
their product life cycle.
In addition to the development of new products, we continuously review our
existing products to try to reduce their costs while trying to enhance their
features to help stave off the downward price pressures from our competitors. On
the manufacturing side, we use a number of different contract manufacturers to
get the benefits of reduced costs resulting from our volume production and
continue to explore the possibility of off-shore manufacturing that has the
potential of additional savings.
Sales and Marketing Expenses
Selling and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, and customer support. Selling and
marketing expenses decreased slightly to $0.9 million from $1.0 million or $0.1
million for the six months ended June 30, 2004 and 2003 or a decline of less
than 10%. Even though we increased our tradeshow attendance as well as our
customer training sessions in the six months ending June 30, 2004 versus the
same period in 2003, overall expenses stayed fairly level. Any additional costs
incurred as a result of increased marketing efforts, customer training or
product awareness were offset by reduction in sales commissions due to lower
revenues, performance-related reduction of sales headcount, and increased
tightening of other related sales and marketing support costs, especially
related to travel and entertainment.
In the second quarter, we made changes to our sales and marketing efforts
along with our new product development processes. We added senior sales
management personnel to expand upon our current core equipment sales efforts and
also to train existing sales personnel and hire new personnel to begin selling
system solutions as well. Additionally, we realigned our international sales
department in order to strengthen our focus in the international arena. We hope
to grow our international sales, which typically have not constituted a large
part of our overall sales. In conjunction with our increased international
focus, we are continuing to have more of our products certified by selected
in-country regulatory authorities to improve our products' acceptance in these
regions.
General and Administrative Expenses
General and administrative expenses consist primarily of employee
salaries, benefits and associated costs for information systems, finance, legal,
and administration of a public company. General and administrative expenses
increased to $3.9 million for the six months ended June 30, 2004 from $3.6
million for the six months ended June 30, 2003 or an increase of about 8.5%
period over period. The increased costs are primarily due to our incurring
typical public company costs only in the second quarter of 2003 since we were
only public during that second quarter. We expect that our general and
administrative expenses will be higher in the second half of 2004 due to the
three acquisitions we completed in the latter part of the second quarter of 2004
but we expect those expenses to begin to decline late in the fourth quarter 2004
as we integrate the acquisitions into our operation and realize any synergies
that would result in reducing any duplicate expenses previously incurred.
20
Research and Development Expenses
Research and development expenses consist primarily of personnel salaries
and fringe benefits and related costs associated with our product development
efforts. Other related items included in this category are costs associated with
the development and introduction of new products and components, sustaining
engineering on existing products, test equipment, and related facilities costs.
Research and development expenses increased to $1.0 million for the six months
ended June 30, 2004 from $0.6 million for the six months ended June 30, 2003, a
$0.4 million increase or 67% period over period. The increase in our research
and development expenses for the first six months of 2004 from 2003 was
primarily due to our increasing our product development capabilities by adding
research and development engineering personnel through the Telaxis acquisition
in April 2003 and the three acquisitions completed in the second quarter of
2004. There also was a small amount of expense related to additional prototype
materials and other related support costs. One significant event during the
first six months was the resignation of our President/Chief Technical Officer in
the first week of June 2004. This did not have any significant effect on costs
during the reporting period.
Income Taxes
Provision for income taxes for the six months ended June 30, 2004 in the
amount of $2,000 relates to minimum state income taxes due. As of June 30, 2004,
we cannot accurately predict when sufficient taxable income will be generated to
justify recognition of deferred tax assets without a valuation allowance.
Benefit for income taxes for the six months ended June 30, 2003 in the amount of
$177,000 relates to a projected income tax benefit for prior income taxes paid.
Other income (expense)
Other income for the first half of 2004 was $0.5 million compared to an
expense of $(21,000) for the same period ending in 2003. The difference is
because we sold intellectual property that was on the books at no value for
$500,000 in the first half of 2004.
Extraordinary gain
The extraordinary gain during the first half of 2003 was due to the
immediate recognition into income of the negative goodwill of $4.3 million
related to the Telaxis combination in accordance with SFAS No. 141.
