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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
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
TERABEAM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2751645
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2115 O'NEL DRIVE
SAN JOSE, CA 95131
(Address of principal executive offices)
(408) 731-2700
(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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of October 31, 2006, there were 21,544,772 shares of the registrant's
common stock outstanding.
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TERABEAM, INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ........................................... 3
Consolidated Balance Sheets as of September 30, 2006
(unaudited) and December 31, 2005 .......................... 4
Consolidated Statements of Operations for the nine months
ended September 30, 2006 and 2005 (unaudited) .............. 5
Consolidated Statement of Changes in Stockholders' Equity for
the nine months ended September 30, 2006 (unaudited) ....... 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2006 and 2005 (unaudited) .............. 7
Notes to Consolidated Financial Statements (unaudited) ...... 8
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations .......................................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 23
Item 4. Controls and Procedures ........................................ 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 26
Item 1A. Risk Factors ................................................... 27
Item 6. Exhibits ....................................................... 30
SIGNATURE ....................................................................... 31
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 II,
Item 1A -- Risk Factors. 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
TERABEAM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2006 2005
------------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $12,387 $14,133
Investment securities - available-for-sale 166 260
Accounts receivable, net 5,214 8,378
Inventory 9,809 10,070
Prepaid expenses 1,715 1,045
------------- ------------
Total current assets 29,291 33,886
Property and equipment, net 3,031 3,924
Other Assets:
Restricted cash 76 5,076
Goodwill 7,922 7,380
Intangible assets, net 12,078 23,817
Deposits and prepaid expenses 263 675
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Total other assets 20,339 36,948
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Total assets $52,661 $74,758
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $14,006 $15,600
Deferred revenue 2,938 2,503
License agreement payable - current maturities 858 981
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Total current liabilities 17,802 19,084
License agreement payable, net of current maturities 2,309 2,956
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Total liabilities 20,111 22,040
Commitments and contingencies
Stockholders' Equity
Preferred stock, $0.01 par value; authorized 4,500,000, none issued at
September 30, 2006 and December 31, 2005 -- --
Common stock, $0.01 par value, 100,000,000 shares authorized, 21,540,865
issued and outstanding at September 30, 2006, and 21,446,217 issued and
outstanding at December 31, 2005 215 214
Additional paid-in capital 57,696 56,638
Retained earnings (accumulated deficit) (25,254) (4,122)
Treasury stock -- --
Accumulated other comprehensive income:
Net unrealized gain (loss) on available-for-sale securities (107) (12)
------------- ------------
Total stockholders' equity 32,550 52,718
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Total liabilities and stockholders' equity $52,661 $74,758
============= ============
See accompanying notes
4
TERABEAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenues $17,876 $18,147 $57,162 $31,909
Cost of goods sold 9,805 10,503 32,762 17,509
Restructuring provision for excess and
obsolete inventory 1,502 2,143 1,502 2,143
------------ ------------ ------------ ------------
Gross profit 6,569 5,501 22,898 12,257
Operating expenses:
Selling costs 5,123 3,800 13,419 5,831
Restructuring charges -- 944 116 944
Restructuring charge for impairment of
intangible assets 8,874 4,664 8,874 4,664
General and administrative 3,457 3,342 10,812 8,627
Research and development 2,823 2,788 11,471 4,438
------------ ------------ ------------ ------------
Total operating expenses 20,277 15,538 44,692 24,504
------------ ------------ ------------ ------------
Operating income (loss) (13,708) (10,037) (21,794) (12,247)
Other income (expenses):
Interest income 101 122 303 612
Interest expense (50) (4) (151) (140)
Other income (loss) 9 10 552 (106)
------------ ------------ ------------ ------------
Total other income (expenses) 60 128 704 366
------------ ------------ ------------ ------------
Income (loss) before income taxes (13,648) (9,909) (21,090) (11,881)
Benefit (provision) for income taxes (16) (3) (42) 11
------------ ------------ ------------ ------------
Income (loss) before minority interest (13,664) (9,912) (21,132) (11,870)
Minority interest in net income of Merry
Fields 0 (101) 0 (101)
------------ ------------ ------------ ------------
Net income (loss) ($13,664) ($10,013) ($21,132) ($11,971)
============ ============ ============ ============
Weighted average shares - basic and
diluted 21,541 21,163 21,515 21,932
------------ ------------ ------------ ------------
EPS, basic and diluted ($0.63) ($0.47) ($0.98) ($0.55)
============ ============ ============ ============
See accompanying notes
5
TERABEAM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(In thousands, except share data)
(Unaudited)
Common Stock
-------------------
Accumulated
Additional Retained Other
Paid-in Earnings Comprehensive
Shares Amount Capital (Deficit) Income (Loss) Total
-----------------------------------------------------------------------------
Balances, January 1, 2006 21,446,217 $214 $56,638 ($4,122) ($12) $52,718
Exercise of stock options and warrants 94,648 1 54 -- -- 55
Employee stock option amortization -- -- 1,004 -- -- 1,004
Comprehensive income:
Net income (loss) -- -- -- (21,132) -- (21,132)
Unrealized gain (loss) on investments -- -- -- -- (95) (95)
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Total comprehensive income (loss) -- -- -- (21,132) (95) (21,227)
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Balances, September 30, 2006 21,540,865 $215 $57,696 ($25,254) ($107) $32,550
=============================================================================
See accompanying notes
6
TERABEAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2006 2005
------------ ------------
Cash flows from operating activities:
Net income (loss) ($21,132) ($11,971)
Depreciation and amortization 4,136 1,860
Loss on write-down of investments available-for-sale -- 112
Bad debt allowance (recovery) (179) 26
Employee stock option amortization 1,004 --
Inventory allowance 107 34
Restructuring charge for impairment of intangible assets 8,874 4,664
Restructuring provision for excess and obsolete inventory 1,502 2,143
Changes in assets and liabilities affecting operations:
Restricted cash -- 60
Accounts receivable, net 3,298 (1,256)
Refundable income taxes -- 151
Inventory (1722) 1,011
Deposits 104 (180)
Prepaid expenses (393) (706)
Accounts payable and accrued expenses (1,686) (374)
License agreement payable (770) --
Deferred revenue 435 1,515
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Net cash provided by (used in) operating activities (6,422) (2,911)
------------ ------------
Cash flows from investing activities:
Release of restricted cash 5,000 --
Cash used in acquisitions -- (23,916)
Purchase of securities -- 5,056
Purchase of property and equipment (379) --
Proceeds on disposal of assets held for sale -- 53
Investment in capitalized software -- (396)
Sale of securities -- 169
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Net cash provided by (used in) investing activities 4,621 (19,034)
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Cash flows from financing activities:
Repurchase of common stock -- (2,069)
Exercise of stock options and warrants 55 132
Repayment of notes payable -- (2,743)
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Net cash provided by (used in) financing activities 55 (4,680)
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,746) (26,625)
Cash and cash equivalents, beginning of period 14,133 35,368
------------ ------------
Cash and cash equivalents, end of period $12,387 $8,743
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $79 $160
============ ============
Income taxes paid $42 $0
============ ============
See accompanying notes
7
TERABEAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements of Terabeam, Inc. (the "Company" or
"Terabeam") for the three month and nine month periods ended September 30, 2006
and 2005 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 except as discussed in footnotes 4 and 6 below. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2005 filed with the
Securities and Exchange Commission.
