<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 2000
REGISTRATION NO. 333-42570
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NOVATEL WIRELESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4812 86-0824673
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
9360 TOWNE CENTRE DRIVE
SUITE 110
SAN DIEGO, CA 92121
(858) 320-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN MAJOR
CHIEF EXECUTIVE OFFICER
NOVATEL WIRELESS, INC.
9360 TOWNE CENTRE DRIVE
SUITE 110
SAN DIEGO, CA 92121
(858) 320-8800
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE
NUMBER INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
PETER V. LEPARULO, ESQ.
PATRICK T. WATERS, ESQ.
JEAN-JACQUES B. DUPRE, ESQ.
ORRICK, HERRINGTON & SUTCLIFFE LLP
777 SOUTH FIGUEROA
LOS ANGELES, CA 90017
(213) 629-2020
J. SCOTT HODGKINS, ESQ.
LATHAM & WATKINS
633 WEST FIFTH STREET
LOS ANGELES, CA 90017
(213) 485-1234
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
The information in this preliminary prospectus is not complete and may
be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 1, 2000
Shares
[NOVATEL LOGO]
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $ and $ per share. We have applied to list our common stock on
The Nasdaq Stock Market's National Market under the symbol "NVTL".
The underwriters have an option to purchase a maximum of
additional shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NOVATEL WIRELESS
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
U.S. BANCORP PIPER JAFFRAY
BANC OF AMERICA SECURITIES LLC
The date of this prospectus is , 2000
<PAGE> 3
The inside front cover contains a graphic of our product portfolio.
<PAGE> 4
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 2
RISK FACTORS.......................... 6
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 17
USE OF PROCEEDS....................... 18
DIVIDEND POLICY....................... 18
CAPITALIZATION........................ 19
DILUTION.............................. 20
SELECTED FINANCIAL DATA............... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 23
BUSINESS.............................. 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT............................ 45
RELATED PARTY TRANSACTIONS............ 56
PRINCIPAL STOCKHOLDERS................ 60
DESCRIPTION OF SECURITIES............. 62
SHARES ELIGIBLE FOR FUTURE SALE....... 65
UNDERWRITING.......................... 67
NOTICE TO CANADIAN RESIDENTS.......... 69
LEGAL MATTERS......................... 70
EXPERTS............................... 70
WHERE YOU CAN FIND ADDITIONAL
INFORMATION......................... 71
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. NEITHER WE NOR THE UNDERWRITERS HAVE AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE
USED ONLY WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTION IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
AN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and financial statements appearing elsewhere
in this prospectus. This prospectus contains forward-looking statements. The
outcome of the events described in these forward-looking statements is subject
to risks and actual results could differ materially. The sections entitled "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as those discussed elsewhere in
this prospectus, contain a discussion of some of the factors that could
contribute to those differences.
OUR COMPANY
We are a leading provider of wireless data communications access solutions.
We provide wireless data modems and software for use with handheld computing
devices and portable personal computers. Our products enable professionals and
consumers to access enterprise networks and the Internet "anytime, anywhere." We
also provide wireless data modems which can be integrated into other devices for
a wide range of vertical applications. We also offer provisioning, activation
and systems integration services to our customers to facilitate use of our
products.
We have a strong history of designing innovative wireless access products.
We designed and delivered the first products to enable wireless connectivity for
the Palm family of handheld computing devices. We have successfully developed
and are continuing to develop solutions that enable our customers to wirelessly
access data utilizing a wide range of mobile computing devices across a broad
range of wireless data network technologies. Our current product portfolio
includes the following:
- The Minstrel line of Wireless Modem cradles, for the Palm family of
handheld computing devices and the Casio E-15 Windows Pocket PC handheld
device;
- The Merlin Type II PC Card, for portable and desktop personal computers
(PCs);
- The Sage Wireless Modem, for portable and desktop PCs;
- The NRM-6812 and Expedite Wireless OEM Modem, for custom integration with
computers and other devices; and
- The Lancer 3W Wireless Modem, for vehicle-mounted applications.
Our core modem technology is easily customized to address a broad range of
vertical applications. Our customers include wireless telecommunications
operators such as Verizon Wireless, AT&T Wireless, and wireless data content and
service providers such as OmniSky Corporation, GoAmerica Communications Corp.
and CreSenda Wireless. We also have original equipment manufacturer (OEM)
customers such as @Road, Harvest/Coca Cola and KeyCorp and we have entered into
strategic technology and development relationships within the wireless
communications industry with Hewlett-Packard Company, Metricom, Inc., OmniSky,
Symbol Technologies, Inc. and VoiceStream Wireless Corp.
The convergence of mobile computing, wireless communications and the
Internet and enterprise networks is driving the rapidly expanding demand for
wireless data access. The explosion of the Internet and enterprise networks has
accelerated the development of applications for communications, information
access, content and commerce. As professionals and consumers have become
increasingly dependent on the growing functionality, productivity and
convenience offered by these applications, they are demanding wireless
connectivity for their mobile computing devices. We believe that demand for an
ever increasing range of wireless data applications will continue to grow as
wireless data network coverage, bandwidth and security improve to allow higher
quality service.
2
<PAGE> 6
To meet this rapidly growing demand, we provide the following advantages to
our customers:
Breadth of Wireless Access Products. Our products enable both handheld
computing devices and portable PCs to wirelessly access the Internet and
enterprise networks. We also provide wireless modems to enable wireless
connectivity to a broad range of devices for vertical applications.
Price Performance Leadership. We have designed our products to provide high
levels of performance and functionality with attractive pricing to drive
widespread adoption among users.
Convenience. Our products provide users with wireless connectivity to the
Internet and enterprise networks with a focus on ease-of-use and real-time
access to e-mail, online content and critical personal and professional
information. We have designed our products to reduce their size and weight
without compromising performance.
Productivity. Our products enhance productivity by enabling handheld
devices and portable PCs to be in constant connection with the Internet and
enterprise networks. Our products for handheld devices also enable wireless
synchronization so users can backup and access personal and professional data
from remote locations.
Customized Solutions. Our technology platform enables us to provide
wireless data solutions for a wide range of specialized applications and to
adapt our products to specific customer needs. We enable our OEM customers to
provide their clients with tailored solutions for vertical market applications
such as securities trading, field services and sales, public safety
transportation, retail and point of sale terminals, telemetry and vending system
monitoring.
Our objective is to be the leading global provider of wireless data access
products. The key elements of our strategy include:
- Extending our technology leadership to capitalize on the evolution and
expansion of global wireless data access technologies;
- Driving widespread adoption of our products by increasing our sales and
marketing activities, continuing to price our products strategically and
to improve their ease-of-use;
- Expanding and developing strategic relationships to improve the design
and functionality of our wireless access products and rapidly gain market
share;
- Continuing to target key vertical markets by offering products that
increase productivity, reduce costs and create operational efficiencies;
and
- Developing value-added applications to expand the capabilities of our
products.
CORPORATE INFORMATION
We were incorporated in Delaware on April 26, 1996 when we acquired certain
intellectual property rights relating to wireless communications. Our principal
executive offices are located at 9360 Towne Centre Drive, Suite 110, San Diego,
California 92121. Our telephone number at that location is (858) 320-8800.
References in the prospectus to "we," "our," "us" and the "Company" refer to
Novatel Wireless, Inc. together with our consolidated subsidiaries. Our Web site
is www.novatelwireless.com. This reference to our website is not an active
hyperlink, nor is the information contained in our Web site incorporated by
reference into this prospectus and it does not constitute part of this
prospectus.
Our trademarks and service marks include Contact(R), Expedite(TM), Lancer
3W(TM), Merlin(TM), Minstrel(R), Minstrel IIIc(TM), Minstrel III(TM), Minstrel
V(TM), Minstrel Plus(TM), Minstrel S(TM), MissionONE(TM), Sage(R), Viking(TM),
Expedite(TM) with the accompanying design, and the Novatel Wireless logo.
Novatel Wireless, our logo and other trademarks and service marks mentioned in
this prospectus are the property of Novatel Wireless, Inc. or its subsidiaries.
All other brand names, trademarks, or service marks of other companies and
products appearing in this prospectus are the property of their respective
holders.
3
<PAGE> 7
THE OFFERING
Common stock offered by us.......... shares of our common
stock
Common stock to be outstanding after
the offering...................... shares of our common
stock
Use of proceeds..................... For working capital and general
corporate purposes, including increased
research and development and sales and
marketing expenditures. See "Use of
Proceeds."
Nasdaq National Market symbol....... NVTL
The number of shares of our common stock to be issued and outstanding
immediately after this offering is based on the number of shares issued and
outstanding as of July 25, 2000. It also reflects the automatic conversion into
shares of our common stock upon completion of this offering of (i) Series A, B
and C preferred stock outstanding as of June 30, 2000 into 8,022,415 shares of
our common stock and (ii) all shares of our Series D preferred stock which we
issued and sold to investors on June 30, 2000 and on July 14, 2000 into
1,964,050 shares of our common stock, and (iii) all shares of preferred stock of
our subsidiary Novatel Wireless Technologies, Ltd. an Alberta, Canada
corporation (NWT) (discussed below). In addition to the shares of common stock
to be outstanding after this offering, there are:
- 2,900,731 shares of common stock that could be issued upon the exercise
of options outstanding as of July 25, 2000 at a weighted average exercise
price of $9.09 per share;
- 3,539,305 shares of common stock that could be issued upon the exercise
of warrants outstanding as of July 25, 2000;
- 1,099,269 shares of common stock that could be issued in the future under
our stock option plans as of July 25, 2000;
- 500,000 shares of common stock that could be issued in the future under
our 2000 employee stock purchase plan.
Prior to this offering, the authorized capital stock of our subsidiary,
NWT, consisted of an unlimited number of Series A preferred shares, an unlimited
number of Series B preferred shares and an unlimited number of common shares.
Upon consummation of this offering, all the NWT Series A preferred shares and
all the NWT Series B preferred shares will be exchanged for an equal number of
shares of our Series A preferred stock and our Series B preferred stock,
respectively, and thereafter will be immediately converted into an aggregate of
1,465,412 shares of our common stock. In this prospectus, we refer to this
exchange and subsequent conversion as the "NWT Exchange."
Except as otherwise specified in this prospectus, all information in this
prospectus assumes:
- the occurrence of the NWT Exchange prior to this offering;
- the automatic conversion of all the outstanding shares of our preferred
stock into shares of our common stock immediately prior to the completion
of this offering;
- the filing of our amended and restated certificate of incorporation with
the Delaware Secretary of State;
- the effectiveness of our 2000 stock incentive plan and our 2000 employee
stock purchase plan; and
- no exercise of the underwriters' over-allotment option.
4
<PAGE> 8
SUMMARY FINANCIAL DATA
You should read the following selected financial data in conjunction with
our consolidated financial statements and the related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this prospectus. The consolidated
statements of operations data for the years ended December 31, 1997, 1998 and
1999, and the balance sheet data at December 31, 1998 and 1999, are derived from
our consolidated financial statements which have been audited by Arthur Andersen
LLP and which are included elsewhere in this prospectus. The consolidated
statement of operations data for the period from inception to December 31, 1996
is derived from audited consolidated financial statements not included in this
prospectus. The balance sheet data at March 31, 2000 and consolidated statements
of operations data for the quarters ended March 31, 1999 and 2000 are derived
from unaudited consolidated financial statements which are included elsewhere in
this prospectus. See notes 4 and 14 of the notes to the consolidated financial
statements for an explanation of the number of shares used to compute net loss
per share and pro forma net loss per share. The historical financial information
may not be indicative of our future performance, and results of interim periods
may not be indicative of results that may be expected for any other interim
period or for the year as a whole.
