-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dfdg3RQP2gUKFwgTm65LrT41Gq8hRp+IgF8A6vh2ADvsa8bVIdPDRW0FPw80IdMW 7GJv6AYxJNiS4Jbj7y0FKg== 0000914317-04-003123.txt : 20040816 0000914317-04-003123.hdr.sgml : 20040816 20040816141407 ACCESSION NUMBER: 0000914317-04-003123 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YDI WIRELESS INC CENTRAL INDEX KEY: 0000712511 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 042751645 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29053 FILM NUMBER: 04977792 BUSINESS ADDRESS: STREET 1: 20 INDUSTRIAL DRIVE EAST CITY: SOUTH DEERFIELD STATE: MA ZIP: 01373 BUSINESS PHONE: 4136658551 MAIL ADDRESS: STREET 1: 20 INDUSTRIAL DRIVE EAST STREET 2: INDUSTRIAL PARK CITY: SOUTH DEERFIELD STATE: MA ZIP: 01373 FORMER COMPANY: FORMER CONFORMED NAME: TELAXIS COMMUNICATIONS CORP DATE OF NAME CHANGE: 19991015 FORMER COMPANY: FORMER CONFORMED NAME: MILLITECH CORP DATE OF NAME CHANGE: 19990913 10-Q 1 form10q-62318_ydi.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q ---------- |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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. ================================================================================ 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. 24 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. 25 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. 26 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) 28 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. 29 EX-10.3 2 ex10-3.txt Exhibit 10.3 Employment Agreement For Mr. Alexander Young June 1, 2004 through December 31, 2004 June 8, 2004 Mr. Alexander Young 6614 Quicksilver Court Springfield, VA 22150 Dear Mr. Young: On behalf of YDI Wireless, Inc. (the "Company"), and subject to Board of Director approval, I am pleased to offer you (the "Executive") a position of increased scope and responsibility, as the Company's Senior Vice President, Sales and Marketing. In this position, you will report directly to me, the Chief Executive Officer (the "Offered Position"). After you have had the opportunity to review and consider this offer, please indicate your intentions by responding in writing as indicated below as soon as possible, but not later than June 10, 2004. Please be advised that the Company reserves its right to withdrawn this offer prior to your acceptance, without prior notice. Offer Summary: 1) Duties: Subject to the ultimate control and discretion of the Chief Executive Officer of the Company, the Executive shall serve in the Offered Position and perform all duties and services commensurate with that Offered Position. Examples of, but not a complete list of, the type of duties to be performed by the Executive follow; a) attain Company revenue and profit objectives by: i) the direct supervision of regional sales personnel and marketing specialists, as well as direct customer and industry interaction; ii) the development and execution of an effective global distribution strategy; iii) the identification, articulation, business case analysis of new customer, product, service and market opportunities; iv) product life cycle management; v) the creation, increased awareness and customer loyalty to, the Company's "Brand(s)"; and vi) product pricing to ensure maximum profitability and target market penetration levels. b) assist in the negotiate sales contracts, distributor agreements and recommend OEM supplier agreements for new products and services, and c) develop Company strategy regarding meeting customer requirements, based on competitive and market analysis, and d) coordinate the periodic preparation of the Company's business plan, and e) create, maintain and project a positive Company image to the public and f) create and maintain positive relations with investors, and g) identify strategic business relationships that will enhance the Company's performance, and h) any other related duties that may be assigned by the CEO from time to time. 2) Reporting Location: The Executive's reporting location shall be at Company provided facilities located at 8000 Lee Highway, Falls Church, VA 22042 (the "Reporting Location"). Please be advised that since the geographic scope of the Offered Position is global in nature, significant travel will be required. 