Liquidity and Capital Resources
At June 30, 2004, we had cash and cash equivalents of $15.3 million,
excluding restricted cash, and $34.2 million in securities. For the six months
ended June 30, 2004, cash provided by operations was $227,000. We currently are
meeting all of our working capital needs through internally generated cash from
operations. In addition, approximately 20 - 25% of our sales are paid prior to
shipment, by credit card or wire transfer. This increases cash flow and
decreases credit risk and bad debt expense. We see no immediate requirement over
the next twelve months for external financing to fund our day-to-day normal
operations, which includes sales and marketing, research and development, and
general and administrative expenses on our core business. The cash and
investments acquired from Terabeam are available to be used in operations as
needed.
For the six months ended June 30, 2004, cash provided by investing
activities was $6.0 million. The acquisition of Terabeam provided $10.3 million,
while we used $4.8 million for the acquisitions of KarlNet and Ricochet Networks
during the second quarter of 2004.
Cash (used) / provided by financing activities was $58,000 for the six
months ended June 30, 2004. Debt repayments accounted for (used) of $119,000,
while stock option exercises accounted for $227,000 in cash provided.
During the first quarter of 2004 and 2003, Merry Fields distributed to its
members $50,000 and $40,000, respectively. The distributed amounts were Merry
Fields' funds generated from YDI Wireless' rental payments to Merry Fields.
Although Merry Fields is a separate legal entity from YDI Wireless, its
financial statements are consolidated with YDI Wireless' for financial reporting
purposes, which is why this Merry Fields distribution appears on YDI Wireless'
financial statements.
21
Our long-term financing requirements depend upon our growth strategy,
which relates primarily to our desire to increase revenue both domestically as
well as internationally. One significant constraint to our growth is the rate of
new product introduction. These new products or product lines may be designed
and developed internally or acquired from existing suppliers to reduce the time
to market and inherent risks of new product development. Our current funding
levels may have to be supplemented through our existing bank line of credit ($2
million), new bank debt financing, public debt or equity offerings, or other
means, depending upon our desired rate of future growth.
Debt, Covenant Compliance and Liquidity
We have a $2.0 million line of credit with Bank of America. We have not
used this line of credit as of June 30, 2004. This line of credit is
collateralized by a $2.0 million Certificate of Deposit.
Safe Harbor for Forward-Looking Statements
General Overview
This Quarterly Report on Form 10-Q contains forward-looking statements as
defined by federal securities laws that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, intentions, projections, developments, future
events, performance or products, underlying assumptions, and other statements,
which are other than statements of historical facts. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "intends," "plans," "anticipates," "contemplates,"
"believes," "estimates," "predicts," "projects," and other similar terminology
or the negative of these terms. From time to time, we may publish or otherwise
make available forward-looking statements of this nature. All such
forward-looking statements, whether written or oral, and whether made by us or
on our behalf, are expressly qualified by the cautionary statements described in
this Form 10-Q, including those set forth below, and any other cautionary
statements which may accompany the forward-looking statements. In addition, we
undertake no obligation to update or revise any forward-looking statement to
reflect events, circumstances, or new information after the date of this Form
10-Q or to reflect the occurrence of unanticipated or any other subsequent
events, and we disclaim any such obligation.
You should read forward-looking statements carefully because they may
discuss our future expectations, contain projections of our future results of
operations or of our financial position, or state other forward-looking
information. However, there may be events in the future that we are not able to
accurately predict or control. Forward-looking statements are only predictions
that relate to future events or our future performance and are subject to
substantial known and unknown risks, uncertainties, assumptions, and other
factors that may cause actual results, outcomes, levels of activity,
performance, developments, or achievements to be materially different from any
future results, outcomes, levels of activity, performance, developments, or
achievements expressed, anticipated, or implied by these forward-looking
statements. As a result, we cannot guarantee future results, outcomes, levels of
activity, performance, developments, or achievements, and there can be no
assurance that our expectations, intentions, anticipations, beliefs, or
projections will result or be achieved or accomplished. In summary, you should
not place undue reliance on any forward-looking statements.