The Company provides high-speed wireless communications equipment and
services in the United States and internationally. Its systems enable service
providers, enterprises, and governmental organizations to deliver high-speed
data connectivity enabling a broad range of applications. The Company provides
wireless solutions for the mobile enterprise, security and surveillance, last
mile access, voice and data backhaul, and municipal networks. The Company
believes its fixed wireless systems address the growing need of our customers
and end-users to rapidly and cost effectively deploy high-speed communication
networks.
Terabeam and its subsidiaries operate in two primary businesses: broadband
wireless equipment and high-speed wireless service and connectivity. The
equipment business is the historic operations of Terabeam as a designer,
manufacturer, and seller of wireless telecommunications equipment ("Equipment")
and generates the substantial majority of the Company's revenues and expenses.
This business is conducted through its Proxim Wireless Corporation subsidiary
and includes the financial results of the business acquired from Proxim
Corporation ("Old Proxim") in July 2005. Terabeam's services business, which it
began in 2004, is conducted through its Ricochet Networks, Inc. subsidiary. This
business ("Services") was acquired with the Ricochet Networks acquisition during
the second quarter of 2004. Ricochet Networks has been ranked as one of the five
largest wireless Internet service providers (WISPs) in the United States (in
terms of subscribers). There are no significant inter-company transactions which
affect the revenue or expenses of either segment.
In April 2006, the Company announced the retention of an outside
consulting firm to explore a variety of possible strategic alternatives for our
Ricochet services business. To date, we have not announced any strategic
transaction and have discontinued the engagement of the outside consulting firm.
However, we continue to explore a variety of possible strategic alternatives for
our Ricochet services business. These alternatives may include the divestiture
of Ricochet, an investment in Ricochet, strategic relationships with Ricochet,
sale of some or all of the assets of Ricochet, and a number of other possible
alternatives. There can be no assurance that any transaction or other corporate
action regarding Ricochet will result from this exploration of alternatives.
Further, there can be no assurance whatsoever concerning the type, form,
structure, nature, results, timing, or terms and conditions of any such
potential action, even if such an action does result from this exploration.
Summarized information for the business segments as of September 30, 2006
and 2005 and for the periods then ended is as follows (in thousands):
Three Months Ended September 30:
2006: 2005:
--------------------------------- ---------------------------------
Equipment Services Total Equipment Services Total
--------- -------- -------- --------- -------- --------
Assets ................ $ 50,659 $ 2,002 $ 52,661 $ 62,316 $ 3,249 $ 65,565
Revenue ............... $ 17,322 $ 554 $ 17,876 $ 17,500 $ 647 $ 18,147
Operating income (loss) $ (13,123) $ (585) $(13,708) $ (9,439) $ (598) $(10,037)
8
Nine Months Ended September 30:
2006: 2005:
--------------------------------- ---------------------------------
Equipment Services Total Equipment Services Total
--------- -------- -------- --------- -------- --------
Assets ................ $ 50,659 $ 2,002 $ 52,661 $ 62,316 $ 3,249 $ 65,565
Revenue ............... $ 55,006 $ 2,156 $ 57,162 $ 29,882 $ 2,027 $ 31,909
Operating income (loss) $ (20,269) $ (1,525) $(21,794) $ (10,562) $ (1,685) $(12,247)
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
Prior to 2006, the Company accounted for its stock-based compensation
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations ("APB 25").
Under APB 25, no stock-based compensation cost was reflected in net income for
grants of stock prior to fiscal year 2006 because the Company grants stock
options with an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant.
Effective January 1, 2006 the Company adopted Statement of Financial
Accounting Standards No. 123 (Revised 2004) Share-Based Payment ("SFAS 123R"),
which requires the measurement and recognition of compensation cost at fair
value for all share-based payments, including stock options. Stock-based
compensation for the first nine months of 2006 includes compensation expense,
recognized over the applicable vesting periods, for new share-based awards and
for share-based awards granted prior to, but not yet vested, as of December 31,
2005 (modified prospective application). Stock-based compensation for the
three-month periods ended September 30, 2006 and 2005 totaled approximately
$435,000 and $220,000, respectively, and is included in cost of goods sold and
operating expenses in the condensed consolidated statements of operations only
for the period ended September 30, 2006. Stock-based compensation for the
nine-month periods ended September 30, 2006 and 2005 totaled approximately
$1,004,000 and $1,006,000, respectively, and is included in cost of goods sold
and operating expenses in the condensed consolidated statements of operations
only for the period ended September 30, 2006.
For the quarter and nine months ended September 30, 2006, the operating
loss, the loss before income taxes and the net loss were $435,000 and $1,004,000
higher, respectively, and the basic and diluted loss per share were $0.02 and
$0.05 higher due to the adoption of SFAS 123R. Net cash used in operating
activities and net cash provided by financing activities were not changed by the
adoption of SFAS 123R.
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 2006 and 2005: risk-free interest rate of 4.51% - 5.02 %
and 3.58%, expected life of 4 years and 5 years, volatility, calculated using
historical volatility, of 260% - 284% and 111% and dividend rate of zero
percent, respectively. Using these assumptions, the weighted average fair value
of the stock options granted in the quarter and nine months ended September 30,
2006 was $1.87 and $2.55, respectively, and the weighted average fair value of
the stock options granted in 2005 was $2.38. The fair value of the stock options
granted will be amortized as compensation expense over the vesting period of the
options. Estimates of fair value are not intended to predict actual future
events or the value ultimately realized by employees who receive equity awards,
and subsequent events are not indicative of the reasonableness of the original
estimates of fair value made by the Company under SFAS No. 123R.
No tax effects are recognized currently for the granting of share-based
compensation arrangements as the Company currently cannot estimate the
realizability of related tax benefits as the Company is in a net operating tax
9
loss position with tax NOL carryforwards as described in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with
the SEC.
Had the Company used the fair value based accounting method for stock
compensation expense prescribed by SFAS 123R for the quarter and nine months
ending September 30, 2005, the consolidated net loss and net loss per share
would have increased to the pro forma amounts indicated below (in thousands,
except per share amounts):
Three months Nine months
ended Sept 30, ended Sept 30,
2005 2005
---------------------------------
(unaudited) (unaudited)
Net income (loss) attributable to common stockholders, as
reported: .................................................... $ (10,013) $ (11,971)
Less: Total stock based employee compensation expense
determined under the fair value based method for all awards .. (220) (1,006)
--------------------------------
Pro forma net income (loss) attributable to common
stockholders ................................................. $ (10,233) $ (12,977)
================================
Basic and diluted net loss per common share, as reported ........ $ (0.47) $ (0.55)
================================
Basic and diluted net loss per common share, pro forma ......... $ (0.48) $ (0.59)
================================
3. Comprehensive Loss
The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." During the nine months ended September 30,
2006 and 2005, the Company had comprehensive losses of $21.2 million and $12.0
million respectively, including approximately $95,000 and $15,000 (unaudited),
respectively, of unrealized losses on available-for-sale investments, net of
income taxes of $0 and $0, respectively.