<TABLE>
<CAPTION>
PERIOD FROM QUARTER
APRIL 26, 1996 ENDED
(INCEPTION) TO FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------ -----------------------
1996 1997 1998 1999 1999 2000
-------------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue............................... $ 277 $ 3,354 $ 5,378 $ 9,556 $ 1,273 $ 6,837
Cost of revenue....................... 168 1,136 3,433 11,955 1,076 7,865
---------- ---------- ---------- ---------- ---------- ----------
Gross margin.......................... 109 2,218 1,945 (2,399) 197 (1,028)
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development............ 2,650 2,715 2,333 3,717 457 2,076
Sales and marketing................. 256 2,058 2,685 4,480 391 2,319
General and administrative.......... 656 1,944 2,611 4,663 878 1,066
---------- ---------- ---------- ---------- ---------- ----------
Net loss.............................. (3,462) (4,476) (5,506) (18,469) (1,513) (6,268)
========== ========== ========== ========== ========== ==========
Net loss per common share:
Basic and diluted................... $ (1.11) $ (1.54) $ (2.06) $ (6.13) $ (0.58) $ (2.21)
========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding....................... 3,237,210 3,237,210 3,237,210 3,242,807 3,237,210 3,339,998
========== ========== ========== ========== ========== ==========
Pro forma net loss per share
(unaudited)(1):
Basic and diluted................... $ (2.19) $ (0.21) $ (0.57)
========== ========== ==========
Weighted average shares
outstanding....................... 9,066,423 9,050,760 12,827,825
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------------------
AS
ACTUAL ADJUSTED(2)
------------ -----------
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 14,065
Working capital............................................. 8,395
Total assets................................................ 31,673
Total long-term liabilities................................. 89
Stockholders' equity........................................ (38,341)
</TABLE>
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(1) See notes 4 and 14 of the notes to the consolidated financial statements for
an explanation of the determination of the number of shares and share
equivalents used in computing pro forma per share amounts.
(2) "As adjusted" reflects the application of the net proceeds from the sale of
shares of common stock offered by us at an assumed initial
public offering price of $ per share, after deducting the underwriting
discounts and commissions and the estimated offering expenses. See "Use of
Proceeds" and "Capitalization."
5
<PAGE> 9
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described below and the
other information contained in this prospectus before you decide whether to
invest in our common stock. If any of the following risks actually occurs, our
business, financial condition, results of operations and liquidity could be
materially adversely affected. This may cause the trading price of our common
stock to decline after this offering, and you could lose part or all of the
money you paid to purchase our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED SIGNIFICANT OPERATING LOSSES SINCE OUR INCEPTION AND WE EXPECT
TO CONTINUE TO INCUR SIGNIFICANT NET LOSSES AND NEGATIVE CASH FLOWS FOR THE
FORESEEABLE FUTURE.
We have experienced operating losses and net losses in each quarterly and
annual period since our inception, and we expect to continue to incur
significant losses for the foreseeable future. We incurred net losses of $3.5
million for the eight months ended December 31, 1996, $4.5 million for the year
ended December 31, 1997, $5.5 million for the year ended December 31, 1998 and
$18.5 million for the year ended December 31, 1999. In addition, we had negative
cash flows from operations of $3.5 million for the year ended December 31, 1997,
$5.0 million for the year ended December 31, 1998 and $5.2 million for the year
ended December 31, 1999. As of March 31, 2000, we had an accumulated deficit of
$42.5 million. We expect our operating expenses and negative cash flows will
increase substantially as we continue to attempt to expand our business. We also
expect to significantly increase our product development, sales and marketing,
research and development, manufacturing, and general and administrative expenses
in future periods. We have entered into and expect to continue to enter into
significant customer contracts for the development and supply of our products.
These contracts may place significant demands on our resources. If we are unable
to increase our revenue sufficiently to offset these expected increases in our
expenses, we will not achieve profitability and our operating losses, net losses
and negative cash flows will increase.
BECAUSE WE HAVE BEEN OPERATING ONLY SINCE 1996, OUR HISTORIC OPERATING RESULTS
MAY NOT BE MEANINGFUL TO AN INVESTOR EVALUATING OUR COMPANY.
We launched our first wireless modem in 1996. Because we have a limited
operating history for you to evaluate when considering an investment in our
company, it may be difficult for you to evaluate our current business and
prospects. You must consider the risks, expenses and uncertainties that an early
stage company like ours faces, particularly in the new and rapidly evolving
wireless communications market. These considerations include our ability to
continue to expand our customer base, maintain our current
strategic-relationships and develop new ones, deliver products associated with
our key contracts in a profitable and timely manner, attract and retain
qualified personnel and manage our growth. Because we have only recently
commenced commercial sales of our products, our past results and rates of growth
may not be meaningful, and you should not rely on them as an indication of our
future performance.
IF WE DO NOT CORRECTLY ANTICIPATE DEMAND FOR OUR PRODUCTS, WE MAY NOT BE ABLE TO
ARRANGE COST-EFFECTIVE PRODUCTION OF OUR PRODUCTS OR WE COULD HAVE COSTLY EXCESS
INVENTORIES OR PRODUCTION.
Historically, we have experienced steady increases in demand for our
products and generally have been able to arrange for increased production to
meet that demand. However, the demand for our products depends on many factors
and is difficult to predict. We expect that it will become more difficult to
predict demand for specific products as we introduce and support multiple
wireless communications products and as competition in the market for our
products intensifies. Significant unanticipated fluctuations in demand could
cause the following problems in our operations:
- If demand increases beyond what we anticipate, we would have to rapidly
arrange for increased production at our third-party manufacturers. Our
manufacturers depend on suppliers to provide
6
<PAGE> 10
additional volumes of components. If these suppliers cannot provide the
additional volumes of components, our manufacturers may not be able to
increase production rapidly enough to meet the unexpected demand. Even if
our manufacturers are able to procure enough components, they may not be
able to produce enough of our products to allow us to deliver them in a
timely manner to our customers. The inability of our suppliers to provide
material components or of our manufacturers to increase production
rapidly enough or to sufficient levels could cause us to fail to meet
customer demand.
- Rapid increases in production levels to meet unanticipated demand could
result in higher costs for manufacturing and supply of components and
other expenses. These higher costs could lower our profit margins.
Further, if production is increased rapidly, manufacturing yields could
decline, which may also lower our profit margins.
- If anticipated demand does not develop, we could have excess inventories
of finished products and components, which would reduce our cash flow and
could lead to write-offs of some or all of the excess inventories. Lower
than anticipated demand could also result in manufacturing activity at
our third-party manufacturers below the minimum manufacturing activity
level for which we are financially committed, which could result in
higher costs of goods sold and lower profit margins.
IF WE CANNOT DELIVER PRODUCTS ASSOCIATED WITH OUR SIGNIFICANT CONTRACTS IN A
PROFITABLE AND TIMELY MANNER, OUR REPUTATION COULD BE HARMED AND OUR REVENUE AND
PROFIT MARGINS MAY DECREASE.
Our ability to generate future revenue under many of our significant supply
contracts depends upon our ability to manufacture and supply products that meet
defined specifications. To realize the benefits of these agreements, we will
have to manage the following risks successfully:
- We have priced these contracts on our estimate of future production
costs. If we incur higher costs than anticipated, our gross margins on
these contracts will decrease and these contracts may not be as
profitable as they otherwise may have been.
- If we are unable to commit the necessary resources or are unable to
deliver our products as required by the terms of these contracts, our
customers may cancel the contracts. In that event, we might not recover
any costs that we incurred for research and development, sales and
marketing, production and otherwise and we may incur additional costs as
contractual penalties.
- If we fail to meet a delivery deadline, or a customer determines that the
products we delivered do not meet the agreed-upon specifications, we may
have to reduce the price we can charge for our products, or we may be
liable to pay damages to the customer.
If we are unable to successfully manage these risks or meet required deadlines
in connection with one or more of our key contracts, our reputation could be
harmed and our business, financial condition, results of operations and
liquidity could be materially adversely affected.
IF THE MARKET FOR WIRELESS ACCESS TO THE INTERNET DOES NOT CONTINUE TO GROW, OUR
REVENUE WILL LIKELY DECLINE.
The market for wireless access to the Internet has experienced significant
growth in recent years. However, we cannot assure you that the market for our
existing products will continue to grow, that potential customers within the
industry will adopt our products for integration with their wireless data
communications solutions, or that we will be successful in independently
establishing markets for our products. If the wireless data communications
market fails to grow, or grows more slowly than we currently anticipate, or if
we are unable to establish markets for our new products, our business, financial
condition, results of operations and liquidity could be materially adversely
affected.
7
<PAGE> 11
THE MARKETABILITY OF OUR PRODUCTS MAY SUFFER IF WIRELESS TELECOMMUNICATIONS
OPERATORS DO NOT DELIVER ACCEPTABLE WIRELESS SERVICES.
The success of our business depends on the capacity, affordability and
reliability of wireless data access provided by various wireless
telecommunications operators. Currently, various wireless telecommunications
operators such as Verizon Wireless and AT&T Wireless, either directly or jointly
with us, sell our products in connection with the sale of their wireless data
access services to their customers. Growth in demand for wireless data access
may be limited if wireless telecommunications operators fail to offer services
which customers consider valuable, fail to maintain sufficient capacity to meet
demand for wireless data access, delay the expansion of their wireless networks
and services, fail to offer and maintain reliable wireless network services or
fail to market their services effectively. If any of these occurs, or if for any
other reason the demand for wireless data access fails to grow, sales of our
products will decline and our business, financial condition and results of
operations could be materially adversely affected.
In addition, our future growth depends on the successful deployment of next
generation wireless data networks by third parties, including those networks for
which we currently are developing products. If these next generation networks
are not deployed or widely accepted, or if deployment is delayed, there will be
no market for the products we are developing to operate on these networks. As a
result, we will not be able to recover our research and development expenses and
our financial condition and results of operations and liquidity could be
materially adversely affected.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MANAGE ADDITIONAL GROWTH SUCCESSFULLY.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We have continued to increase the scope of our operations domestically
and have grown our shipments and headcount substantially. At June 30, 2000, we
had a total of approximately 219 employees, representing an increase from 36
employees since March 31, 1997. In addition, we expect to continue to hire a
significant number of employees during the remainder of 2000. Our growth has
resulted, and any future growth will result, in increased responsibilities for
our management and increased demands on our resources. To be successful, we will
need to:
- implement additional management information systems;
- improve our operating, administrative, financial and accounting systems,
procedures and controls;
- maintain and expand our manufacturing capacity;
- continue to train, motivate, manage and retain our existing employees and
attract and integrate new employees; and
- maintain close coordination among our executive, engineering,
professional services, accounting, finance, marketing, sales and
operations organizations.
We may not adequately anticipate all the demands that growth may impose on
our systems, procedures and structure. If we fail to anticipate and respond
adequately to these demands or if we are otherwise unable to manage our growth
effectively, we may not be able to compete effectively and our business,
financial condition, results of operations and liquidity could be materially
adversely affected.
WE CURRENTLY RELY EXCLUSIVELY ON A THIRD-PARTY MANUFACTURER TO PRODUCE OUR
PRODUCTS, AND OUR ABILITY TO CONTROL ITS OPERATIONS IS LIMITED.
We currently outsource all our manufacturing to Sanmina Corporation. In
April 2000, we entered into a manufacturing agreement with GVC Corporation.