Cautionary Statements of General Applicability
In addition to other factors and matters discussed elsewhere in this Form
10-Q, in our other periodic reports and filings made from time to time with the
Securities and Exchange Commission, and in our other public statements from time
to time (including, without limitation, our press releases), some of the
important factors that, in our view, could cause actual results to differ
materially from those expressed, anticipated, or implied in the forward-looking
statements include, without limitation, a severe worldwide slowdown in the
telecommunications equipment market and in the United States in particular; the
downturn and ongoing uncertainty in the telecommunications industry and larger
economy; developments in our relatively new industry and in the larger economy;
the intense competition in the telecommunications equipment industry and
resulting pressures on our pricing, gross margins, and general financial
performance; the impact, availability, pricing, and success of competing
technologies and products; difficulties in distinguishing our products from
competing technologies and products; difficulties or delays
22
in obtaining customers; dependence on a limited number of significant customers;
lack of or delay in market acceptance and demand for our current and
contemplated products; difficulties or delays in obtaining raw materials,
subassemblies, or other components for our products at the times, in the
quantities, and at the prices we desire or expect; risks arising from and
relating to our recent acquisitions of Ricochet Networks, Inc., Terabeam
Corporation, and KarlNet, Inc. (including without limitation management
distraction due to those acquisitions, the ability of the companies to integrate
in a cost-effective, timely manner without material liabilities or loss of
desired employees or customers; the risk that the expected synergies and other
benefits of the transactions will not be realized at all or to the extent
expected; the risk that cost savings from the transactions may not be fully
realized or may take longer to realize than expected; reactions, either positive
or negative, of investors, competitors, customers, suppliers, employees, and
others to the transactions; and the risk that those transactions will expose YDI
to lawsuits or other liabilities); the expense of defending and the outcome of
pending and any future stockholder litigation, including without limitation, our
possible exposure under the contemplated settlement of that litigation; our
recent focus on certain aspects of our current business; difficulties or delays
inherent in entering new markets and business areas; difficulties or delays in
developing and establishing new products, product lines, and business lines;
difficulties or delays in developing, manufacturing, and supplying products with
the contemplated or desired features, performance, price, cost, and other
characteristics; difficulties in estimating costs of developing and supplying
products; difficulties in developing, manufacturing, and supplying products in a
timely and cost-effective manner; difficulties or delays in developing improved
products when expected or desired and with the additional features contemplated
or desired; our limited ability to predict our future financial performance; the
expected fluctuation in our quarterly results; the expected fluctuation in
customer demand and commitments; the expected volatility and possible stagnation
or decline in our stock price, particularly due to the number of shares of our
stock we issued in connection with the acquisitions we made in the second
quarter of 2004 and the relatively low number of shares that trade on a daily
basis; difficulties in attracting and retaining qualified personnel; our
dependence on key personnel; inability to protect our proprietary technology;
the potential for intellectual property infringement, warranty, product
liability, and other claims; failure of our customers to sell broadband
connectivity solutions that include our products; difficulties in our customers
or ultimate end users of our products obtaining sufficient funding; cancellation
of orders without penalties; difficulties in complying with existing
governmental regulations and developments or changes in governmental regulation;
difficulties or delays in obtaining any necessary governmental or regulatory
permits, waivers, or approvals; our dependence on third-party suppliers and
manufacturers; difficulties in obtaining satisfactory performance from
third-party manufacturers and suppliers; risks associated with foreign sales
such as collection, currency and political risk; investment risk resulting in
the decrease in value of our investments; difficulties in collecting our
accounts receivable; future stock sales by our current stockholders, including
our current and former directors and management; the effect of our anti-takeover
defenses; and risks associated with any acquisitions or investments in which we
may be involved. Many of these and other risks and uncertainties are described
in more detail in our annual report on Form 10-K, as amended, for the year ended
December 31, 2003 filed with the Securities and Exchange Commission.
Specific Cautionary Statements Relating to the Contemplated Acquisition of
Phazar Corp.
On October 30, 2003, YDI Wireless announced a definitive merger agreement
to acquire Phazar Corp. There can be no assurance whatsoever that this
acquisition or any other combination transaction between YDI Wireless and Phazar
will be consummated. Risks associated with or arising from this contemplated
transaction include risks relating to the companies' ability and desire to
satisfy the conditions to closing the transaction set forth in the definitive
transaction documentation (including, without limitation, the need to obtain the
approval of Phazar's stockholders and Phazar's desire to obtain an updated
financial fairness opinion relating to the transaction); the possibility that
the terms of the transaction, as amended to date, may be further amended; the
substantial time and costs each company will be expending and incurring relating
to a contemplated transaction; the ability to obtain any necessary regulatory
approvals and clearances, including federal and state securities registrations,
qualifications, approvals, clearances, and/or exemptions, needed to consummate a
transaction; the ability of the companies to integrate in a cost-effective,
timely manner without material loss of employees, customers, or suppliers; the
risk that the expected synergies and other benefits of the transaction will not
be realized at all or to the extent expected; the risk that cost savings from
the transaction may not be fully realized or may take longer to realize than
expected; reactions, either positive or negative, of investors, competitors,
customers, suppliers, employees, and others to the transaction; the time and
costs required to complete the contemplated transaction and then integrate the
companies; management and board interest in and distraction due to the
contemplated transaction and integrating the companies; the uncertain impact on
the trading market, volume, and price of each company's stock; difficulties in
predicting the
23
combined company's future business and financial performance; costs and delays
in implementing common systems and procedures, including financial accounting
systems; and the fact that the registration, issuance, and/or future sale of a
large number of shares of our common stock may cause a stagnation or decline in
the market price of our common stock.