4. Inventory and Restructuring Provision for Excess and Obsolete Inventory
(in thousands)
September 30, December 31,
2006 2005
------------- ------------
(unaudited)
Raw materials ................................... $ 8,198 $ 4,737
Work in process ................................. 641 437
Finished goods .................................. 12,005 13,863
-------------- ------------
20,844 19,037
Allowance for excess and obsolescence ........... (11,035) (8,967)
-------------- ------------
Net Inventory ................................... $ 9,809 $ 10,070
-------------- ------------
During the three months ended September 30, 2006, the Company recorded a
$1.5 million inventory restructuring provision for excess and obsolete inventory
related to certain under-performing product lines.
During the quarter ended September 30, 2005, the Company recorded a $2.1
million restructuring provision for excess and obsolete inventory as part of the
Company's restructuring activities. The excess inventory charges were due
principally to management's decision to discontinue certain older Terabeam
product lines subsequent to the acquisition of the Old Proxim product lines and
distribution channels.
10
5. Restructuring Charges for Severance and Excess Facilities
The Company accounts for restructuring charges under the provisions of
Statement of Financial Accounting Standards No. 146 ("FAS 146"), Accounting for
Costs Associated with Exit or Disposal Activities.
During the nine months ended September 30, 2006, the Company recorded
restructuring charges of approximately $116,000. These charges consisted of
one-time termination benefits related to a reduction in force, implemented in an
effort to streamline operations in response to the first quarter financial
results.
During the quarter ended September 30, 2005, and subsequent to the Old
Proxim acquisition, the Company recorded restructuring charges of approximately
$944,000. These charges consisted of operating lease commitments related to
facilities which were closed during the quarter, and severance payments to
Terabeam employees laid off subsequent to the Old Proxim acquisition.
6. Intangibles and Restructuring Provision for Impairment of Intangibles
Schedule of Non-Amortizable Assets
September 30, December 31,
--------------- --------------
2006 2005
(unaudited)
--------------- --------------
(in thousands)
Trade names - indefinite useful life ............... 2,250 2,250
--------------- --------------
Less: Impairment charge at Sept 30, 2006 .......... (1,100) --
=============== ==============
Trade names - indefinite useful life, net .......... $ 1,150 $ 2,250
=============== ==============
Schedule of Amortizable Assets
September 30, December 31,
------------- -------------
2006 2005
(unaudited)
------------- -------------
(in thousands)
Capitalized software - placed in service .................. $ 1,225 $ 1,225
Patents, customer relationships and other technologies with
identifiable useful lives ............................... 24,031 24,031
--------------- --------------
Total Intangible Assets ................................... 25,256 25,256
Less: Impairment charges at Sept 30, 2006 ................. (7,774) --
Less: accumulated amortization ........................... (6,554) (3,689)
--------------- --------------
Amortizable intangible assets, net ........................ $ 10,928 $ 21,567
=============== ==============
Amortization is computed using the straight-line method over the estimated
useful life, based on the Company's assessment of technological obsolescence of
the respective assets. Amortization expense for the three months and nine months
ended September 30, 2006 totaled approximately $0.9 million and $2.8 million,
respectively. The weighted average estimated useful life is 6.2 years. There is
no estimated residual value.
Impairment of Intangibles:
During the quarter ended September 30, 2006, in accordance with the
guidance contained in the Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the Company tested certain intangible assets for
impairment because management determined that the year to date losses and weaker
than expected third quarter revenues were indications that these assets may be
impaired. An impairment loss on such assets is recognized if the carrying amount
of an intangible asset is not recoverable and its carrying amount exceeds its
fair value. In the quarter ended September 30, 2006, the Company recorded a
charge for the impairment of amortizable intangible assets totaling
11
$7.8 million. The charges were based on an independent third party valuation of
the intangible assets, and consisted of:
o A charge of $881,000 from the write off of intangibles related
to the acquisition of Karlnet, Inc. in 2004. The intangible
assets, Kbridge technology, Karlnet customer relationships,
and the TurboCell trade name were related to products that the
Company has recently decided to discontinue.
o A $2.1 million charge related to the developed components
technology acquired in the acquisition of Terabeam Corporation
in 2004. The revised valuation at September 30, 2006 is
$290,000, and this amount will be amortized over a remaining
useful life of 45 months.
o A charge of $4.8 million related to the developed technology
acquired in the acquisition of Old Proxim in 2005.
In addition, the Company tested goodwill and other non-amortizable assets
at September 30, 2006 in accordance with the guidance contained in the Financial
Accounting Standards Board Statement of Financial Accounting Standard No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets". Based on an independent
third party valuation, the company recorded a $1.1 million charge related to the
Proxim trade name. The revised valuation at September 30, 2006 is $1.1 million,
and has an indefinite useful life. There was no impairment indicated for
goodwill.
The total charge for impairment of amortizable and indefinite-lived
intangible assets in the accompanying financial statements at September 30, 2006
is approximately $8.9 million.
Prior Year Impairment of Intangibles:
During the quarter ended September 30, 2005, and subsequent to the Old
Proxim acquisition, the restructuring of the Company and the Company's product
lines affected the carrying value of certain intangible assets, and the Company
recorded a charge for the impairment of intangible assets in the accompanying
2005 financial statements totaling $4.7 million. These charges consisted of:
o A $3.6 million impairment charge related to the Terabeam trade
name in accordance with the guidance contained in the SFAS
142, "Goodwill and Other Intangible Assets". Subsequent to the
Old Proxim acquisition, the Company chose to sell its wireless
equipment products under the go to market name of Proxim
Wireless. Since there will be no future revenue stream based
on the Terabeam name, an independent third party valuation
determined that the fair value of the Terabeam trade name was
de minimis at September 30, 2005.
o A $1.1 million charge related to the write off of certain
software development costs that had been previously
capitalized under Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed". The Company abandoned development of its
Logan software development project after acquiring similar
software in the Proxim acquisition due to market timing
issues.
12
7. Goodwill
Goodwill consisted of the following (in thousands):
September 30, December 31,
------------------------- ----------------------------
Acquisition 2006 2005
------------------------- ----------------------------
(unaudited)
------------------------- ----------------------------
KarlNet ................. $ 2,491 $ 2,491
Terabeam ................ 3,322 3,322
Old Proxim .............. 2,109 1,567
----------------------------
Goodwill ................ $ 7,922 $ 7,380
============================
Old Proxim goodwill increased by approximately $842,000 during the first
nine months of 2006 due to adjustments in the purchase price allocation related
to the Proxim acquisition.
Goodwill is tested for impairment at least annually at the reporting unit
level, and more frequently if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount.
8. Earnings per share
(In Thousands) Three Months Ended Sept 30, Nine Months Ended Sept 30,
--------------------------- ---------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Numerator:
Net income (loss) .......................... $ (13,664) $ (10,013) $ (21,132) $ (11,971)
=========== =========== =========== ===========
Denominator- weighted average shares:
Denominator for basic earnings per share ... 21,541 21,163 21,515 21,932
Dilutive effect of stock options ........... $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
Denominator for diluted earnings per share . 21,541 21,163 21,515 21,932
=========== =========== =========== ===========
Basic earnings (loss) per share ............ $ (0.63) $ (0.47) $ (0.98) $ (0.55)
=========== =========== =========== ===========
Diluted earnings (loss) per share .......... $ (0.63) $ (0.47) $ (0.98) $ (0.55)
=========== =========== =========== ===========
At September 30, 2006 and 2005, stock options and warrants to purchase
shares of common stock were outstanding, but were not included in the
computation of diluted earnings for the three month and nine month periods ended
September 30, 2006 and 2005 because there was a net loss for each of the
applicable periods, and the effect would have been anti-dilutive.