Because we only recently entered into this agreement, GVC has not yet begun
production on our products and we have not had any significant working
experience with GVC. We expect GVC to begin manufacturing some of our products
at its facilities in Taiwan in the near future. We expect to continue to depend
exclusively on third-party manufacturers to produce our products in a timely
fashion and at satisfactory quality levels. Neither of these third-party
manufactures is obligated to supply products to us for any specific quantity,
except as may be provided in
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particular purchase orders which we submit to them from time to time. If our
third-party manufacturers experience delays, disruptions, capacity constraints
or quality control problems in their manufacturing operations, then product
shipments to our customers could be delayed, which would negatively impact our
revenues and our competitive position and reputation. The cost, quality and
availability of third-party manufacturing operations are essential to the
successful production and sale of our products. Our reliance on our third-party
manufacturers exposes us to a number of risks which are outside our control:
- unexpected increases in manufacturing costs;
- interruptions in shipments if our third-party manufacturers are unable to
complete production timely;
- inability to control quality of finished products;
- inability to control delivery schedules;
- inability to control production levels and to meet minimum volume
commitments to our customers;
- inability to control manufacturing yield;
- inability to maintain adequate manufacturing capacity; and
- inability to secure adequate volumes of components.
If we are unable to manage successfully our relationships with these
third-party manufacturers, the quality and availability of our products may be
harmed. If Sanmina stopped manufacturing our products or reduced its
manufacturing capacity, we may be unable to replace the lost manufacturing
capacity on a timely basis. In addition, if Sanmina changed the terms under
which it manufactures for us, our manufacturing costs could significantly
increase. We generally place orders with Sanmina at least three months prior to
scheduled delivery of products to our customers. Accordingly, if we inaccurately
anticipate demand for our products, we may be unable to obtain adequate
quantities of components to meet our customers' delivery requirements or we may
accumulate excess inventories. If one or more of these events were to occur, our
business, financial condition and results of operations could be materially
adversely affected by increased costs, reduced revenue and lower profit margins.
IF WE FAIL TO ADOPT NEW TECHNOLOGY AND FAIL TO DEVELOP AND INTRODUCE NEW
PRODUCTS SUCCESSFULLY, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
We operate in a highly competitive environment, characterized by rapidly
changing technology and industry standards. New products based on emerging
technologies or evolving industry standards may quickly render an existing
product obsolete and unmarketable. Our growth and future operating results
depend in part upon our ability to enhance existing products and introduce newly
developed products that conform to prevailing and evolving industry standards,
meet or exceed technological advances in the marketplace, meet changing customer
requirements, achieve market acceptance and respond to our competitors'
products.
The development of new products can be very difficult and requires
technological innovation. The development process is also lengthy and costly. In
addition, wireless communications service providers require that wireless data
systems deployed on their networks comply with their own standards, which may
differ from the standards of other providers. If we fail to anticipate our
customers' needs and technological trends accurately or are otherwise unable to
complete the development of products on time and within budgeted amounts, we
will be unable to introduce new products into the market on a timely basis, if
at all. If we are unsuccessful at developing and introducing new products that
are appealing to consumers, we may be unable to recover our significant research
and development costs and our business, financial condition and results of
operations could be materially adversely affected. In addition, as we introduce
new versions of our products or new products, our current customers may not
require the technological innovations of our new products and may not purchase
them.
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To grow our revenue and achieve profitability, we must retain our current
customers and develop new ones. If consumers view our competitors' products as
superior to ours, or if our products are unable to meet their expectations or
requirements, we may be unable to retain our existing customers or to develop
new customers which would materially and adversely effect our business,
financial condition and results of operations.
THE FLUCTUATION OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Our future quarterly operating results may fluctuate significantly and may
not meet the expectations of securities analysts or investors. If this occurs,
the market price of our stock would likely decline. The following factors may
cause fluctuations in our operating results:
- INCREASES IN OPERATING EXPENSES. We expect that our operating expenses,
particularly our sales and marketing, and our research and development
costs, will increase. We budget our operating expenses based on
anticipated sales, and a significant portion of our sales and marketing,
research and development and general and administrative costs are fixed,
at least in the short term. If revenue decreases and we are unable to
reduce our operating costs quickly and sufficiently, our operating
results could be materially adversely affected. We have entered into and
expect to continue to enter into significant customer contracts for the
development and supply of our products. We expect to incur significant
research and development, sales and marketing and other costs relating to
the development, manufacture and sale of these products prior to
receiving revenue from these contracts.
- PRODUCT MIX. The product mix of our sales affects profit margins in any
given quarter. As our business evolves and the revenue from the product
mix of our sales varies from quarter to quarter, our operating results
will likely fluctuate.
- NEW PRODUCT INTRODUCTIONS. As we introduce new products, the timing of
these introductions will affect our quarterly operating results. We may
have difficulty predicting the timing of new product introductions and
the market acceptance of these new products. If products and services are
introduced earlier or later than anticipated, or if market acceptance is
unexpectedly high or low, our quarterly operating results may fluctuate
unexpectedly. Our quarterly operating results also fluctuate because we
incur substantial upfront research and development, sales and marketing,
production and other costs to support new product introductions prior to
the periods in which we will recognize revenue from new products.
- USE OF SUPPLY CONTRACTS WITH CUSTOMERS. We rely on long-term supply
contracts with our distributor customers. These contracts typically have
minimum purchase volumes, and also typically include a non-binding,
forward-looking rolling forecast and allow the customer to make certain
volume changes within specified periods of time in advance of scheduled
production dates. We use these forecasts for internal planning of
material procurement and required manufacturing capacity, but cannot
predict with certainty incoming orders or changes in forecasts. Our
operating results may fluctuate as a result of deviations from forecasted
amounts, the timing of substantial orders, decreases in orders, failure
to fulfill orders, possible delays or shortages in component supplies, or
possible delays in the manufacture or shipment of current or new
products.
- LENGTHY SALES CYCLE. In addition, the length of time between the date of
initial contact with a potential customer and the execution of a contract
may take several months, and is subject to delays over which we have
little or no control. The sale of our products is subject to delays from
our customers' budgeting, approval and competitive evaluation processes
that typically accompany significant information technology purchasing
decisions. For example, customers frequently begin by evaluating our
products on a limited basis and devote time and resources to testing our
products before they decide whether or not to purchase a product. We
commit substantial time and resources to educate potential customers on
the use and benefits of our products. Customers may also defer orders as
a result of anticipated releases of newer or enhanced products by us or
our competitors. As a result, our ability to anticipate the timing and
volume of sales to specific
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customers is limited, and the delay or failure to complete one or more
large transactions could cause our operating results to vary
significantly from quarter to quarter.
We believe that quarter-to-quarter comparisons of our operating results
will not necessarily be meaningful in predicting our future performance. If we
do not achieve our expected revenue, it is possible that our operating results
will fall below the expectations of market analysts or investors in some future
quarter or quarters. Our failure to meet these expectations would likely
adversely affect the trading price of our common stock.
WE DEPEND UPON A SMALL NUMBER OF OUR CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUE.
A significant portion of our revenue comes from a small number of
customers. Our top ten customers for the year ended December 31, 1999 and the
quarter ended March 31, 2000 accounted for approximately 83.7% and 87.6% of our
revenue, respectively. @Road, OmniSky and AirLink Communications, Inc. accounted
for 23.1%, 14.3% and 9.2% of our revenue, respectively, for the year ended
December 31, 1999. OmniSky, @Road, and Pivot International accounted for 24.2%,
23.6% and 13.0% of our revenue, respectively, for the quarter ended March 31,
2000. We expect that a small number of customers will continue to account for a
substantial portion of our revenue for the foreseeable future. If there is a
downturn in the business of any of these customers, if we are unable to continue
to retain their business, or if we are unable to diversify our customer base,
our revenue may decline.
WE DEPEND ON SOLE SOURCE SUPPLIERS FOR SOME OF OUR COMPONENTS, AND OUR PRODUCT
AVAILABILITY AND SALES WOULD BE HARMED IF THESE SUPPLIERS ARE NOT ABLE TO MEET
OUR DEMAND AND ALTERNATIVE SOURCES ARE NOT AVAILABLE.
Our products contain a variety of components that are procured from a
variety of suppliers. These components include both tooled parts and
industry-standard parts, many of which are similar to parts used in cellular
telephone handsets. The cost, quality and availability of components are
essential to the successful production and sale of our products. Some of these
components come from sole or single source suppliers for which alternative
sources may not be available. If suppliers are unable to meet our demand for
sole source components and if we are unable to obtain an alternative source or
if the price for a substitute is prohibitive, our ability to maintain timely and
cost-effective production of our products would be seriously harmed. Currently,
some components and certain integrated circuits are in short supply world-wide
due to the explosive growth in demand for cellular-telephone handsets. If the
shortage of such components or any other key component persists or worsens, we
may not be able to deliver sufficient quantities of our products to satisfy
demand.
IF WE FAIL TO DEVELOP AND MAINTAIN STRATEGIC ALLIANCES, WE MAY NOT BE ABLE TO
PENETRATE NEW MARKETS.
A key element of our business strategy is to penetrate new markets by
developing new products through strategic alliances with leading companies. We
are currently investing, and plan to continue to invest, significant resources
to develop these relationships. We believe that our success in penetrating new
markets for our products will depend in part on our ability to maintain these
relationships and to cultivate additional or alternative relationships. We
cannot assure you that we will be able to develop additional strategic
alliances, that existing relationships will continue or be successful in
achieving their purposes or that strategic partners will not form competing
arrangements.
ANY SIGNIFICANT REDUCTION IN DEMAND FOR HANDHELD COMPUTING DEVICES OR FOR OUR
PRODUCTS DESIGNED FOR THOSE DEVICES MAY HARM OUR BUSINESS.
A significant amount of our revenue is generated by our products for
handheld computing devices and portable PCs. Although the demand for handheld
computing devices and portable PCs has historically increased at a steady rate,
we cannot assure you that the demand for those devices will continue to grow in
the future. In addition, certain recent models of handheld computing devices and
portable PCs include internal wireless modems installed by the manufacturer
which reduce the need for consumers to purchase
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our wireless modem products. If demand for handheld computing devices and
portable PCs declines or as more consumers purchase handheld computing devices
and PCs with internal wireless modems, the demand for our products would
materially decrease and our revenue would decline.
WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO
INTEGRATE OUR MANAGEMENT TEAM AND RETAIN, HIRE, INTEGRATE AND MANAGE ADDITIONAL
QUALIFIED PERSONNEL.
Many members of our senior management have joined our company within the
last nine months. In particular, John Major, our chief executive officer, joined
us in July 2000. Melvin Flowers, our chief financial officer, and Steven
Schlief, our vice president of operations, joined us February 2000 and July
2000, respectively. As a result, our current management team has worked together
for only a relatively short time and is in the process of integrating as a
management team. Our ability to execute our strategies will depend upon our
ability to integrate these and future managers into our operations, and there
can be no assurance that we will be able to achieve the rapid execution
necessary to fully exploit the market opportunity for our products.
Our success in the future depends in part on the continued contribution of
our executive, technical, engineering, sales, marketing, manufacturing and
administrative personnel. Recruiting and retaining skilled personnel, including
software and hardware engineers, is highly competitive, especially in the San
Diego area. Cash compensation is likely to increase for employees with these
skills whom we hire after our initial public offering because prospective
employees may perceive that the stock option component of our compensation
package is not as valuable as it was prior to the offering. In addition, most of
our senior management and other key personnel are not bound by employment
agreements. If we are not able to attract or retain qualified personnel in the
future, or if we experience delays in hiring required personnel, particularly
qualified engineers, we will not be able to maintain and expand our business.
Over the past year, we have rapidly expanded our direct sales force and
expect to hire additional sales personnel commensurate with our sales
objectives. We may experience difficulty in integrating the new members of our
sales team into our operations. We have limited experience in managing a large,
expanding, geographically dispersed sales force. We cannot be certain that we
will be able to effectively manage the growing sales force in the future or that
newly-hired employees will achieve levels of productivity necessary to sustain
our sales and revenue growth.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
As part of our business strategy, we intend to review on an ongoing basis
acquisition opportunities that we believe would be advantageous to the
development of our business. While we have no current agreements or current
discussions with respect to any acquisitions, we may acquire businesses,
products, or technologies in the future. If we make any acquisitions, we could
take any or all of the following actions, any one of which could adversely
affect our business, financial condition, results of operations and the price of
our common stock:
- issue equity securities that would dilute existing stockholders'
percentage ownership;
- use a substantial portion of our available cash, including proceeds from
this offering;
- incur substantial debt, which may not be available to us on favorable
terms and may adversely affect our liquidity;
- assume contingent liabilities; and
- take substantial charges in connection with the amortization of goodwill
and other intangible assets.