Possible Implications of Cautionary Statements
The items described above, either individually or in some combination,
could have a material adverse impact on our reputation, business, need for
additional capital, ability to obtain additional debt or equity financing,
current and contemplated products gaining market acceptance, development of new
products and new areas of business, sales, cash flow, results of operations,
financial condition, stock price, viability as an ongoing company, results,
outcomes, levels of activity, performance, developments, or achievements. Given
these uncertainties, investors are cautioned not to place undue reliance on any
forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Disclosures About Market Risk
The following discusses our exposure to market risks related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are exposed to risks and
uncertainties, many of which are out of our control. Actual results could vary
materially as a result of a number of factors, including those discussed above
in "Safe Harbor for Forward-Looking Statements."
As of June 30, 2004, we had cash and cash equivalents of $15.3 million and
restricted cash of $5.1 million. All these funds are on deposit in short-term
accounts with several national banking organizations. Therefore, we do not
expect that an increase in interest rates would materially reduce the value of
these funds. The primary risk to loss of principal is the fact that these
balances are only insured by the Federal Deposit Insurance Corporation up to
$100,000 per bank. At June 30, 2004, the uninsured portion totaled approximately
$20.1 million.
In addition, we presently hold approximately $34.2 million in corporate
and U.S. Federal agency bonds. These bonds have a maturity dates no later than
November 2005. These bonds are interest rate sensitive and therefore as rates
rise, the value of these bonds will decrease. We do not believe that a
significant increase in interest rates would not have a material effect on our
financial condition or results of operations.
We guarantee the Merry Fields, LLC debt. The interest rate on the loan is
fixed. Therefore, fluctuations in interest rates would not impact the amounts
payable relating to that debt.
As of June 30, 2004, our investment in Phazar common stock was valued at
$1.8 million. The carrying value of our investment is subject to fluctuation in
the market price and, consequently, the amount realized in any subsequent sale
of this investment may significantly differ from the reported market value.
Fluctuation in the market price of a security may result from perceived changes
in the underlying economic characteristics of the issuer of the security, the
relative price of alternative investments, and general market conditions.
Furthermore, amounts realized in the sale of a particular security may be
affected by the relative quantity of the security being sold. As stated in the
notes to the financial statements, we have signed a definitive agreement to
merge with Phazar. The carrying value of the investment may be adversely
affected should the merger not be completed. Should the merger be completed, the
$1.8 million will be reduced by the unrealized gain, $1.0 million as of June 30,
2004, on YDI holdings of Phazar stock and the remaining $0.8 million will
increase the acquisition cost of Phazar to YDI. However, fluctuation in the
market price of Phazar will not impact the operations of the Company.
In the past three years, all sales to international customers were
denominated in United States dollars and, accordingly, we were not exposed to
foreign currency exchange rate risks. Additionally, we import from other
countries. Our sales and product supply may therefore be subject to volatility
because of changes in political and economic conditions in these countries.
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We presently do not use any derivative financial instruments to hedge our
exposure to adverse fluctuations in interest rates, foreign exchange rates,
fluctuations in commodity prices or other market risks; nor do we invest in
speculative financial instruments.
Due to the nature of our borrowings and our short-term investments, we
have concluded that there is no material market risk exposure and, therefore, no
quantitative tabular disclosures are required.
Item 4. Controls and Procedures.
Disclosure controls and procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June
30, 2004 have concluded that as of such date our disclosure controls and
procedures were adequate and effective.