9. Concentrations
During nine months ended September 30, 2006, there were two customers who
accounted for approximately 15% and 11% of consolidated sales respectively, and
in the corresponding nine months of 2005, no one customer accounted for more
that 10% of sales.
The Company maintains the majority of its cash, cash equivalent, and
restricted cash balances at two major US banks. The balances are insured by the
Federal Deposit Insurance Corporation up to $100,000 per bank. At September 30,
2006 and 2005, the uninsured portion totaled approximately $13.5 million and
$13.2 million, respectively.
13
10. KarlNet
On May 13, 2004, Terabeam acquired KarlNet. The definitive acquisition
agreement contained provisions that provided for certain contingent
consideration after the initial acquisition date. Terabeam may pay up to an
additional $2.5 million over the two years following closing based on
achievement of certain milestones and compliance with other conditions. Although
the Company has received a letter from sellers demanding payment of the first
$1.0 million contingent payment, it is the Company's position that, as of
September 30, 2006, no events have occurred that have triggered the obligation
to pay any of the contingent consideration.
11. License Agreement Payable
In February 2006, Terabeam, Inc. and its subsidiaries entered into a
settlement agreement with Symbol Technologies, Inc. and its subsidiaries
("Symbol") resolving all outstanding litigation between the companies.
The Company recorded an intangible asset related to the license at
December 31, 2005 based on the present value of the scheduled payments, and will
amortize the intangible asset over the useful life of the patents through 2014.
The amortization expense recorded for the quarter and nine months ended
September, 30 2006 totaled approximately $105,000 and $315,000, respectively.
The Company also recorded a license payable equal to the present value of the
scheduled payments. License agreements payable consisted of the following at
September 30 (in thousands):
September 30, December 31
2006 2005
(unaudited)
------------- -----------
License Agreement Payable ................. 3,167 3,937
Current portion ...................... (858) (981)
------------- -----------
Long term portion .................... $ 2,309 $ 2,956
------------- -----------
12. Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
interpretation No. (FIN) 48, "Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109", which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 will be effective beginning Q1 2007. The Company has not yet evaluated the
impact of implementation on the consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements." SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles ("GAAP"), and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measurements in
financial statements, but standardizes its definition and guidance in GAAP.
Thus, for some entities, the application of this statement may change current
practice. SFAS No. 157 is effective for the Company beginning on January 1,
2008. The Company is currently evaluating the impact that the adoption of this
statement may have on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"). SFAS
158 requires employers to fully recognize the obligations associated with
single-employer defined benefit pension, retiree healthcare, and other
postretirement plans in their financial statements. The provisions of SFAS 158
are effective for fiscal years ending after December 15, 2006. The
14
provisions of SFAS 158 are not expected to have a material impact on the
Company's financial position, results of operations, or cash flows.
13. Commitments and Contingencies
IPO Litigation
--------------
During the period from June 12 to September 13, 2001, four purported
securities class action lawsuits were filed against Telaxis Communications
Corporation, a predecessor company to Terabeam, Inc., 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 complaint 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. We understand that virtually all of the
other non-bankrupt issuer defendants have also elected to participate in this
proposed settlement. If ultimately approved by the court, this proposed
settlement would result in the dismissal, with prejudice, of all claims in the
litigation against us and against the other issuer defendants who have elected
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. If recoveries totaling $1 billion or more are
obtained by the plaintiffs from the underwriter defendants, however, the
monetary obligations to the plaintiffs under the proposed settlement will be
satisfied. 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
15
were insufficient to pay that issuer's allocable share of the settlement costs.
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.
Consummation of the proposed settlement is conditioned upon obtaining
approval by the court. On September 1, 2005, the court preliminarily approved
the proposed settlement and directed that notice of the terms of the proposed
settlement be provided to class members. Thereafter the court held a fairness
hearing on April 24, 2006, at which objections to the proposed settlement were
heard. After the fairness hearing, the court took under advisement whether to
grant final approval to the proposed settlement.
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.
General
-------
We are subject to potential liability under contractual and other matters
and various claims and legal actions which are pending or may be asserted
against us or our subsidiaries, including claims arising from contractual
obligations of Proxim Corporation that we assumed and from excess leased
facilities. These matters may arise in the ordinary course and conduct of our
business. While we cannot predict the outcome of such claims and legal actions
with certainty, we currently believe that such matters should not result in any
liability which would have a material adverse affect on our business.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
We provide high-speed wireless communications equipment and services in
the United States and internationally. Our systems enable service providers,
enterprises, and governmental organizations to deliver high-speed data
connectivity enabling a broad range of applications. We also provide wireless
solutions for the mobile enterprise, security and surveillance, last mile
access, voice and data backhaul, and municipal networks. We believe our fixed
wireless systems address the growing need of our customers and end-users to
rapidly and cost effectively deploy high-speed communication networks.
Terabeam and its subsidiaries operate in two primary businesses: broadband
wireless equipment and high-speed wireless service and connectivity. The
equipment business is the historic operations of Terabeam as a designer,
manufacturer, and seller of wireless telecommunications equipment ("Equipment")
and generates the substantial majority of the Company's revenues and expenses.
This business is conducted through its Proxim Wireless Corporation subsidiary
and includes the financial results of the business acquired from Proxim
Corporation ("Old Proxim") in July 2005. Terabeam's services business, which it
began in 2004, is conducted through its Ricochet Networks, Inc. subsidiary. This
business ("Services") was acquired with the Ricochet Networks acquisition during
the second quarter of 2004. Ricochet Networks has been ranked as one of the five
largest wireless Internet service providers (WISPs) in the United States (in
terms of subscribers). There are no significant inter-company transactions which
affect the revenue or expenses of either segment.
In April 2006 we announced the retention of an outside consulting firm to
explore a variety of possible strategic alternatives for our Ricochet services
business. To date, we have not announced any strategic transaction and have
discontinued the engagement of the outside consulting firm. However, we continue
to explore a variety of possible strategic alternatives for our Ricochet
services business. These alternatives may include the divestiture of Ricochet,
an investment in Ricochet, strategic relationships with Ricochet, sale of some
or all of the assets of Ricochet, and a number of other possible alternatives.
There can be no assurance that any transaction or other corporate action
regarding Ricochet will result from this exploration of alternatives. Further,
there can be no
16
assurance whatsoever concerning the type, form, structure, nature, results,
timing, or terms and conditions of any such potential action, even if such an
action does result from this exploration.
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. We base
these estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from our estimates. During the nine months ended September 30,
2006, there were no significant changes to the critical accounting policies we
disclosed in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended
December 31, 2005. The most significant areas involving our judgments and
estimates are described below.