3) Compensation: For all considerations and services to be rendered by the Executive hereunder: Offer letter - A. Young (cont.) a) Base Salary: The Company shall pay the Executive an initial base salary that shall be calculated at the rate of $120,000 (One Hundred and Twenty thousand dollars), effective May 29, 2004, per year, payable in accordance with the company's normal payroll practices. This initial base salary may be adjusted from time to time based on actual performance measured against personal, team and Company goals, consistent with Company policy, and treatment of other Company executives. b) Additional Compensation Eligibility: The Executive shall be eligible to receive additional compensation that will be comprised of 1.) Over quota monthly accomplishment, 2.) Over quota for seven (7) months ending December 31, 2004 bonus and 3.) Over achievement incentive award. Refer to Schedule "A", as attached to this document. Currently there is no over or under gross margin adjustment, but management may reconsider this and change it accordingly. Any such bonus payout, if any, is at the sole discretion of the Company and requires Board of Director Approval. c) Equity Participation: Subject to approval of the Board of Directors of the Company, the Executive shall be granted options under a Stock Option Plan of the Company to purchase Twenty Five Thousand (25,000) shares of common stock of the Company, vesting over a four-year period, at an exercise price equal to the actual market price of the Company's stock on the Nasdaq OTCBB on the day of the actual grant. d) Benefits: Upon employment, the Executive shall (a) be eligible to participate in the Company's group health and dental insurance, disability insurance, life insurance, 401k Pension Plan, and other Company-wide benefits; (b) begin to accumulate fifteen (15) business days of paid vacation per year; (c) be paid for a reasonable number of sick days per year as defined in the Company's Employee Handbook; (d) be entitled to the Company's Nine (9) scheduled paid holidays plus a revenue recognition day, if applicable; and (e) participate in such other benefits that may become available to all employees of the Company in the future. e) Business Expenses: The Company shall promptly reimburse the Executive for all reasonable and customary expenses incurred by the Executive in connection with the performance of the Executive's duties and responsibilities, that are consistent with Company travel and expense policy and upon presentation of completed expense reports with supporting receipts and/or other appropriate documentation. 4) Non-Competition: In consideration of continued employment by the Company and the Executive's receipt of the salary and other benefits associated with the Executive's employment, and in acknowledgment that (i) the Company is engaged in a business based upon the development and distribution of wireless communication technology, (ii) maintains secret and confidential information, (iii) during the course of the Executive's employment by the Company such secret or confidential information may become known to the Executive, and (iv) full protection of the Company's business makes it essential that no employee appropriate for his or her own use, or disclose such secret or confidential information, the Executive agrees to the following: a) The Executive shall not use or disclose at any time during the Executive's employment with the Company, or at any time thereafter, any trade secret or proprietary or confidential information of the Company or any of its affiliates. b) During the Executive's employment with the Company the Executive shall not be engaged as an officer, director or executive of, or in any way be associated in a management or ownership capacity with, any corporation, partnership or other enterprise or venture which conducts a business which is in competition with the business of the Company provided, however, that the Executive may own not more than 3% of the outstanding securities, or equivalent equity interests, of any class of any corporation or firm which is in competition with the business of the Company, which securities are listed on a national securities exchange or traded in the over-the-counter market. - -------------------------------------------------------------------------------- Pg. 2 of 4 Offer letter - A. Young (cont.) c) The Executive agrees that during his employment to promptly disclose and assign to the Company the Executive's entire right, title and interest in any and all inventions and copyrights (including intellectual properties) solely or jointly conceived and/or reduced to practice by the Executive during the term of his employment relating to the current or projected business of the Company. The Executive agrees that all of such inventions and copyrights are the property of said Company. d) The Executive agrees to receive confidential, proprietary and other information of the Company in confidence, and not, directly or indirectly, during the term of is employment or any time after his employment is terminated for any reason to disclose or furnish to others, assist others in the application of or use for the Executive's own gain, such information, including, but not limited to, the Company's customer lists and trade secrets, methods of conducting or obtaining business, the manner or process of manufacture, and the design and drawings of its products, or any part thereof, unless and until it has become