Acquisitions also entail numerous risks, including: difficulties in
assimilating acquired operations, products and personnel; unanticipated costs;
diversion of management's attention from other business concerns; adverse
effects on existing business relationships with suppliers and customers; risks
of entering markets in which we have limited or no prior experience; and
potential loss of key employees from either
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our preexisting business or the acquired organization. We may not be able to
successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future, and our failure to do so could harm our business
and operating results.
OUR FUTURE RESULTS COULD BE HARMED BY RISKS ASSOCIATED WITH INTERNATIONAL SALES
AND OPERATIONS.
We plan to expand our international sales and marketing activities in the
future. We have limited experience in marketing, selling, distributing and
manufacturing our products and services internationally. For the year ended
December 31, 1999, only approximately 12% of our revenue was derived from
international accounts. As we expand international sales, we expect to become
subject to a number of risks which may increase our costs, lengthen our sales
cycle and require significant management attention. These risks associated with
doing business internationally generally include:
- changes in foreign currency exchange rates;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets, and changes in diplomatic
and trade relationships;
- less effective protection of intellectual property;
- trade protection measures and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
- increased expenses associated with customizing products for foreign
countries;
- unexpected changes in regulatory requirements resulting in unanticipated
costs and delays;
- longer collection cycles and difficulties in collecting accounts
receivable; and
- difficulty in managing widespread sales and research and development
operations.
Our sales and invoices are currently denominated in U.S. dollars. In the
future, however, we may record sales and invoice customers in the applicable
local foreign currency. If that occurs, we may be exposed to international
currency fluctuations.
THE WIRELESS COMMUNICATIONS MARKET IS HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO
COMPETE EFFECTIVELY.
We compete in the wireless communications markets. The markets for wireless
data access products are highly competitive and we expect competition to
increase. Many of our competitors or potential competitors have significantly
greater financial, technical and marketing resources than we do. These
competitors may be able to respond more rapidly than we can to new or emerging
technologies or changes in customer requirements. They also may devote greater
resources than we do to the development, promotion and sale of their products.
Many of our competitors have more extensive customer bases and broader
customer relationships and industry alliances that they could leverage to
establish relationships with many of our current and potential customers. These
companies also have significantly more established customer support and
professional services organizations. In addition, these companies may adopt
aggressive pricing policies or offer more attractive terms to customers, may
bundle their competitive products with broader product offerings and may
introduce new products and enhancements. Current and potential competitors may
establish cooperative relationships among themselves or with third parties to
enhance their products. As a result, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
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Our wireless communications products compete with a variety of devices,
including wireless modems, traditional wired modems, wireless handsets, wireless
handheld computing devices and other wireless devices. Our current and potential
competitors include:
- Wireless modem manufacturers, such as Sierra Wireless, Uniden, NextCell
and Tellus;
- Traditional wired modem manufacturers, such as 3Com and Xircom;
- Wireless device manufacturers, such as Handspring, Palm and Research in
Motion;
- Wireless handset manufacturers and next generation wireless technology
providers, such as Ericsson, Motorola and Nokia; and
- Non-CDPD private communications network providers, such as Emotiant, Bell
South and Metricom.
We expect our competitors to continue to improve the performance of their
current products and to introduce new products, services and technologies.
Successful new product introductions or enhancements by our competitors could
reduce our sales and the market acceptance of our products, cause intense price
competition and make our products obsolete. To be competitive, we must continue
to invest significant resources in research and development, sales and
marketing, and customer support. We cannot be sure that we will have sufficient
resources to make these investments or that we will be able to make the
technological advances necessary to remain competitive. Increased competition
could result in price reductions, fewer customer orders, reduced margins and
loss of our market share. Our failure to compete successfully could seriously
harm our business, financial condition and results of operations.
OUR PRODUCTS MAY CONTAIN ERRORS OR DEFECTS WHICH COULD DECREASE THEIR MARKET
ACCEPTANCE.
Our products are technologically complex and must meet stringent user
requirements. We must develop our software and hardware products quickly to keep
pace with the rapidly changing and technologically advanced wireless
communications market. Products as sophisticated as ours may contain undetected
errors or defects, especially when first introduced or when new models or
versions are released. Our products may not be free from errors or defects after
commercial shipments have begun, which could result in the rejection of our
products, damage to our reputation, lost revenues, diverted development
resources, and increased customer service and support costs and warranty claims.
WE COULD INCUR SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT.
Our success depends in large part on our proprietary technology. We rely on
a combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. We may be required to spend significant resources to
monitor and police our intellectual property rights. Before we do so, we may not
be able to detect infringement and we may lose competitive position in the
market. Intellectual property rights also may be unavailable or limited in some
foreign countries, which could make it easier for competitors to capture market
share. The unauthorized use of our technology by competitors could have a
material adverse effect on our ability to sell our products in some markets.
Although we are not currently involved in any intellectual property
litigation, we may be a party to litigation in the future either to protect our
intellectual property or as a result of an alleged infringement of others'
intellectual property. These claims and any resulting litigation could subject
us to significant liability for damages and could cause our proprietary rights
to be invalidated. Litigation, regardless of the merits of the claim or outcome,
would likely be time-consuming and expensive to resolve and would divert
management time and attention. Any potential intellectual property litigation
could also force us to do one or more of the following:
- stop using the challenged intellectual property and refrain from selling
our products or services that incorporate it;
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- obtain a license to use the challenged intellectual property or to sell
products or services that incorporate it, which license may not be
available on reasonable terms, or at all; and
- redesign those products or services that are based on or incorporate the
challenged intellectual property.
If we are forced to take any of the foregoing actions, we may be unable to
manufacture and sell our products, and our business, financial condition and
results of operations may be materially adversely affected.
WE MAY NOT BE ABLE TO DEVELOP PRODUCTS THAT COMPLY WITH APPLICABLE GOVERNMENT
REGULATIONS.
Our products must comply with government regulations. For example, in the
United States, the Federal Communications Commission (FCC) regulates many
aspects of communications devices, including radiation of electromagnetic
energy, biological safety and rules for devices to be connected to the telephone
networks. Modems must be approved under the above regulations by the FCC prior
to being offered for sale. Additionally, we cannot anticipate the effect that
changes in government regulations may have on our ability to develop products in
the future. Failure to comply with existing or evolving government regulations
or to obtain timely regulatory approvals or certificates could materially
adversely affect our business, financial condition and results of operations.
--------------------------------
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY SHARES BECOMING AVAILABLE FOR
SALE UNDER RULE 144 AND AS A RESULT OF REGISTRATION RIGHTS AGREEMENTS WE HAVE
ENTERED INTO WITH SOME OF OUR INVESTORS.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock under Rule 144, or the
perception that these sales could occur, could cause our common stock price to
fall and could impair our ability to raise capital through the sale of
additional equity securities. In addition, we have entered into registration
rights agreements with some investors that entitle these investors to have their
shares registered for sale in the public market. The exercise of these rights
could affect the market price of our common stock. See "Shares Eligible for
Future Sale" for further information concerning potential sales of our shares
after this offering, including information concerning Rule 144 and the
registration rights we have granted.
OUR STOCK PRICE MAY BE VOLATILE, AND WE CANNOT ASSURE YOU THAT OUR STOCK PRICE
WILL NOT DECLINE.
The market price of our common stock could be subject to significant
fluctuations after this offering as a result of factors many of which are beyond
our control. Among the factors that could affect our stock price are:
- quarterly variations in our operating results;
- changes in revenue or earnings estimates or publication of research
reports by analysts;
- speculation in the press or investment community about our business or
the wireless communications industry generally;
- changes in market valuations of similar companies and stock market price
and volume fluctuations generally;
- strategic actions by us or our competitors such as acquisitions or
restructurings;
- regulatory developments;
- additions or departures of key personnel;
- general market conditions; and
- domestic and international economic factors unrelated to our performance.
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The stock markets in general, and the markets for high technology stocks in
particular, have experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common stock. We
cannot assure you that you will be able to resell your shares at or above the
initial public offering price, which will be determined by negotiations between
the representatives of the underwriters and us.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL IN OUR COMPANY.
Our certificate of incorporation and bylaws contain anti-takeover
provisions that could prevent or delay an acquisition of our business at a
premium price. These provisions:
- provide for a staggered board;
- prevent stockholders from taking action by written consent;
- limit the persons who may call special meetings of stockholders;
- authorize our board of directors to approve the issuance of undesignated
preferred stock without stockholder approval; and
- provide for automatic acceleration of option vesting upon the occurrence
of certain events.
In addition, Delaware law imposes some restrictions on mergers and other
business combinations between us and any holder of 15% or more of our common
stock.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF YOUR SHARES.
The initial public offering price per share of our common stock is
substantially higher than the average net tangible book value per share of
common stock. As a result, if you purchase shares of common stock in this
offering your interest will suffer immediate and substantial dilution. This
dilution will reduce the net tangible book value of your shares since any shares
of our common stock that you purchase in this offering will be at a
substantially higher per share price than the current average net tangible book
value per share of our common stock. The dilution will be $ per share in the
net tangible book value of the common stock from the initial public offering
price. If additional shares are sold by the underwriters following exercise of
their over-allotment option, or if outstanding options or warrants to purchase
shares of common stock are exercised, any shares of our common stock that you
may purchase in this offering will be subject to further dilution. As a result
of this dilution, in the event of a liquidation, common stockholders purchasing
stock in this offering may receive significantly less than the full purchase
price that they paid for the shares they purchased in this offering.
OUR DIRECTORS, EXECUTIVE OFFICERS AND EXISTING STOCKHOLDERS AND THEIR AFFILIATES
WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS OFFERING, AND THEIR
INTERESTS MAY DIFFER FROM AND CONFLICT WITH YOURS.
Upon completion of this offering, our executive officers, directors and
principal stockholders will beneficially own, in total, % of our outstanding
common stock. As a result, these stockholders, whose interests may be different
from and may conflict with yours, will be able to influence matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This could have the effect of delaying or
preventing a change of control of our company or otherwise cause us to take
action that may not be in the best interests of all stockholders, either of
which in turn could reduce the market price per share of our common stock.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that relate to future events or
to our future business or performance. In some cases, you can identify
forward-looking statements by words such as "anticipates, " "believes," plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions. Our actual results
could differ materially from the results contemplated by these forward-looking
statements due to a number of factors, including those discussed in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this prospectus. This prospectus also
contains forward-looking statements attributed to third parties relating to
their estimates regarding the growth of our markets. Forward-looking statements
are subject to known and unknown risks, uncertainties and other factors that may
cause our actual results, as well as those of the markets we serve, levels of
activity, performance, achievements and prospects to be materially different
from those expressed or implied by the forward-looking statements. These risks,
uncertainties and other factors include, among others, those identified in "Risk
Factors" and elsewhere in this prospectus. Except as required by law, we
undertake no obligation to update publicly any forward-looking statement for any
reason, even if new information becomes available or other events occur.
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USE OF PROCEEDS
We estimate that the net proceeds to us from our sale in this offering of
shares of common stock at an assumed initial public offering price of $ per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses, will be $ . If the underwriters' exercise in
full their over-allotment option, we estimate that our net proceeds will be
$ .
We currently intend to use the net proceeds of this offering for working
capital and general corporate purposes, including increased research and
development and sales and marketing expenditures. We may also use a portion of
the net proceeds of this offering to acquire or invest in complementary
businesses or technologies, or complementary services or products, although we
have no current agreements or negotiations with respect to any such
transactions.