Revenue Recognition
Product revenue is generally recognized upon shipment when persuasive
evidence of an arrangement exists, the price is fixed or determinable, and
collectibility is reasonably assured. The Company grants certain distributors
limited rights of return and price protection on unsold products. Since certain
conditions of SFAS 48 Revenue Recognition When Right of Return Exists are not
met for sales to these distributors, revenue is deferred until the product is
sold to an end customer. Generally, the Company has no obligation to provide any
modification or customization upgrades, enhancements or other post-sale customer
support. Revenue from services, such as pre-installation diagnostic testing and
product repair services, is recognized over the period for which the services
are performed, which is typically less than one month. Revenue from enhanced
service contracts is recognized over the contract period, which ranges from one
to three years.
For our services business, we recognize revenue when the customer pays for
and then has access to our network for the current fiscal period. Any funds the
customer pays for future fiscal periods are treated as deferred revenue and
recognized in the future fiscal periods for which the customer has access to our
network.
Asset Impairment
The Company periodically evaluates the carrying value of long-lived assets
when events and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than the carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived asset. Fair
market value is determined primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
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.
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
17
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, particularly where we have made last-time-buys of components.
Accelerating the disposal process or incorrect estimates of future sales may
necessitate future adjustments to these provisions.
Goodwill
Goodwill is the excess of the cost of an acquired entity over the net
amounts assigned to assets acquired and liabilities assumed. Goodwill is not
amortized but is tested for impairment at least annually at the reporting unit
level, and more frequently if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount.
Intangible Assets
Intangible assets are accounted for in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets." Intangible assets with finite lives are
amortized over the estimated useful lives using the straight-line method. An
impairment loss on such assets is recognized if the carrying amount of an
intangible asset is not recoverable and its carrying amount exceeds its fair
value. Intangible assets with indefinite useful lives are not amortized but are
tested for impairment at least annually or more frequently if there are
indications that the asset is impaired. The impairment test for these assets
consists of a comparison of the fair value of the asset with its carrying
amount. If the carrying amount of an intangible asset with an indefinite useful
life exceeds its fair value, an impairment loss is recognized in an amount equal
to that excess. For either type of intangible asset, after an impairment loss is
recognized, the adjusted carrying amount of the intangible asset becomes its new
accounting basis. Subsequent reversal of a previously recognized impairment loss
is prohibited.
Our intangible assets include purchased technology and various assets
acquired in business combination transactions. Assets acquired in business
combination transactions include existing hardware technologies, trade names,
existing software technologies, customer relationships, and patents. Some of
these assets have finite useful lives, and some have indefinite useful lives.
Results of Operations
For the three months ended September 30, 2006 and 2005
The following table provides statement of operations data as a percentage
of sales for the periods presented.
18
Three Months Ended
September 30,
(unaudited)
------------------
2006 2005
------ ------
Sales ....................................................... 100% 100%
Cost of goods sold .......................................... 55 58
Restructuring provision for excess and obsolete inventory ... 8 12
----- -----
Gross profit ................................................ 37 30
Operating expenses:
Selling costs ........................................... 29 21
Restructuring charges ................................... -- 5
Restructuring charges for impairment of intangible assets 50 26
General and administrative .............................. 19 18
Research and development ................................ 16 15
----- -----
Total operating expenses ............................. 114 85
----- -----
Operating (loss) income ..................................... (77) (55)
Other income (expenses) ..................................... -- 1
Income taxes ................................................ -- --
Minority interest in net income of Merry Fields ............. -- (1)
----- -----
Net income .................................................. (76)% (55)%
===== =====
Sales
Sales for the three months ended September 30, 2006 were $17.9 million as
compared to $18.1 million for the same period in 2005 for a decrease of $0.2
million or 1.1%. This decrease is primarily due a decrease in demand for our
products in the third quarter of 2006 as compared to the corresponding quarter
of 2005. The decrease occurred even though only two full months of sales related
to the acquired Old Proxim products were included in sales during the third
quarter of 2005.
In the most recent quarter, our service business made up less than 5% of
our total consolidated revenue. We continue our efforts to increase the number
of subscribers and opportunities for the service business.
For the quarters ending September 30, 2006 and 2005, international sales,
excluding Canada, approximated 45% and 41%, respectively, of total sales. The
reason for the increase in international sales as a percent of sales is because
a significant percentage of the sales from the Old Proxim operations are
ultimately made to international customers.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the three months ended September
30, 2006 were $11.3 million and $6.6 million, respectively. For the same period
in 2005, costs of goods sold and gross profit were $12.6 million and $5.5
million, respectively. The cost of goods sold in the third quarters of 2006 and
2005 included restructuring provisions for excess and obsolete inventory
totaling $1.5 million and $2.1 million, respectively. Gross profit margin, as a
percentage of sales, for the three months ended September 30, 2006 was 37% with
the restructuring provision and 45% without restructuring charges, and for the
quarter ended September 30, 2005 was 30% with the restructuring provision and
42% without restructuring charges. The favorable increase in gross margin
percentage was primarily due to the product mix in the current quarter compared
to the corresponding quarter of the prior year.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, customer and technical support as well
as field support. Sales and marketing expenses for the three months ended
September 30, 2006 were $5.1 million, an increase of $1.3 million over $3.8
million for the same period in 2005. This increase was due primarily to
additional commissions and incentives programs for the sales
19
force during the current quarter. In addition, the increase in headcount due to
the acquisition of the Old Proxim sales and distribution channels was reflected
in expense during the entire third quarter of 2006, but for only two months
during the third quarter of 2005.
Restructuring Charges
During the quarter ended September 30, 2005 we recorded restructuring
charges for severance and excess facilities of approximately $944,000. There
were no restructuring charges recorded for these matters in the corresponding
quarter of the current year.
Restructuring Charges for impairment of intangible assets
During the quarter ended September 30, 2006 we recorded restructuring
charges for the impairment of intangible assets totaling $8.9 million. There was
a restructuring charge for the impairment of certain intangible assets totaling
$4.7 million recorded in the corresponding quarter of 2005. Details of these
restructuring charges are contained in footnote 6 to the financial statements in
Part I, Item 1 above.
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 were
$3.5 million for the three months ended September 30, 2006 compared to $3.3
million for the three months ended September 30, 2005. General and
administrative expenses as a percentage of sales during the third quarter of
2006 were 19% as compared to 18% in the third quarter of 2005.
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. These include costs for development of products and components, test
equipment and related facilities. Research and development expenses increased
slightly, but rounded to $2.8 million for each of the three month periods ended
September 30, 2006 and 2005. Research and development expenses as a percentage
of sales during the third quarter of 2006 were 16% as compared to 15% in the
third quarter of 2005.
Other income (expenses)
Other income and expenses totaled approximately $60,000 in the second
quarter 2006 compared to $128,000 for the corresponding quarter of 2005. There
was decrease in interest income of $21,000 due the decrease in the cash balance,
and an increase in interest expense of approximately $46,000 due to the interest
related to the license agreement payable recorded subsequent to the third
quarter of 2005.
20
For the nine months ended September 30, 2006 and 2005
The following table provides statement of operations data as a
percentage of sales for the periods presented.