Internal controls
There has not been any change in our internal controls over financial
reporting that occurred during the fiscal quarter covered by this Quarterly
Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
During the period from June 12 to September 13, 2001, four purported
securities class action lawsuits were filed against Telaxis in the U.S. District
Court for the Southern District of New York: Katz v. Telaxis Communications
Corporation et al., Kucera v. Telaxis Communications Corporation et al.,
Paquette v. Telaxis Communications Corporation et al., and Inglis v. Telaxis
Communications Corporation et al. The lawsuits also named one or more of the
underwriters in the Telaxis initial public offering and certain of its officers
and directors. On April 19, 2002, the plaintiffs filed a single consolidated
amended complaint, which supersedes the individual complaints originally filed.
The amended complaint alleges, among other things, violations of the
registration and antifraud provisions of the federal securities laws due to
alleged statements in and omissions from the Telaxis initial public offering
registration statement concerning the underwriters' alleged activities in
connection with the underwriting of Telaxis' shares to the public. The amended
complaint seeks, among other things, unspecified damages and costs associated
with the litigation. These lawsuits have been assigned along with, we
understand, approximately 1,000 other lawsuits making substantially similar
allegations against approximately 300 other publicly-traded companies and their
public offering underwriters to a single federal judge in the U.S. District
Court for the Southern District of New York for consolidated pre-trial purposes.
We believe the claims against us are without merit and have defended the
litigation vigorously. The litigation process is inherently uncertain, however,
and there can be no assurance that the outcome of these claims will be favorable
for us.
On July 15, 2002, together with the other issuer defendants, Telaxis filed
a collective motion to dismiss the consolidated, amended complaints against the
issuers on various legal grounds common to all or most of the issuer defendants.
The underwriters also filed separate motions to dismiss the claims against them.
In October 2002, the court approved a stipulation dismissing without prejudice
all claims against the Telaxis directors and officers who had been defendants in
the litigation. On February 19, 2003, the court issued its ruling on the
separate motions to dismiss filed by the issuer defendants and the underwriter
defendants. The court granted in part and denied in part the issuer defendants'
motions. The court dismissed, with prejudice, all claims brought against Telaxis
under the anti-fraud provisions of the securities laws. The court denied the
motion to dismiss the claims brought under the registration provisions of the
securities laws (which do not require that intent to defraud be pleaded) as to
Telaxis and as to substantially all of the other issuer defendants. The court
denied the underwriter defendants' motion to dismiss in all respects.
In June 2003, we elected to participate in a proposed settlement agreement
with the plaintiffs in this litigation. This decision was made by a special
independent committee of our board of directors. We understand that a large
majority of the other issuer defendants have also elected to participate in this
proposed settlement. If ultimately approved by the court, this proposed
settlement would result in a dismissal, with prejudice, of all claims in the
litigation against us and against the other issuer defendants who elect to
participate in the proposed settlement, together with the current or former
officers and directors of participating issuers who were named as individual
defendants. The proposed settlement does not provide for the resolution of any
claims against the underwriter defendants. The proposed settlement provides that
the insurers of the participating issuer defendants will guarantee that the
plaintiffs in the cases brought against the participating issuer defendants will
recover at least $1 billion. This means there will be no monetary obligation to
the plaintiffs if they recover $1 billion or more from the underwriter
defendants. In addition, we and the other participating issuer defendants will
be required to assign to the plaintiffs certain claims that the participating
issuer defendants may have against the underwriters of their IPOs.
The proposed settlement contemplates that any amounts necessary to fund
the guarantee contained in the settlement or settlement-related expenses would
come from participating issuers' directors and officers liability insurance
policy proceeds as opposed to funds of the participating issuer defendants
themselves. A participating issuer defendant could be required to contribute to
the costs of the settlement if that issuer's insurance coverage were
insufficient to pay that issuer's allocable share of the settlement costs.
Therefore, the potential exposure of each participating issuer defendant should
decrease as the number of participating issuer defendants increases. We
currently expect that our insurance proceeds will be sufficient for these
purposes and that we will not otherwise be required to contribute to the
proposed settlement.
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The parties to the proposed settlement have drafted formal settlement
documents and requested preliminary approval by the court of the proposed
settlement, including the form of the notice of the proposed settlement that
would be sent to members of the proposed classes in each settling case. Certain
underwriters who were named as defendants in the settling cases, and who are not
parties to the proposed settlement, have filed an opposition to preliminary
approval of the proposed settlement of those cases. If preliminary court
approval is obtained, notice of the proposed settlement will be sent to the
class members, and a motion will then be made for final court approval of the
proposed settlement. Consummation of the proposed settlement remains conditioned
on, among other things, receipt of both preliminary and final court approval. If
the proposed settlement described above is not consummated, we intend to
continue to defend the litigation vigorously. Moreover, if the proposed
settlement is not consummated, we believe that the underwriters may have an
obligation to indemnify us for the legal fees and other costs of defending these
suits. While there can be no assurance as to the ultimate outcome of these
proceedings, we currently believe that the final result of these actions will
have no material effect on our consolidated financial condition, results of
operations, or cash flows.