public knowledge, or has come into the possession of such or others by legal and equitable means. Furthermore, whether or not such information comprises proprietary information, trade secrets, or confidential information, the Executive also agrees not to disclose, furnish to others, assist others in the application of, or use for the Executive s own gain, either any information within the categories of information herein above specifically listed, including the identity of any customers of the Company, or any other information relating to the Company s business not made available by the Company to the public or in the public domain. e) To assist in carrying out the intent of subparagraph (d) above, the Executive, during the term of his employment, agrees to refrain from engaging on his own behalf or on behalf of any third party in the design, manufacture, or sale of electronic equipment, accessories and components thereof, or to perform services or research work in this field of activity. 5) Termination: The Executive acknowledge and agrees that, notwithstanding the foregoing, the Executive's employment with the Company is "at will", meaning that the Company may terminate the Executive's employment with the Company at any time, with or without Cause. As used herein, "Cause" means the Executive's commission of a felony, gross dereliction or abdication of duties, repeated refusal to perform duties assigned to the Executive by management that are consistent with the Executive's titles, or the Executive's intentional acts that cause material harm to the Company. 6) Other Provisions: a) The Executive agrees to deliver to the Company, upon termination of his employment, all property and documents of the Company and all data relating to the Company s business then in his custody and not take with him any drawings, documents, or reproductions of confidential or trade secret information or of any other information of any kind not made available to the public by the Company. b) The Executive also agrees that the Company may use for any purpose, at any time during his employment or after such employment, all photographs of the Executive taken during the term of his employment. c) The Executive also agrees that he will not, directly or indirectly, during the term of his employment or within one year after termination of his employment for any reason, in any manner, encourage, persuade, or induce any other Executive of the Company to terminate his employment, or any person or entity engaged by the Company to represent it to terminate that relationship. d) The Executive also agrees to, and acknowledges that he has been informed that the Company reserves its right to require the Executive to submit to, and pass a drug-screening test as a condition of this employment offer. - -------------------------------------------------------------------------------- Pg. 3 of 4 Offer letter - A. Young (cont.) Please indicate your acceptance of this offer by signing below and returning this original to Mr. Patrick Milton. If you have any questions regarding this offer, please feel free to contact me directly by phone at (703) 205-0600 or e-mail at RF@ydi.com. Very Truly Yours, ACCEPTED AND AGREED: /s/ Robert E. Fitzgerald By /s/ Alexander Young - -------------------------------- ---------------------------- Robert Fitzgerald Alexander Young CEO 7/19/04 -------------------------------- Date - -------------------------------------------------------------------------------- Pg. 4 of 4 EX-31.1 3 ex31-1.txt Exhibit 31.1 SECTION 302 CERTIFICATION I, Robert E. Fitzgerald, Chief Executive Officer of YDI Wireless, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of YDI Wireless, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 16, 2004 /s/ Robert E. Fitzgerald -------------------------------- Robert E. Fitzgerald Chief Executive Officer EX-31.2 4 ex31-2.txt Exhibit 31.2 SECTION 302 CERTIFICATION I, Patrick L. Milton, Chief Financial Officer and Treasurer of YDI Wireless, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of YDI Wireless, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 16, 2004 /s/ Patrick L. Milton ----------------------------------------- Patrick L. Milton Chief Financial Officer and Treasurer EX-32.1 5 ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of YDI Wireless, Inc. (the "Company") for the quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned Robert E. Fitzgerald, Chief Executive Officer, and Patrick L. Milton, Chief Financial Officer and Treasurer, of the Company certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert E. Fitzgerald /s/ Patrick L. Milton - ---------------------------------- ------------------------------------- Robert E. Fitzgerald Patrick L. Milton Chief Executive Officer Chief Financial Officer and Treasurer Date: August 16, 2004 Date: August 16, 2004 -----END PRIVACY-ENHANCED MESSAGE-----