Nine Months Ended
September 30,
(unaudited)
-----------------
2006 2005
---- ----
Sales ....................................................... 100% 100%
Cost of goods sold .......................................... 57 55
Restructuring provision for excess and obsolete inventory ... 3 7
---- ----
Gross profit ................................................ 40 38
Operating expenses:
Selling costs ........................................... 23 18
Restructuring charges ................................... -- 3
Restructuring charges for impairment of intangible assets 15 15
General and administrative .............................. 19 27
Research and development ................................ 20 14
---- ----
Total operating expenses ............................. 77 77
---- ----
Operating (loss) income ..................................... (38) (39)
Other income (expenses) ..................................... 1 1
Income taxes ................................................ -- --
Minority interest in net income of Merry Fields ............. -- --
---- ----
Net income .................................................. (37)% (38)%
==== ====
Sales
Sales for the nine months ended September 30, 2006 were $57.2 million as
compared to $31.9 million for the same period in 2005 for an increase of $25.3
million or 79%. This increase is primarily due to the acquisition of the Old
Proxim operations in the third quarter of 2005.
In the first nine months of 2006, our service business made up less than
5% of our total consolidated revenue. We continue our efforts to increase the
number of subscribers and opportunities for the service business.
For the nine month periods ending September 30, 2006 and 2005,
international sales, excluding Canada, approximated 51% and 29%, respectively,
of total sales. The reason for the large increase in international sales as a
percent of sales is because a significant percentage of the sales from the Old
Proxim operations were ultimately made to international customers.
Cost of goods sold and gross profit
Cost of goods sold and gross profit for the nine months ended September
30, 2006 were $34.3 million and $22.9 million, respectively. For the same period
in 2005, costs of goods sold and gross profit were $19.7 million and $12.3
million, respectively. The cost of goods sold in the first nine months of 2006
and 2005 included restructuring provisions for excess and obsolete inventory
totaling $1.5 million and $2.1 million, respectively. Gross profit margin, as a
percentage of sales, for the nine months ended September 30, 2006 was 40% with
the restructuring provision and 43% without restructuring charges, and for the
nine months ended September 30, 2005 was 38% with the restructuring provision
and 45% without restructuring charges. The decrease in gross margin percentage
(without restructuring charges) was primarily due to the product mix in the
current nine months compared to the first nine months of the prior year. In
addition, due to lower than expected revenue results for the first nine months
of 2006, certain fixed manufacturing costs were not fully absorbed and
contributed to a reduction in gross profit margins.
21
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, customer and technical support as well
as field support. Sales and marketing expenses for the nine months ended
September 30, 2006 were $13.4 million, an increase of $7.6 million over $5.8
million for the same period in 2005. This increase was due primarily to
increased headcount and increased sales related expenses due to the acquisition
of the Old Proxim sales and distribution channels in the third quarter of 2005,
along with additional commissions and incentives to the sales force during the
current quarter.
Restructuring Charges
During the nine months ended September 30, 2006 we recorded restructuring
charges of approximately $116,000. These charges consisted of one-time
termination benefits related to a reduction in force, implemented in an effort
to streamline operations in response to the first quarter financial results.
During the corresponding nine months of 2005 we recorded restructuring charges
for severance and excess facilities of approximately $944,000.
Restructuring Charges for impairment of intangible assets
During the nine months ended September 30, 2006 we recorded restructuring
charges for the impairment of intangible assets totaling $8.9 million. There was
a restructuring charge for the impairment of certain intangible assets totaling
$4.7 million recorded in the corresponding period of 2005. Details of these
restructuring charges are contained in footnote 6 to the financial statements in
Part I, Item 1 above.
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 were
$10.8 million for the nine months ended September 30, 2006 compared to $8.6
million for the nine months ended September 30, 2005 resulting in an increase of
about 26% or $2.2 million from the prior year's reporting period. The increase
is principally a result of additional headcount and related general and
administrative expenses due to the acquisition of Old Proxim's operations.
However, general and administrative expenses as a percentage of sales during the
first nine months of 2006 were reduced to 19% as compared to 27% in the first
nine months of 2005.
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. These include costs for development of products and components, test
equipment and related facilities. Research and development expenses increased to
$11.5 million for the nine months ended September 30, 2006 from $4.4 million for
the nine months ended September 30, 2005, an approximate increase of $7.1
million or 161%. The increase in current year to date research and development
costs over the same period in fiscal 2005 was primarily due to the addition of
research and development engineering personnel through the acquisition of Old
Proxim's operations as well as additional prototype material and other related
support costs required for our new product development, certification, and
introduction efforts.
Other income (expenses)
Other income and expenses totaled approximately $704,000 in the first nine
months of 2006 compared to $366,000 for the corresponding first nine months of
2005. There was a decrease in interest income of $309,000 due to reduced cash
balances primarily from the cash used to acquire Old Proxim's operations and
ongoing operating losses. This decrease was offset by gains on the settlement of
certain old Terabeam Corporation leases and property taxes, and the sale of
certain Ricochet intellectual property during the first three quarters of 2006,
and because there was a permanent write-down in the first nine months of 2005 of
certain bond and stock holdings totaling $112,000.
22
Liquidity and Capital Resources
At September 30, 2006, we had cash, cash equivalents, and investments
available-for-sale of $12.6 million. For the nine months ended September 30,
2006, cash used by operations was approximately $6.4 million. We currently are
meeting our working capital needs through cash on hand as well as internally
generated cash from operations and other activities. Cash used by operations
includes a net loss of $21.1 million and $0.9 million in changes in assets and
liabilities affecting operations, offset by $15.6 million of non-cash items. The
non-cash items include restructuring charges for impairment of intangible assets
and for excess and obsolete inventory totaling $10.2 million.
For the nine months ended September 30, 2006, cash provided by investing
activities was approximately $4.6 million. The cash provided by investing
activities was principally related to the release of restricted cash, which had
been held in an indemnification trust for the benefit of former Terabeam
Corporation directors and officers. In March 2006, the beneficiaries of that
indemnification trust agreed to the early termination of that trust. During the
quarter ended June 30, 2006 that indemnification trust was terminated and the
net trust proceeds of approximately $5.0 million (after payments to the
beneficiaries) were distributed to the Company as unrestricted cash. The release
of restricted cash was offset by approximately $379,000 used for the purchase of
property and equipment.
Cash provided by financing activities was approximately $55,000 for the
nine months ended September 30, 2006 and resulted from the exercise of employee
stock options during this period.
We believe that cash flow from operations, along with our cash on hand,
should be sufficient to meet the operating cash requirements over the next
twelve month period as currently contemplated. 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.
However, although the acquisition of Old Proxim's operations in 2005
significantly increased both our domestic and international revenue, we incurred
operating losses totaling $21.5 million in the first nine months of 2006. For
the remainder of 2006 and 2007, we must attempt to increase revenues and adjust
operating expenses to levels that will produce positive cash flows and return us
to operating profitability. Due to the large fluctuations in quarterly revenue
we have experienced since the Old Proxim operation acquisition, management is
closely following revenue trends and operating expenses, and reviewing its long
term business strategy to evaluate whether there will be a requirement for
external financing to fund our operations. One significant constraint to our
equipment business growth is the rate of new product introduction. 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. We will also need to use some of our current capital to
fund the expected future operating losses in our services business given the
significant numbers of new subscribers we would have to add for that business to
be profitable. We may also use some of our current capital or raise additional
capital for our services business if we decide to expand the geographic areas in
which we offer service. Our current resources may have to be supplemented
through new bank debt financing, public debt or equity offerings, or other means
due to a number of factors, including our acquisition of Old Proxim's operations
and our desired rate of future growth. See Part II, Item 1A - Risk Factors below
and the more detailed discussion of risk factors described in our Annual Report
on Form 10-K for the year ended December 31, 2005 filed with the Securities and
Exchange Commission.