We are subject to potential liability under contractual and other matters
and various claims and legal actions, which may be asserted against us or our
subsidiaries from time to time. These matters may arise in the ordinary course
and conduct of our business. While the outcome of any of these claims and legal
actions against us cannot be forecast with certainty, we believe that such
matters should not result in any liability, which would have a material adverse
effect on our business.
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities.
Recent Sales of Unregistered Securities
We issued 1,000,000 shares of common stock in May 2004 to two accredited
investors in a private placement. We received no cash proceeds from the issuance
of these shares. The shares were issued to the two stockholders of KarlNet, Inc.
in connection with our acquiring that company. The issuances were completed
without registration under the Securities Act in reliance upon the exemptions
contained in Section 4(2) and/or 4(6) of the Securities Act and/or Rule 506 of
Regulation D promulgated under the Securities Act for transactions not involving
a public offering. This reliance was based in part on representations and
warranties made to us by the two accredited investors. These issuances of common
stock by us did not involve the use of an underwriter, and no commissions were
paid in connection with these issuances.
On June 22, 2004, we completed our strategic combination with Terabeam
Corporation. In that merger, the Terabeam shares outstanding prior to the merger
converted into the right to receive, in the aggregate, 11,567,132 shares of our
common stock. In addition, in the merger, we assumed warrants to purchase
574,706 shares of our common stock that prior to the merger had represented the
right to purchase shares of Terabeam stock. We received no cash proceeds from
the issuance of these shares or assumption of these warrants. These transactions
were completed without registration under the Securities Act in reliance upon
the exemption contained in Section 3(a)(10) of the Securities Act. Prior to the
completion of the merger, the State of California Department of Corporations
held a hearing upon the fairness of the terms and conditions of the proposed
issuance and assumption at which all persons to whom it was proposed to issue
securities in the merger and all holders of warrants to purchase Terabeam stock
had the right to appear. After the hearing, on May 28, 2004, the State of
California Department of Corporations issued a permit and certificate of
issuance approving the proposed transactions. These transactions did not involve
the use of an underwriter, and no commissions were paid in connection with these
transactions.
We issued 42,105 shares of common stock in June 2004 to one accredited
investor in a private placement. We received no cash proceeds from the issuance
of these shares. The shares were issued to the one stockholder of Ricochet
Networks, Inc. in connection with our acquiring that company. The issuance was
completed without registration under the Securities Act in reliance upon the
exemptions contained in Section 4(2) and/or 4(6) of the Securities Act and/or
Rule 506 of Regulation D promulgated under the Securities Act for transactions
not involving a public offering. This reliance was based in part on
representations and warranties made to us by the accredited investor. This
issuance of common stock by us did not involve the use of an underwriter, and no
commissions were paid in connection with this issuance.
27
We issued warrants to purchase 50,000 shares of our common stock at a
purchase price of $4.75 per share in June 2004 to one accredited investor in a
private placement. The warrants may be exercised on or before June 24, 2005. The
recipient of these warrants was the accredited investor who purchased 500,000
shares of our common stock in December 2003 in a private placement. In return
for these warrants, we received a release of claims from the accredited investor
and the return of $25,000 we had paid to the placement agent in the December
2003 private placement. Final documentation relating to this issuance was
completed in July 2004. The issuance was completed without registration under
the Securities Act in reliance upon the exemptions contained in Section 4(2)
and/or 4(6) of the Securities Act for transactions not involving a public
offering. No commissions were paid in connection with this issuance of warrants
by us.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
On April 6, 2004, we filed a report on Form 8-K to report a press release
we issued relating to an amendment to the merger agreement with Phazar Corp
extending the time within which the merger may be completed.
On April 16, 2004, we filed a report on Form 8-K to report a press release
we issued relating to our agreement to acquire Terabeam Corporation by merger.
On April 28, 2004, we filed a report on Form 8-K to report a press release
we issued relating to our financial results for the first quarter ended March
31, 2004.