As of the date of this prospectus, we have not allocated any specific
amount of the net proceeds for the purposes listed above. Management will
maintain broad discretion in the allocation of the net proceeds of this
offering. You will not have the opportunity to evaluate the economic, financial
or other information on which we base our decisions on how to use the proceeds.
Pending our use of the net proceeds of this offering, we intend to invest the
net proceeds from the offering in interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate declaring or paying any
cash dividends in the foreseeable future. The declaration and payment of
dividends, if any, will be at the discretion of our board of directors, after
taking into account various factors our board of directors deems relevant,
including our financial condition, operating results, current and anticipated
cash needs, expansion plans and debt covenants. Our revolving line of credit
with Venture Banking Group, a division of Cupertino National Bank, currently
prohibits us from paying dividends without its prior approval.
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CAPITALIZATION
The following table sets forth our consolidated total capitalization as of
March 31, 2000. You should read this table in conjunction with "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the notes to our financial statements appearing elsewhere in this
prospectus. This information is presented:
- on an actual basis at March 31, 2000;
- on a pro forma basis at March 31, 2000 after giving effect to the
automatic conversion of all the outstanding shares of our preferred stock
and minority interest shares outstanding at March 31, 2000 and after
giving effect to our receipt of the net proceeds of $33,560,000 from the
sale in June and July 2000 of a total of 1,964,050 shares of our Series D
preferred stock; and
- on a pro forma as adjusted basis to give effect to the receipt of the net
proceeds from the sale by us of shares of common stock in this offering
at an assumed price of $ per share and after deducting underwriting
discounts and commissions and offering expenses payable by us.
<TABLE>
<CAPTION>
MARCH 31, 2000
(UNAUDITED)
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS) -------- --------- -----------
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 14,065 $ 14,065
======== ========
Capital lease obligations, current portion................ $ 74 $ 74
Capital lease obligations, net of current portion......... 89 89
-------- --------
Total indebtedness........................................ 163 163
-------- --------
Convertible and redeemable minority interest.............. 4,457
--------
Convertible and redeemable preferred stock................ 44,833
--------
Stockholders' equity (deficit):
Common stock............................................ 3 15
Additional paid in capital.............................. 5,131 87,969
Deferred stock compensation............................. (986) (986)
Accumulated deficit..................................... (42,489) (42,489)
-------- --------
Total stockholders' equity (deficit)................. (38,341) 44,509
-------- --------
Total capitalization................................. $(11,112) $ 44,672
======== ========
</TABLE>
---------------
The common stock outstanding as shown above is based on shares outstanding as of
March 31, 2000, and excludes:
- 2,900,731 shares of common stock that could be issued upon the exercise
of options outstanding as of July 25, 2000;
- 3,539,305 shares of common stock that could be issued upon the exercise
of warrants outstanding as of July 25, 2000;
- 1,099,269 shares of common stock that could be issued in the future under
our stock option plans as of July 25, 2000;
- 500,000 shares of common stock that could be issued in the future under
our 2000 employee stock purchase plan.
19
<PAGE> 23
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. The pro forma net tangible book value of
our common stock as of June 30, 2000 was approximately $ million or $ per
share of common stock. Pro forma net tangible book value per share represents
the dollar amount of our total tangible assets reduced by the dollar amount of
our total liabilities and divided by the total number of shares of our common
stock outstanding at June 30, 2000, after giving effect to the sale of shares of
our Series D preferred stock on June 30, 2000 and July 14, 2000.
After giving effect to the receipt of the estimated net proceeds from this
offering, based upon an assumed initial public offering price of $ per
share, and after deducting underwriting discounts and commissions and estimated
offering expenses and the adjustments, the pro forma net tangible book value of
our common stock as of June 30, 2000 would have been $ or $ per
share. This represents an immediate increase in net tangible book value of $ per
share to existing stockholders and an immediate dilution of $ per share to
new investors purchasing shares at the initial public offering price. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Estimated initial public offering price per share........... $
Pro forma net tangible book value per share as of March
31, 2000............................................... $
Increase per share attributable to new investors..........
--------
Pro forma as adjusted net tangible book value after the
offering..................................................
--------
As adjusted dilution per share to new investors............. $
========
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option,
our pro forma as adjusted net tangible book value at June 30, 2000 would have
been approximately $ per share, representing an immediate increase in net
tangible book value of $ per share to our existing stockholders and an
immediate and substantial dilution in net tangible book value of $ per share
to new investors.
The following table summarizes, at June 30, 2000, on a pro forma basis, the
total number of shares purchased from us, and consideration paid to us and the
average price per share paid by existing holders of common stock and by new
investors purchasing shares of common stock in this offering at an assumed
initial public offering price of $ per share, before deducting the estimated
underwriting discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------ ----------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................. % $ % $
New investors..........................................
-------- ----- ------- -----
Total................................................ % %
======== ===== ======= =====
</TABLE>
The foregoing discussion and table assume no exercise of the underwriters'
overallotment option and exclude the effect of:
- 2,900,731 shares of common stock that could be issued upon the exercise
of options outstanding as of July 25, 2000;
- 3,539,305 shares of common stock that could be issued upon exercise of
warrants outstanding as of July 25, 2000;
- 1,099,269 shares of common stock that could be issued in the future under
our stock option plans as of July 25, 2000; and
- 500,000 shares of common stock that could be issued in the future under
our 2000 employee stock purchase plan.
To the extent that any of our these options or warrants are exercised or shares
are issued, there will be further dilution to new public investors. See
"Capitalization," "Management -- Stock Plans," "Description of Securities
Stock," and notes 8 and 9 of notes to consolidated financial statements
contained elsewhere in this prospectus.
20
<PAGE> 24
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our consolidated financial statements and notes to our consolidated financial
statements and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," which are included elsewhere in this prospectus. The
consolidated statement of operations data for each of the years ended December
31, 1997, 1998 and 1999, and the balance sheet data at December 31, 1998 and
1999 are derived from our consolidated financial statements which have been
audited by Arthur Andersen LLP and which are included elsewhere in this
prospectus. The consolidated statement of operations data for the period from
inception to December 31, 1996 and the balance sheet data at December 31, 1996
and 1997 are derived from audited consolidated financial statements not included
in this prospectus. The consolidated balance sheet data at March 31, 1999 is
derived from unaudited consolidated financial statements not included in this
prospectus. The consolidated balance sheet data at March 31, 2000 is derived
from unaudited consolidated financial statements included elsewhere in this
prospectus. See notes 4 and 14 of the notes to consolidated financial statements
for an explanation of the number of shares used to compute net loss per share
and pro forma net loss per share. The historical financial information may not
be indicative of our future performance and results of interim periods may not
be indicative of results that may be expected for any other interim period or
for the year as a whole.
<TABLE>
<CAPTION>
PERIOD FROM QUARTER ENDED
APRIL 26, 1996 YEAR ENDED DECEMBER 31, MARCH 31,
(INCEPTION) TO ------------------------------------ ------------------------
DECEMBER 31, 1996 1997 1998 1999 1999 2000
----------------- ---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue...................... $ 277 $ 3,354 $ 5,378 $ 9,556 $ 1,273 $ 6,837
Cost of revenue.............. 168 1,136 3,433 11,955 1,076 7,865
---------- ---------- ---------- ---------- ---------- -----------
Gross margin................. 109 2,218 1,945 (2,399) 197 (1,028)
---------- ---------- ---------- ---------- ---------- -----------
Operating expenses:
Research and development... 2,650 2,715 2,333 3,717 457 2,076
Sales and marketing........ 256 2,058 2,685 4,480 391 2,319
General and
administrative........... 656 1,944 2,611 4,663 878 1,066
---------- ---------- ---------- ---------- ---------- -----------
Total operating
expenses............... 3,562 6,717 7,629 12,860 1,726 5,461
---------- ---------- ---------- ---------- ---------- -----------
Loss from operations......... (3,453) (4,499) (5,684) (15,259) (1,529) (6,489)
Other income (expense) net... (9) 23 178 (3,210) 16 221
---------- ---------- ---------- ---------- ---------- -----------
Net loss..................... $ (3,462) $ (4,476) $ (5,506) $ (18,469) $ (1,513) $ (6,268)
========== ========== ========== ========== ========== ===========
Net loss per common share:
Basic and diluted.......... $ (1.11) $ (1.54) $ (2.06) $ (6.13) $ (0.58) $ (2.21)
========== ========== ========== ========== ========== ===========
Weighted average shares
outstanding.............. 3,237,210 3,237,210 3,237,210 3,242,807 3,237,210 3,339,998
========== ========== ========== ========== ========== ===========
Pro forma net loss per share
(unaudited)(1):
Basic and diluted.......... $ (2.19) $ (0.21) $ (0.57)
========== ========== ===========
Weighted average shares
outstanding.............. 9,066,423 9,050,760 12,827,825
========== ========== ===========
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------- -----------
1996 1997 1998 1999 2000
------- ------- -------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 1,262 $ 1,927 $ 3,497 $ 25,455 $ 14,065
Working capital.................................... 274 937 3,383 15,769 8,395
Total assets....................................... 3,065 3,879 6,184 38,118 31,673
Long-term obligations, net of current portion...... -- -- -- 106 89
Convertible and redeemable preferred stock......... 4,316 9,769 14,812 43,805 44,833
Common stock....................................... 3 3 3 3 3
Accumulated deficit................................ (3,462) (7,937) (15,249) (35,122) (42,489)
Stockholders' equity (deficit)..................... (752) (1,100) (14,625) (31,128) (38,341)
</TABLE>
---------------
(1) See notes 4 and 14 of the notes to the consolidated financial statements for
an explanation of the determination of the number of shares and share
equivalents used in computing pro forma per share amounts.
22
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our consolidated financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
This prospectus contains certain statements of a forward-looking nature relating
to future events or our future financial performance. We caution prospective
investors that such statements involve risks and uncertainties, and that actual
events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this prospectus, including the matters set forth under the caption
"Risk Factors" contained elsewhere in this prospectus which could cause actual
results to differ materially from those indicated by such forward-looking
statements.
OVERVIEW
We are a leading provider of wireless data access solutions. Since our
inception in April 1996, we have been focused on the development and
commercialization of two-way wireless data communications technologies. We
launched our NRM-6812 OEM module in September 1996, our Sage and first Minstrel
products in 1997, our Minstrel II Wireless Modem and Expedite Wireless Modem in
April 1999 and our Merlin Type II Wireless Modem in August 1999. In addition, we
announced our Minstrel V Wireless Modem for the Palm V handheld computing device
in October 1999 and our Lancer 3W Modem in April 2000.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our product
development, sales and marketing and professional services departments, and to
establish our administrative infrastructure. Historically, our operating
expenses have exceeded the revenue generated by our products and services. As a
result, we have incurred net operating losses in each quarter since inception
and had an accumulated deficit of $42.5 million as of March 31, 2000. In
addition, we have increased our number of employees and independent contractors
from 56 as of December 31, 1998 to 219 as of June 30, 2000.
We have entered into, and expect to continue to enter into, significant
customer contracts for the development and supply of our products. These
contracts may place significant demands on our resources. As a result, we expect
research and development, sales and marketing and other costs relating to the
development, manufacture and sale of our products to increase. We also expect to
continue to incur these expenses in periods prior to recognizing revenue from
these contracts.
Revenue. Our revenue has been generated from the sale of wireless modems to
wireless telecommunications operators, wireless data content and service
providers, resellers and OEM customers. We also generate revenue from the
systems activation and integration services we provide prior to shipping;
through March 31, 2000, such revenue has not been significant. Revenue from
product sales and services is recognized upon the later of transfer of title or
upon shipment of the product to the customer and rendering services. We
establish reserves for estimated product returns and allowances in the period in
which revenue is recognized.