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 below
in Part II, Item 1A - Risk Factors.
23
As of September 30, 2006, we had cash and cash equivalents of $12.4
million. The majority of total cash and cash equivalents were on deposit in
short-term accounts with two major US 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 September 30, 2006, the uninsured portion totaled
approximately $12.5 million. Although an immediate increase in interest rates
would not have a material effect on our financial condition or results of
operations, declines in interest rates over time would reduce our interest
income.
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. However, we may make sales denominated in
foreign currencies in the future. 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.
We presently do not use any derivative financial instruments to hedge our
exposure to adverse fluctuations in interest rates, foreign exchange rates, and
fluctuations in commodity prices or other market risks; nor do we invest in
speculative financial instruments.
Due to the nature of our liabilities 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
Based on their evaluation as of September 30, 2006, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were effective as of that date to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC's rules and forms. In coming to this
conclusion, our Chief Executive Officer and Chief Financial Officer considered
the matters described under the next heading and elsewhere in this Form 10-Q.
Internal control over financial reporting
Under current SEC regulations, we are not currently required to evaluate
or provide a report on our internal control over financial reporting. However,
we continue our analysis and action plans on that subject to better prepare us
for the time when we will be required to evaluate and provide a report on our
internal control over financial reporting. In connection with its 2005 annual
audit and review procedures, our independent auditors considered and provided
input to us relating to our internal control over financial reporting, and
reported no material weaknesses in our internal control over financial
reporting.
We acquired the Old Proxim business, including the related accounting and
financial systems, during the third quarter of 2005. We have moved our corporate
headquarters to the Old Proxim offices in San Jose, CA, and during the quarter
ended June 30, 2006 we substantially completed the process of integrating the
accounting and financial systems of the two companies. We will continue to
review our internal control processes as we begin the process to comply with
Sarbanes-Oxley Act Section 404 by the end of 2007 (as currently scheduled), and
we will determine and implement any necessary revisions to our internal controls
resulting from this process.
Changes in internal control over financial reporting
There was no change in our internal control over financial reporting
during the quarter ended September 30, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control over our financial
reporting other than the changes described above under the preceding heading
"Internal Control over Financial Reporting." We expect we will continue to make
revisions and improvements to our internal control over
24
financial reporting, particularly as we complete the final phase of reviewing
the integration of the accounting and financial systems of Old Proxim and
Terabeam and begin the process to comply with Sarbanes-Oxley Act Section 404.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
IPO Litigation
--------------
During the period from June 12 to September 13, 2001, four purported
securities class action lawsuits were filed against Telaxis Communications
Corporation, a predecessor company to Terabeam, Inc., 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 complaint 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. We understand that virtually all of the
other non-bankrupt issuer defendants have also elected to participate in this
proposed settlement. If ultimately approved by the court, this proposed
settlement would result in the dismissal, with prejudice, of all claims in the
litigation against us and against the other issuer defendants who have elected
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. If recoveries totaling $1 billion or more are
obtained by the plaintiffs from the underwriter defendants, however, the
monetary obligations to the plaintiffs under the proposed settlement will be
satisfied. 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. 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
Consummation of the proposed settlement is conditioned upon obtaining
approval by the court. On September 1, 2005, the court preliminarily approved
the proposed settlement and directed that notice of the terms of the proposed
settlement be provided to class members. Thereafter the court held a fairness
hearing on April 24, 2006, at which objections to the proposed settlement were
heard. After the fairness hearing, the court took under advisement whether to
grant final approval to the proposed settlement.
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.
General
-------
We are subject to potential liability under contractual and other matters
and various claims and legal actions which are pending or may be asserted
against us or our subsidiaries, including claims arising from contractual
obligations of Proxim Corporation that we assumed and from excess leased
facilities. These matters may arise in the ordinary course and conduct of our
business. While we cannot predict the outcome of such claims and legal actions
with certainty, we currently believe that such matters should not result in any
liability which would have a material adverse affect on our business.
Item 1A. Risk Factors.
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.
27
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, the downturn and continuing uncertainty
in the telecommunications industry and global economy; the intense competition
in the broadband wireless equipment industry and resulting pressures on our
pricing, gross margins, and general financial performance; difficulties in
differentiating our products from competing broadband wireless products and
other competing technologies; the impact, availability, pricing, and success of
competing technologies and products; possible delays in our customers making
buying decisions due to the actual or potential availability of new broadband
connectivity technologies; difficulties in developing products that will address
a sufficiently broad market to be commercially viable; our developing products
for portions of the broadband connectivity and access markets that do not grow;
our inability to keep pace with rapid technological changes and industry
standards; expected declining prices for our products over time; our inability
to offset expected price declines with cost savings or new product
introductions; our inability to recover capital and other investments made in
developing and introducing new products; lack of or delay in market acceptance
and demand for our current and contemplated products; 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 fluctuating financial results, which may be caused at times by
receipt of large orders from customers; our limited ability to predict our
future financial performance; our possible desire to make limited or no public
predictions as to our expected future financial performance; the expected
fluctuation in customer demand and commitments; difficulties in predicting our
future financial performance, in part due to our past and possible future
acquisition activity; our inability to achieve the contemplated benefits of our
July 2005 acquisition of Proxim Corporation's operations and any other
acquisitions we may contemplate or consummate; 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; the risk that those transactions will, or could, expose us to
lawsuits or other liabilities; obligations arising from contractual obligations
of Proxim Corporation that we assumed; litigation risks, obligations, and
expenses arising from contractual obligations of Proxim Corporation that we
assumed; management and other employee distraction due to litigation arising
from contractual obligations of Proxim Corporation that we assumed; adverse
impacts of purchase accounting treatment and amortization and impairment of
intangible assets acquired in any acquisitions; our general lack of receiving
long-term purchase commitments from our customers; cancellation of orders
without penalties; the ability of our customers to return to us some or all of
the products they had previously purchased from us with the resulting adverse
financial consequences; costs, administrative burdens, risks, and obligations
arising from terms and conditions that we find onerous but that are imposed upon
us by certain customers as a condition of buying products from us; our not
selling products to certain customers due to our refusal to accept their terms
and conditions of sale that we find onerous; 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, particularly those
that are sole source or available from a limited number of suppliers; inability
to achieve and maintain profitability; purchases of excess inventory that
ultimately may not be used; difficulties or delays in developing alternative
sources for limited or sole source components; our having to reconfigure our
products due to our inability to receive sufficient quantities of limited or
sole source components; adverse impact of stock option and other accounting