On May 20, 2004, we filed a report on Form 8-K to report a press release
we issued relating to our acquisition of KarlNet, Inc.
On June 7, 2004, we filed a report on Form 8-K to report a press release
we issued relating to a second amendment to the merger agreement with Phazar
Corp further extending the time within which the merger may be completed and
making certain other changes to the merger agreement.
On June 29, 2004, we filed a report on Form 8-K to report a press release
we issued relating to the completion of our acquisition of Terabeam Corporation
by merger.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YDI Wireless, Inc.
Date: August 16, 2004 By: /s/ Patrick L. Milton
--------------------------------------------
Patrick L. Milton,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
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EXHIBIT INDEX
Exhibit
Number Description
2.1 Amendment No. 1 to Agreement and Plan of Merger, dated as of
April 1, 2004, by and among YDI Wireless, Inc., Stun
Acquisition Corporation, and Phazar Corp. (1)
2.2 Amendment to Agreement and Plan of Merger, dated June 2, 2004,
by and among YDI Wireless, Inc., Stun Acquisition Corporation,
and Phazar Corp. (2)
2.3 Agreement and Plan of Merger, dated as of April 14, 2004, by
and among YDI Wireless, Inc., T-Rex Acquisition Corporation,
and Terabeam Corporation. (3)
2.4 Agreement and Plan of Merger, dated as of May 13, 2004, by and
among YDI Wireless, Inc., KFire Merger Corporation, KarlNet,
Inc., Douglas J. Karl, and Elise L. Karl. (4)
10.1 Secured Promissory Note, dated May 13, 2004, from KarlNet,
Inc. in favor of YDI Wireless, Inc. (4)
10.2 Security Agreement, dated as of May 13, 2004, between KarlNet,
Inc. and YDI Wireless, Inc. (4)
10.3 Employment Agreement, dated June 8, 2004, between YDI
Wireless, Inc. and Alexander Young.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a).
32.1 Certification Pursuant to Rule 13a-14(b) and Section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
Section 1350 of Chapter 63 of Title 18 of the United States
Code).
99.1 Stockholder Agreement, dated as of April 14, 2004, by and
among YDI Wireless, Inc. and Mobius Technology Ventures VI,
L.P., Mobius Technology Ventures Advisors Fund VI, L.P.,
Mobius Technology Ventures Side Fund VI, L.P., Softbank US
Ventures VI, L.P., Softbank Technology Ventures Advisors Fund
V, L.P., Softbank Technology Ventures Entrepreneurs Fund V,
L.P., and Softbank Technology Ventures V, L.P. (3)
99.2 Stockholder Agreement, dated as of April 14, 2004, by and
among YDI Wireless, Inc. and SOFTBANK Capital Partners, L.P.,
SOFTBANK Capital LP, and SOFTBANK Capital Advisors Fund LP.
(3)
99.3 Lock-up Agreement, dated as of April 14, 2004, by and among
YDI Wireless, Inc. and Mobius Technology Ventures VI, L.P.,
Mobius Technology Ventures Advisors Fund VI, L.P., Mobius
Technology Ventures Side Fund VI, L.P., Softbank US Ventures
VI, L.P., Softbank Technology Ventures Advisors Fund V, L.P.,
Softbank Technology Ventures Entrepreneurs Fund V, L.P., and
Softbank Technology Ventures V, L.P. (3)
99.4 Lock-up Agreement, dated as of April 14, 2004, by and among
YDI Wireless, Inc. and SOFTBANK Capital Partners, L.P.,
SOFTBANK Capital LP, and SOFTBANK Capital Advisors Fund LP.
(3)
99.5 Form of Noncompetition Agreement, dated as of May 13, 2004, a
substantially similar version of which was entered between YDI
Wireless, Inc. and each of Douglas J. Karl and Elise L. Karl.
(4)
- ----------
All non-marked exhibits listed above are filed herewith.
(1) Incorporated herein by reference to the exhibits to Form 8-K filed with
the SEC on April 6, 2004.
(2) Incorporated herein by reference to the exhibits to Form 8-K filed with
the SEC on June 7, 2004.
(3) Incorporated herein by reference to the exhibits to Form 8-K filed with
the SEC on April 16, 2004.
(4) Incorporated herein by reference to the exhibits to Form 8-K filed with
the SEC on May 20, 2004.
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