Cost of Revenue. Our cost of revenue typically consists of material
components, labor for system assembly and testing, product activations,
technical support, warranty costs and overhead expenses. We currently outsource
our manufacturing operations to third parties to minimize our capital
expenditures and to benefit from contract manufacturer economies of scale.
Gross Margin. Our overall gross margin, or revenue less cost of revenue,
may fluctuate from quarter to quarter as a result of the availability and costs
of components, shifts in product mix, the proportion of direct and indirect
sales, anticipated decreases in average selling prices and our ability to manage
manufacturing costs.
Research and Development. Our research and development expenses consist of
employee compensation, related personnel expenses, consultant fees and prototype
expenses related to the design, development,
23
<PAGE> 27
testing and enhancement of our products. Our research and development costs are
expensed as incurred. We believe that continued investment in research and
development is critical to achieving our strategic product development and cost
reduction objectives and, as a result, expect these expenses to continue to
increase significantly in absolute dollars in the future.
Sales and Marketing. Our sales and marketing expenses consist of employee
compensation, sales commissions and related expenses for personnel engaged in
marketing, sales and field service support and advertising and promotional
materials. We anticipate that sales and marketing expenses will increase in
future quarters as we increase sales and marketing operations, expand
distribution channels, increase the number of sales and marketing personnel and
increase our international sales efforts.
General and Administrative. Our general and administrative expenses consist
of employee compensation and related personnel expenses, recruiting and
relocation expenses, professional and consulting fees, and other general
corporate expenses. We expect these expenses to increase as we increase the
number of personnel and incur additional costs related to our operation as a
public company.
Stock-Based Compensation Expense. We recorded deferred compensation expense
of $1.4 million as a result of stock options granted below fair value for
accounting purposes through March 31, 2000. This amount represents the
difference between the exercise price of these stock option grants and the
estimated fair value of the underlying common stock at the time of grant. Of
this amount, we have amortized approximately $444,000 through March 31, 2000.
The remaining $986,000 will be amortized over the remaining vesting period of
the options, which is generally four years.
RESULTS OF OPERATIONS
The following table sets forth our consolidated statements of operations
expressed as a percentage of revenue for the periods indicated. Data for the
period from inception through December 31, 1996 is not presented because revenue
for that period was not material.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ---------------
1997 1998 1999 1999 2000
------ ------ ------ ------ -----
(AS A PERCENT OF REVENUE)
<S> <C> <C> <C> <C> <C>
Revenue...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.............................. 33.9 63.8 125.1 84.5 115.0
------ ------ ------ ------ -----
Gross margin................................. 66.1 36.2 (25.1) 15.5 (15.0)
------ ------ ------ ------ -----
Operating expenses:
Research and development................... 80.9 43.4 38.9 35.9 30.4
Sales and marketing........................ 61.4 49.9 46.9 30.7 33.9
General and administrative................. 58.0 48.5 48.8 69.0 15.6
------ ------ ------ ------ -----
Total operating expenses................ 200.3 141.8 134.6 135.6 79.9
------ ------ ------ ------ -----
Loss from operations......................... (134.2) (105.6) (159.7) (120.1) (94.9)
------ ------ ------ ------ -----
Interest income.............................. 0.7 3.3 0.5 1.3 3.1
Interest expense............................. -- -- (34.2) -- (0.2)
Other, net................................... -- -- 0.1 -- 0.3
------ ------ ------ ------ -----
Net loss..................................... (133.5)% (102.3)% (193.3)% (118.8)% (91.7)%
====== ====== ====== ====== =====
</TABLE>
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
Revenue. Revenue for the quarter ended March 31, 2000 increased $5.5
million, or 437%, to $6.8 million compared to $1.3 million for the same period
in 1999. In 2000, sales of existing products increased due to the overall
increase in demand for wireless products. New products contributed to the
overall sales increases with the introduction of the Expedite Wireless Modem in
April 1999, the Merlin Type II Wireless Modem in August 1999 and the Minstrel V
Wireless Modem in October 1999.
24
<PAGE> 28
Cost of Revenue. Our cost of revenue for the quarter ended March 31, 2000
increased $6.8 million, or 631%, to $7.9 million compared to $1.1 million in the
same period in 1999. The increase in cost of revenue was primarily the result of
increased units sold, start-up costs associated with the production of new
products, increases in the cost of raw materials and costs associated with
changing manufacturers and moving production during the latter half of 1999.
Gross Margin. Our gross margin for the quarter ended March 31, 2000
decreased by $1.2 million, or 622%, to negative $1.0 million compared to
$200,000 in the same period in 1999. This decrease was primarily the result of
the manufacturing changes and cost increases described above.
Research and Development. Our research and development expenses for the
quarter ended March 31, 2000 increased $1.6 million, or 354%, to $2.1 million
compared to $500,000 in the same period in 1999. The increase was primarily due
to an increase in the number of personnel and to an increase in the number of
projects in development.
Sales and Marketing. Sales and marketing expenses for the quarter ended
March 31, 2000 increased $1.9 million, or 493%, to $2.3 million compared to
$400,000 in the same period in 1999. The increase was the result of increased
headcount, expanded advertising, increased participation in trade shows and
increased expenditures to support new products and expand distribution channels.
General and Administrative. General and administrative expenses for the
quarter ended March 31, 2000 increased $200,000, or 21.4%, to $1.1 million
compared to $900,000 in the same period in 1999. Included in general and
administrative expenses is $109,000 of non-cash stock-based compensation expense
(the difference between the exercise price of options granted and the estimated
fair value of the common stock underlying those options on the date of grant) in
2000 compared to $69,000 in 1999.
Interest Income. Interest income for the quarter ended March 31, 2000
increased $198,000 to $215,000 compared to $17,000 in 1999. The increase was due
to income on the proceeds from the Series C financing which closed on December
31, 1999.
Net Loss. The net loss for the quarter ended March 31, 2000 increased $4.8
million, or 314%, to $6.3 million compared to $1.5 million in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenue. Revenue for 1999 increased $4.2 million, or 78%, to $9.6 million
compared to $5.4 million in 1998. In 1999, sales of existing products increased
due to the overall increase in demand for wireless products. New products also
contributed to the overall sales with the introduction of the Expedite Wireless
Modem in April 1999 and the Merlin Type II Wireless Modem in August 1999.
Cost of Revenue. Our cost of revenue for 1999 increased $8.5 million, or
248%, to $12.0 million compared to $3.4 million in 1998. The increase in cost of
revenue was primarily the result of increased units sold, start-up costs
associated with the production of new products and costs associated with
changing manufacturers and moving production during the year. Prior to 1999, we
used offshore contract manufacturers. In the first quarter of 1999, our
principal manufacturer experienced financial difficulties as a result of the
general downturn in the Asian economies and, as a result, ceased production of
our finished goods. To maintain production levels in the short-term, we and our
new manufacturer were forced to purchase raw materials for immediate delivery at
premium prices. We also incurred substantial start-up costs associated with
commencing production at our new manufacturer's facility.
Gross Margin. Gross margin for 1999 decreased by $4.3 million, or 223%, to
negative $2.4 million compared to $1.9 million in 1998. This decrease was
primarily the result of the manufacturing changes and cost increases described
above.
Research and Development. Research and development expenses for 1999
increased $1.4 million, or 59%, to $3.7 million compared to $2.3 million in
1998. The increase was primarily due to an increase in the number of personnel
and to an increase in the number of projects in development.
25
<PAGE> 29
Sales and Marketing. Sales and marketing expenses for 1999 increased $1.8
million, or 67%, to $4.5 million compared to $2.7 million in 1998. The increase
was the result of increased headcount, expanded advertising, increased
participation in trade shows and expenditures to support new products and to
expand our distribution channels.
General and Administrative. General and administrative expenses for 1999
increased $2.1 million, or 79%, to $4.7 million compared to $2.6 million in
1998. This increase was due to an increase in the number of personnel from 1998
to 1999 and our relocation of the administrative functions from Calgary to San
Diego. We recorded $220,000 in non-cash compensation expense (the difference
between the exercise price of options granted and the estimated fair value of
the common stock underlying those options on the date of grant) in 1999 compared
to $115,000 in 1998.
Interest Expense. Interest expense amounted to $3.3 million for 1999 due to
the non-cash charges we incurred in connection with the convertible subordinated
debentures that we issued and sold in 1999 and the related common stock warrants
issued in connection with these debentures. We did not incur any interest
expense during 1998.
Interest Income. Interest income for 1999 decreased $131,000, or 74%, to
$47,000 compared to $178,000 in 1998. The decrease was due to lower average cash
invested in 1999 compared to 1998.
Net Loss. The net loss for the year ending December 31, 1999 increased
$13.0 million, or 235%, to $18.5 million compared to $5.5 million in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Revenue. Revenue for 1998 increased $2.0 million, or 60%, to $5.4 million
compared to $3.4 million in 1997. This increase reflects the introduction of the
original Minstrel, Sage and Contact products in late 1997. Shipments of these
new products accounted for $1.5 million of the increase in our 1998 revenue. Our
existing products accounted for the remaining increase.
Cost of Revenue. Our cost of revenue for 1998 increased $2.3 million, or
202%, to $3.4 million compared to $1.1 million in 1997. The increase in cost of
revenue was the result of the costs of increased units sold and the start-up
costs associated with the production of new products.
Gross Margin. Gross margin for 1998 decreased by $300,000, or 12%, to $1.9
million compared to $2.2 million in 1997. This decrease was primarily the result
of the factors described above.
Research and Development. Research and development expenses for 1998
decreased $400,000, or 14%, to $2.3 million compared to $2.7 million in 1997.
Fiscal year 1997 included approximately $500,000 for research and development
costs to further projects we commenced in 1996.
Sales and Marketing. Sales and marketing expenses for 1998 increased
$600,000, or 30%, to $2.7 million compared to $2.1 million in 1997. The increase
was the result of increased headcount, expanded advertising and increased
participation in trade shows. During 1998, we also increased marketing
expenditures to support new products and expand our distribution channels.
General and Administrative. General and administrative expenses for 1998
increased $700,000, or 34%, to $2.6 million compared to $1.9 million in 1997.
This increase was primarily due to additions to our senior management team and
administrative personnel. In addition, we recorded $115,000 in non-cash
compensation expense in 1998 compared to none in 1997.
Interest Income. Interest income for 1998 increased $155,000 to $178,000
compared to $23,000 in 1997. This increase was due to additional interest income
earned on our increased average cash and short-term investment balances.
Net Loss. The net loss for the year ending December 31, 1998 increased $1.0
million or 23% to $5.5 million compared to $4.5 million in 1997.