rules; our reliance on third party distributors and resellers in our indirect
sales model; our dependence on a limited number of significant distributors; our
inability to obtain larger customers; dependence on continued demand for
broadband connectivity and access; difficulties in attracting and retaining
qualified personnel; our dependence on key personnel; competition from companies
that hire some of our former personnel; lack of key man life insurance on our
executives or other employees; lack of a succession plan; inability of our
limited internal manufacturing capacity to meet customers' desires for our
products; our substantial reliance on contract manufacturers to obtain raw
materials and components for our products and to manufacture, test, and deliver
our products; interruptions in our manufacturing operations or the operations of
our
28
contract manufacturers or other suppliers; possible adverse impacts on us of the
directive on the restriction of the use of certain hazardous substances in
electrical and electronic equipment (the RoHS directive), including, without
limitation, adverse impacts on our ability to supply our products in the
quantities desired and adverse impacts on our costs of supplying products;
possible adverse impacts on us of the waste electrical and electronic equipment
directive (the WEEE directive), including, without limitation, adverse impacts
on our ability to supply our products in the quantities desired and adverse
impacts on our costs of supplying products; our failing to maintain adequate
levels of inventory; our failure to effectively manage our growth; difficulties
in reducing our operating expenses; adverse impacts of the war in Iraq and the
war on terrorism generally; the potential for intellectual property
infringement, warranty, product liability, and other claims; risks associated
with foreign sales such as collection, currency, and political risk; limited
ability to enforce our rights against customers in foreign countries; lack of
relationships in foreign countries which may limit our ability to expand our
international sales and operations; difficulties in complying with existing
governmental regulations and developments or changes in governmental regulation;
difficulties or delays in obtaining any necessary Federal Communications
Commission and other governmental or regulatory certifications, permits,
waivers, or approvals; possible adverse consequences resulting from marketing,
selling, or supplying products without any necessary Federal Communications
Commission or other governmental or regulatory certifications, permits, waivers,
or approvals; changes in governmental regulations which could adversely impact
our competitive position; our maintaining tight credit limits which could
adversely impact our sales; difficulties in our customers or ultimate end users
of our products obtaining sufficient funding; difficulties in collecting our
accounts receivable; failure or inability to protect our proprietary technology
and other intellectual property; possible decreased ability to protect our
proprietary technology and other intellectual property in foreign jurisdictions;
ability of third parties to develop similar and perhaps superior technology
without violating our intellectual property rights; the costs and distraction of
engaging in litigation to protect our intellectual property rights, even if we
are ultimately successful; adverse impacts resulting from our settlement of
litigation initiated by Symbol Technologies, Inc.; our limited experience in
operating our Ricochet(R) network; adverse impacts on our broadband wireless
equipment business due to our Ricochet wireless communications services
business; expected ongoing losses from our Ricochet business; our inability to
increase and retain subscribers for the Ricochet service; the intense
competition in the wireless data access market; different data access
technologies which may be superior to the access afforded by our Ricochet
business; costs, time, and commitments involved in our possible geographic
expansion of the Ricochet network; effectively managing any expansion of the
Ricochet network; difficulties in obtaining roof and other attachment rights for
our Ricochet network equipment at the times and at the costs and other terms we
desire; possible insufficient equipment to expand our Ricochet network;
dependence of our Ricochet network on network connections provided by third
parties; failure of our third-party contractors to adequately maintain and
repair the Ricochet network; possible harmful interference degrading or
disrupting the service provided by the Ricochet network; costs of complying with
governmental regulations such as Section 404 and other provisions of the
Sarbanes-Oxley Act; the expense of defending and settling and the outcome of
pending and any future stockholder litigation, including without limitation, our
possible exposure under the contemplated settlement of that litigation; the
expense of defending and settling and the outcome of pending and any future
litigation against us; the expected volatility and possible stagnation or
decline in our stock price, particularly due to the relatively low number of
shares that trade on a daily basis and public filings regarding sales of our
stock by one or more of our significant stockholders; future stock sales by our
current stockholders, including our current and former directors and management;
future actual or potential sales of our stock that we issue upon exercise of
stock options or stock warrants; possible dilution of our existing stockholders
if we issue stock to acquire other companies or product lines or to raise
additional capital; possible better terms of any equity securities we may issue
in the future than the terms of our common stock; our limited capital resources
and uncertain prospects for obtaining additional financing; the possibility that
we may raise additional capital on terms that we or our stockholders find
onerous; investment risk resulting in the decrease in value of our investments;
and risks, impacts, and effects associated with any acquisitions, investments,
or other strategic transactions we may evaluate or 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 for the year ended December 31, 2005 filed with
the Securities and Exchange Commission.
Specific Cautionary Statements relating to Possible Ricochet Strategic
Transaction
In April 2006, we announced the retention of an outside consulting firm to
explore a variety of possible strategic alternatives for our Ricochet services
business. To date, we have not announced any strategic transaction and have
discontinued the engagement of the outside consulting firm. However, we continue
to explore a variety of possible strategic alternatives for our Ricochet
services business. There can be no assurance whatsoever that any
29
transaction or other corporate action regarding Ricochet will result from this
exploration of alternatives. Further, there can be no assurance whatsoever
concerning the type, form, structure, nature, results, timing, or terms and
conditions of any such potential action, even if such an action does result from
this exploration. Other risks associated with this process include our ability
to identify desirable strategic alternatives for our Ricochet business, as well
as our ability to execute such alternatives or the transactions associated with
such alternatives; the level of interest of third parties in pursuing possible
strategic transactions relating to our Ricochet business; our desire and ability
(or lack thereof) to continue to explore possible strategic alternatives and
opportunities relating to our Ricochet business; the desire and ability (or lack
thereof) of us and any relevant third parties to reach mutually acceptable
definitive documentation to effect a possible strategic transaction and, if that
occurs, whether the conditions to closing would then be satisfied; the time and
costs required to explore and investigate possible transactions and other
corporate actions; management and board interest in and distraction due to
exploring and investigating possible transactions and other corporate actions;
and reactions, either positive or negative, of investors, competitors,
customers, employees, and others to our exploring possible strategic
alternatives and opportunities relating to our Ricochet business and to any
specific strategic alternative or opportunity selected by us. We do not intend
to make any additional comments regarding this matter unless and until a
definitive transaction agreement has been reached, the exploration of
alternatives has been terminated, or there are other definitive developments
warranting further disclosure.
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 6. Exhibits.
See Exhibit Index.
30
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.
Terabeam, Inc.
Date: November 14, 2006 By: /s/ Brian J. Sereda
---------------------------------
Brian J. Sereda,
Chief Financial Officer
(principal financial and
accounting officer)
31
EXHIBIT INDEX
Exhibit
Number Description
10.1 Letter Employment Agreement between the Registrant and Len
Eisenstein dated May 24, 2005 (1)
10.2 Letter Employment Agreement between the Registrant and Brian J.
Sereda dated August 2, 2006 (2)
10.3 Form of Incentive Stock Option Agreement for Executive Officers (2)
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).
- -------------
All non-marked exhibits are filed herewith.
(1) Incorporated herein by reference to the exhibits to Form 8-K filed
with the SEC on July 31, 2006.
(2) Incorporated herein by reference to the exhibits to Form 8-K filed
with the SEC on August 4, 2006.
32