26
<PAGE> 30
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our historic unaudited quarterly
consolidated statements of operations data for each of the five fiscal quarters
ended March 31, 2000, and such information expressed as a percentage of our
revenue. This unaudited quarterly information has been prepared on the same
basis as the annual audited financial statements appearing elsewhere in this
prospectus, and includes all necessary adjustments, consisting only of normal
recurring adjustments, that we consider necessary to present fairly the
financial information for the quarters presented. The quarterly data should be
read in conjunction with the audited consolidated financial statements and the
notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue................................. $ 1,273 $ 822 $ 3,825 $ 3,636 $ 6,837
Cost of revenue......................... 1,076 1,452 2,594 6,834 7,865
------- ------- ------- ------- -------
Gross margin............................ 197 (630) 1,231 (3,198) (1,028)
------- ------- ------- ------- -------
Operating expenses:
Research and development.............. 457 578 891 1,792 2,076
Sales and marketing................... 391 988 1,175 1,925 2,319
General and administrative............ 878 936 1,957 892 1,066
------- ------- ------- ------- -------
Total operating expense................. 1,726 2,502 4,023 4,609 5,461
------- ------- ------- ------- -------
Loss from operations.................... (1,529) (3,132) (2,792) (7,807) (6,489)
Interest income......................... 17 8 8 15 215
Interest expense........................ -- -- (1,268) (2,000) (11)
Other, net.............................. (1) -- -- 12 17
------- ------- ------- ------- -------
Net loss................................ $(1,513) $(3,124) $(4,052) $(9,780) $(6,268)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUE:
Revenue.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.......................... 84.5 177.0 67.8 187.9 115.0
------ ------- ------ ------ -----
Gross margin............................. 15.5 (77.0) 32.2 (87.9) (15.0)
------ ------- ------ ------ -----
Operating expenses:
Research and development............... 35.9 70.3 23.3 49.3 30.4
Sales and marketing.................... 30.7 120.3 30.7 52.9 33.9
General and administrative............. 69.0 113.9 51.2 24.5 15.6
------ ------- ------ ------ -----
Total operating expense.................. 135.6 304.5 105.2 126.7 79.9
------ ------- ------ ------ -----
Loss from operations..................... (120.1) (381.5) (73.0) (214.6) (94.9)
Interest income.......................... 1.3 1.0 0.2 0.4 3.1
Interest expense......................... -- -- (33.2) (55.0) (0.2)
Other, net............................... -- -- -- 0.3 0.3
------ ------- ------ ------ -----
Net loss................................. (118.8)% (380.5)% (106.0)% (268.9)% (91.7)%
====== ======= ====== ====== =====
</TABLE>
We have experienced and expect to continue to experience significant
fluctuations in quarterly operating results. We believe that quarter-to-quarter
comparisons of our operating results should not be relied upon as an indication
of our future performance.
See "Risk Factors -- Because we have been operating only since 1996, our
historic operating results may not be meaningful to an investor evaluating our
company" and " -- The fluctuation of our quarterly operating results may cause
our stock price to decline."
27
<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our operations primarily through
private sales of our equity securities and the issuance of debt instruments, and
to a lesser extent, capital lease arrangements and borrowings under various
lines of credit. To date, net proceeds from these transactions have totaled
approximately $78 million. At June 30, 2000 we had approximately $32.7 million
in cash and cash equivalents.
For the years ended December 31, 1997, 1998 and 1999, we used net cash in
operating activities of $3.5 million, $5.0 million and $5.2 million,
respectively. Our operating activities included major uses of cash to fund our
1999 net loss of $18.5 million which included a $3.3 million non-cash charge for
interest expenses related to the warrants we issued with our convertible
subordinated debentures. During 1999, we used cash in operating activities by
increasing our due-from-supplier account by $4.7 million, inventories by $4.1
million and accounts receivable by $900,000, and generated cash flows by
increasing accounts payable and accrued expenses by approximately $11.0 million
and our deferred revenue increased by $8.1 million. Our net cash used in
operating activities in the first quarter of 2000 amounted to $10.1 million.
Our net cash used in investing activities in 1999 was $600,000, which was
primarily for purchases of property and equipment. Our net cash used in
investing activities in 1997 and 1998 was $800,000 and $300,000, respectively,
and $1,400,000 during the quarter ending March 31, 2000, and was also primarily
for purchases of property and equipment. These capital expenditures were
primarily investments for equipment to test our products and to support our
business.
Cash provided from financing activities, consisting primarily of net
proceeds from the sale of our equity securities, was approximately $4.7 million
for the year ending December 31, 1997, $7.2 million for the year ending December
31, 1998, $27.7 million for the year ending December 31, 1999 and $21,000 during
the quarter ending March 31, 2000.
We believe that our available cash reserves, which includes proceeds from
the sale of our Series D preferred stock completed in June and July 2000,
together with the estimated net proceeds of this offering, will be sufficient to
fund operations and to meet our working capital needs and anticipated capital
expenditures for at least the next twelve months. We do not anticipate
significant capital expenditures over the course of the next twelve months. We
may also use a portion of the net proceeds to invest in complementary products,
to license other technology or to make acquisitions. Thereafter, we may raise
additional funds to fund more rapid expansion of our business, fund unexpected
expenditures, continue to develop new products and enhancements to our current
products, or acquire technologies or businesses. Additional financing may not be
available when needed, on favorable terms, or at all.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments. We generally
place our marketable security investments in high credit quality instruments,
primarily U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material; however, these investments are subject
to interest rate risk. We do not currently enter into foreign currency hedge
transactions. Through June 30, 2000, foreign currency fluctuations have not had
a material impact on our financial position or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board, or FASB, issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" and in June
1999 issued SFAS No. 137, "Accounting for Derivatives and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." Under
SFAS No. 133, derivatives not meeting hedge criteria are recorded in the balance
sheet as either an asset or liability measured at fair value and changes in fair
value are recognized currently in earnings. The
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Company will be required to implement SFAS No. 133, as amended by SFAS No. 137,
in fiscal 2001. The Company does not anticipate that the adoption of SFAS No.
133 and SFAS No. 137 will have a material impact on its financial position or
results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB No. 101 is effective during the fourth quarter of fiscal 2000. Management
has reviewed the provisions of SAB No. 101 and does not believe that its
adoption thus far has had a material impact on the Company's financial position
or results of operations.
YEAR 2000 COMPLIANCE
As a result of the change over from 1999 to 2000, none of our systems or
products was affected nor are we aware of any significant issues that have
affected our third-party suppliers or customers.
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BUSINESS
OVERVIEW
We are a leading provider of wireless data modems and software for use with
handheld computing devices and portable personal computers. We also provide
wireless data modems which can be integrated into other devices for a wide range
of vertical applications. We also offer provisioning, activation and systems
integration services to our customers to facilitate use of our products.
We have a strong history of designing innovative wireless access products.
We designed and delivered the first products to enable wireless connectivity for
the Palm family of handheld computing devices. We have successfully developed
and are continuing to develop solutions that enable our customers to wirelessly
access data utilizing a wide range of mobile computing devices across a broad
range of wireless data network technologies. Our current product portfolio
includes the following:
- The Minstrel line of Wireless Modem cradles, for the Palm family of
handheld computing devices and the Casio E-15 Windows Pocket PC handheld
device;
- The Merlin Type II PC Card for portable and desktop PCs;
- The Sage Wireless Modem for portable and desktop PCs;
- The NRM-6812 and Expedite Wireless OEM Modems for custom integration with
computers and other devices; and
- The Lancer 3W Wireless Modem for vehicle-mounted applications.
Our core modem technology is easily customized to address a broad range of
vertical applications. Our customers include wireless telecommunications
operators such as Verizon Wireless and AT&T Wireless (which services our
products, through its distribution partner Global Data Wireless) as well as
wireless data content and service providers such as OmniSky, GoAmerica and
CreSenda. We also have OEM customers such as @Road, Harvest/Coca Cola and
KeyCorp and we have entered into strategic technology and development
relationships within the wireless communications industry with Hewlett-Packard,
Metricom, OmniSky, Symbol and VoiceStream.
INDUSTRY BACKGROUND
The convergence of mobile computing, wireless communications and the
Internet and enterprise networks is driving the rapidly expanding demand for
wireless data access. The explosion of the Internet and enterprise networks has
accelerated the development of applications for communications, information
access, content and commerce. As professionals and consumers increasingly depend
on the growing functionality, productivity and convenience that these
applications afford, they are demanding "anytime, anywhere" connectivity for
their mobile computing devices. International Data Corporation projects that by
the end of 2002, the number of worldwide mobile users with two-way
communications to the Internet could exceed the number of wired users.
Growth in Mobile Computing
Competition and productivity demands are requiring an increasing number of
professionals to maintain remote and mobile access to the Internet, e-mail and
enterprise networks. International Data Corporation forecasts that the remote
and mobile workforce in the United States, defined as employees spending more
than 20% of their time on the job away from the office, will grow from 34
million individuals at the end of 1998 to 47 million at the end of 2003. This
trend towards mobile computing has led to the increased use of handheld
computing devices and portable PCs both on the road and in the office.
International Data Corporation projects that worldwide shipments of handheld
companions will grow from approximately 4 million in 1998 to approximately 19
million units in 2003, and that portable PC shipments will grow from
approximately 15 million in 1998 to approximately 33 million in 2003.
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Growth in Wireless Communications
The adoption of digital wireless voice communications has grown rapidly due
to improved service, declining prices, expanding network coverage and the
availability of extended service features such as voice and text messaging.
Dataquest projects that the number of worldwide digital wireless subscribers
will grow from approximately 217 million at the end of 1998 to approximately 828
million by the end of 2003. Recent developments in wireless data technology,
increased network coverage and deployment of digital data networks combined with
price reductions for data communications have enabled the adoption of wireless
data applications such as e-mail, financial services, news and lifestyle
content.
There are currently several standards-based technologies for the
transmission and reception of wireless data. Existing digital wireless
communications technologies such as Time Division Multiple Access (TDMA), Code
Division Multiple Access (CDMA) and Global System for Mobile Communications
(GSM), collectively known as second generation, or 2G, wireless technologies,
offer low speed transmission rates. The transmission rates afforded by these
circuit-switched technologies are adequate for limited content applications such
as short messaging, financial services, news and other text-based applications.
Cellular Digital Packet Data (CDPD) technology is a packet-switched standard
that is deployed over traditional analog networks and provides a continuous
network connection at slightly higher transmission speeds.
A new set of technologies, often referred to as 2.5G, is under development
to provide high-speed packet-based data services over GSM, CDMA and TDMA
networks. These 2.5G technologies are expected to support a broader set of data
applications, such as streaming media and web browsing. Packet-based technology
affords its users several advantages over circuit-switched systems, including
continuous connectivity and higher bandwidth performance, leading to significant
cost savings for data transmission. As a result, the 2.5G standards are expected
to generate even wider use of wireless data access devices. Third generation, or
3G, systems are being developed for longer-term deployment eventually to replace
2G and 2.5G digital wireless systems. 3G networks will provide for broadband
transmission rates enabling enhanced multimedia applications.
Growth in the Internet and Enterprise Networks
The Internet has emerged as a global communications medium enabling
millions of people to deliver and share information and conduct business
electronically. The development of applications for the digital delivery of
products and services such as news, weather, stock quotes and trading, books,
music, driving directions and lifestyle information is increasing the everyday
use of the Internet. International Data Corporation estimates that the number of
worldwide Internet users will grow from approximately 142 million in 1998 to 602
million by the end of 2003. This dramatic growth has led to a proliferation of
information and services available on or through the Internet. As access speed
and the breadth of applications for the Internet increase, we believe the
Internet is quickly becoming a necessary medium for information access, commerce
and communication.
Similarly, the proliferation of enterprise networks continues to drive the
increasing need for the remote retrieval and use of information. As wireless
data communications improve, and as business computing systems are redesigned to
integrate and manage wireless enterprise solutions, wireless Internet access
applications and services will increasingly play a key role in providing mobile
access to corporate information.
Convergence of Mobile Computing, Wireless Communications and the Internet and
Enterprise Networks
The increase in demand for "anytime, anywhere" access is driving the
convergence of mobile computing, wireless communications and the Internet and
enterprise networks, creating new opportunities for wireless data products and
services. We have designed our wireless products to capitalize on these
opportunities and to afford increased mobile access to enterprise networks and
the Internet. We believe that demand for wireless data applications will
continue to increase as wireless data network coverage, bandwidth and security
improve to allow higher quality service. New wireless technologies that enable
high
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speed access to the Internet allow service providers to offer end-users greater
access to a vast array of services and content. These offerings are expected to
increase usage, attract new customers and improve customer loyalty. Dataquest
estimates that the number of wireless data subscribers worldwide will grow from
approximately 16 million at the end of 1998 to approximately 111 million by the
end of 2003.
As this convergence evolves, a large opportunity exists to develop wireless
connectivity applications for a wide range of vertical industry segments, such
as:
- Securities Trading;
- Enterprise Networking, for access to corporate databases and intranets
and the facilitation of virtual office applications;
- Field Services and Sales, to provide Web access, enterprise network
access and contact management in the field;
- Public Safety, for police, fire and ambulance related applications such
as remote database access, information dissemination, police substation
communication and electronic monitoring;
- Transportation, for applications related to trucking and mobile dispatch,
vehicle fleet management and location, driver communications, order entry
and vehicle location and tracking;
- Retail and Point of Sale Terminals, for applications such as remote
credit card verification and automated teller machines; and
- Vending System Monitoring.
Need for Cost-Effective Wireless Data Access for Mobile Computing Devices
We believe that as mobile professionals and consumers increasingly depend
on the Internet and other enterprise computing applications, they will demand
convenient, cost-effective and user-friendly wireless data solutions for all
mobile computing devices. Until now, devices such as smart phones and two-way
pagers have been introduced to address this demand. Smart phones are enhanced
cellular telephones that are designed for voice applications rather than data
applications, and two-way paging devices allow users to access e-mail and other
information, but are not currently suited for interactive or large display
applications. While these products may adequately address low bandwidth
applications, such as messaging, we believe devices that allow greater display
and interactive capabilities, such as handheld computing devices and portable
PCs, are better suited for wireless data applications.
OUR SOLUTION
We are a leading provider of integrated wireless data access solutions. We
provide a suite of wireless data modems and enabling software for use with
handheld computing devices and portable PCs and for vertical applications. We
provide our customers the following advantages:
Breadth of Wireless Access Products
Our products enable both handheld computing devices and portable PCs to
access the Internet and enterprise networks wirelessly. We also provide wireless
modems which enable connections to a broad range of appliances for vertical
applications. We are developing additional capabilities for emerging wireless
networks in order to afford our customers maximum flexibility in choosing their
wireless data access solutions.
Price Performance Leadership
We have designed our products to provide high levels of performance and
functionality at an attractive price to drive widespread adoption among users.
We use software solutions where others still use hardware and we build our
products around a core common hardware and software platform. As a result,
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we are able to offer products which present a substantially better value
proposition than do other wireless data access products with similar
functionality.
Convenience
Our products provide users with a wireless connection to the Internet and
enterprise networks with a focus on ease-of-use and real-time access to e-mail,
online content and critical personal and professional information. We have
designed our products to reduce their size and weight without sacrificing
performance. For example, our Minstrel modems for handheld computing devices are
lightweight and slip easily into a suit pocket or purse. We have also designed
our products to enhance range and functionality with low power requirements, so
that they can be used for extended periods of time without needing to recharge.
Moreover, we offer activation services to service providers prior to shipping so
that our products are ready for immediate use upon their delivery.
Productivity
Our products improve productivity by enabling handheld computing devices
and portable PCs to be continuously connected to the Internet and enterprise
networks. Our products for handheld computing devices also enable wireless
synchronization so users can backup and access personal and professional data
from remote locations. These features allow mobile professionals to access and
manage data and information even while they are away from traditional work
settings, thereby significantly increasing their productivity.
Customized Solutions
Our technology platform enables us to provide wireless data solutions for a
wide range of specialized applications and to adapt our products to specific
customer needs. We enable our OEM customers to provide their clients with
tailored solutions for vertical market applications such as securities trading,
public safety, transportation and retail and point of sale terminals. Our
engineering group assists with the integration of our wireless products to
provide comprehensive solutions to our customers.
OUR STRATEGY
Our objective is to be the leading global provider of wireless data access
products. The key elements of our strategy are to:
Extend Our Technology Leadership
We intend to continue developing higher speed integrated wireless data
access solutions to capitalize on the expansion of global wireless data access
technologies. We plan to rapidly develop new modem technologies based on
evolving wireless data standards and to offer customers a comprehensive range of
wireless access products for mobile computing devices. We also intend to
continue to apply our technological expertise to reduce the overall size,
weight, cost and power consumption of our products, while increasing their
capabilities and performance.
Drive Widespread Adoption of Our Products and Increased Market Penetration
We intend to drive widespread adoption of our products through increased
global marketing activities, strategic pricing and expansion of our
international and direct sales distribution networks. We believe these efforts
will increase our revenue and our brand recognition. Our product pricing is an
important part of this strategy and we will continue to adjust our prices to
ensure market penetration by offering value to our customers. We also intend to
promote and extend our technology integration services which, in simplifying
customer use, will help ensure the widespread adoption of our products.
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Expand and Develop Strategic Relationships
We plan to build and expand on strategic relationships to improve the
design and functionality of our wireless access products and rapidly gain market
share. We intend to establish and maintain relationships with a strategic focus
on:
- Wireless computing communications companies, such as our existing
relationships with Hewlett-Packard, Symbol and VoiceStream, to extend our
platform and expand distribution of our products;
- Software applications companies, such as our existing relationships with
FusionOne, Inc. AvantGo, Inc., Puma Technologies, Inc. and JP Systems,
Inc. to offer a wide array of value-added applications for our customers;
and
- Technology companies, such as our existing relationships with Metricom,
Inc. and TPP Communications Ltd. to accelerate the time to market and
expand the capabilities of our new products.
Continue to Target Key Vertical Markets
We market our products to key vertical industry segments by offering them
products that increase productivity, reduce costs and create operational
efficiencies. We are currently working with, among others, Harvest in vending
system monitoring, KeyCorp in retail/point of sale, @Road in vehicle tracking
and Symbol in inventory control. We believe that continuing improvements in
wireless computing technologies will create additional vertical markets and more
applications for our products.
Focus on Developing Value-added Applications
Developing value-added applications to expand the capabilities of our
products will be an important factor in increasing the overall demand for and
the use of our products. As competition in our marketplace intensifies, we
believe that developing proprietary value-added applications for our products in
vertical enterprise markets will give us a competitive advantage and
differentiate us from our competitors. To this end, we may pursue acquisition
opportunities to extend our product lines and provide additional solutions to
our customers.
PRODUCTS
We successfully deliver innovative and comprehensive solutions to our
customers. We currently offer a variety of wireless data access solutions to
OEMs, VARs, systems integrators, wireless telecommunications operators,
enterprise, mobile professionals and consumers. We delivered the first wireless
cradle modem for the Palm family of handheld computing devices and currently
provide the only commercially available wireless cradle modem for the Palm III
and Palm V product families. We also offer a Type II PC Card modem for portable
personal computers and Windows Pocket PC mobile computing devices.
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The following table describes our principal product lines:
<TABLE>
<CAPTION>
PRODUCT APPLICATION
------- -----------
<S> <C>
WIRELESS CRADLE DEVICES
- Minstrel III Wireless Modem - Palm III handheld device
- Minstrel E-15 Wireless Modem - Casio E-15 Palm-Size PC
- Minstrel V Wireless Modem - Palm V handheld device
WIRELESS PC CARD AND MODEMS
- Merlin Type II Wireless Modem - Portable and desktop PCs
- Sage Wireless Modem - Portable and desktop PCs
OEM PRODUCTS
- Expedite Wireless Modem - point of sale terminals, automated
teller machines, vehicle tracking
- NRM-6812 Wireless Modem - utility monitoring, vending system
- Lancer 3W Wireless Modem monitoring
- public safety vehicle mounted
applications
</TABLE>
Wireless Cradle Devices
Our Minstrel family of wireless data modems adds two-way communications
capability to the Palm family of handheld computing devices, private labeled
derivatives and the Casio E-15 Windows Pocket PC handheld device. The Minstrel
wireless "cradles" maintain the key advantages of these devices: size, ease-
of-use, synchronization and customization. Minstrel provides users with complete
portable access to enterprise networks, e-mail and the Internet without the
limitation of wired connections. The Minstrel/ Palm handheld computing device
integrated product is lightweight and slips easily into a suit pocket or purse.
Minstrel can also be used with most third-party software developed for the Palm
family of handheld computing devices.
The Minstrel III Wireless Modem offers two-way wireless data communications
on the Palm III connected organizers. Improvements to prior versions include a
smaller and thinner form factor, lighter weight and improved battery life. The
Minstrel E-15 Wireless Modem, which is designed exclusively for the Casio E-15
Windows Pocket PC handheld computer, offers two-way wireless data
communications. The Minstrel V Wireless Modem, which is designed for the Palm V
connected organizer and is currently branded by OmniSky for sales and
distribution, also offers two-way wireless data communications.
Wireless PC Cards and Modems
Our Merlin Type II Wireless Modem, which was designed for Windows
95/98/2000/NT/Pocket PC computers, allows mobile professionals and consumers to
send and receive e-mail, and to connect wirelessly to their enterprise networks
and to the Internet.
Our Sage Wireless Modem is a self-powered, external, wireless modem for
desktop PCs. The key strengths of Sage include its low price, extended battery
life and versatility. Sage provides its users with wireless access to e-mail,
enterprise networks and the Internet. Sage is also well suited for fixed
installations, particularly in situations where telephone lines are unavailable
or inconvenient.
OEM Products and Devices
The Expedite Wireless Modem offers 0.6-watt full-duplex wireless CDPD modem
capabilities with minimal power requirements and a form factor almost four times
smaller than its predecessor. The Expedite's 3.6 volt power supply has an
extended battery life and is compatible with more integrated products. The
Expedite is currently used in numerous applications, including wireless
telemetry monitoring, inventory monitoring, point-of-sale terminals, automated
teller machines and automated vehicle location and tracking. The Expedite is
also priced below comparable products offered by our competitors, making it
extremely attractive to OEMs, VARs and systems integrators that require wireless
CDPD solutions. The
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Expedite's small form factor, standards-based interfaces and adherence to
specifications, together with its simple design, make it easy for OEM customers
to incorporate a wireless CDPD solution into their existing or new product
lines.
The forerunner of the Expedite, the NRM-6812 Wireless Modem, remains an
industry leader in terms of size, performance and cost. The NRM-6812 has a wider
temperature range and differing voltage levels than the Expedite, making it
preferable for certain types of wireless applications such as oil and gas
telemetry and vehicle tracking.
The Lancer 3W is a wireless CDPD modem with extreme temperature tolerance
capabilities, high vibration tolerance and a ruggedized form factor which, with
input power voltage capabilities from 9 to 30 volts, is ideally suited for a
variety of applications ranging from public safety vehicle mounted applications
to field service and wireless telemetry monitoring. In addition, the Lancer 3W
has power saving capabilities offered by the "sleep mode," which maintains
network connection at low battery levels and reduces battery drainage. The
Lancer 3W is equipped with modem manager software and remote diagnostics which
allow users to monitor and control the modem remotely.
CURRENT WIRELESS TECHNOLOGY
Wireless data communications are currently transmitted over various public
and private networks utilizing either circuit-switched data or packet-switched
data, such as Cellular Digital Packet Data (CDPD), ARDIS and Mobitex. The
following table outlines these technologies.
<TABLE>
<CAPTION>
TECHNOLOGY STANDARD DATA TRANSMISSION ATTRIBUTES NOMINAL DATA RATES
------------------- ---------------------------- ------------------
<S> <C> <C>
Analog Circuit-Switched Data Analog Circuit 9.6 Kbps
Cellular Digital Packet Data Digital Packet 19.2 Kbps
ARDIS Digital Packet 19.2 Kbps
Metricom Digital Packet 28.8 Kbps
Mobitex Digital Packet 9.6 Kbps
</TABLE>
In a circuit-switched system the user is temporarily connected to the
network and pays for the total connection time. Although circuit-switched
systems cover a very broad geographical area, the newer packet networks have
significant performance, technical and economic advantages over circuit-switched
systems. CDPD uses a packet system which sends and receives content consisting
of individually addressed segments or "packets." The user is continually
connected to the network and pays either a flat monthly service fee or a fee
based on the amount of data transferred.
We believe that one of our competitive advantages is our broad base of core
technologies. Currently, we offer products based on the CDPD standard. We have
developed and continue to build on the following key current technology areas:
CDPD. CDPD is one of the most widely adopted wide-area wireless packet data
system in North and South America. CDPD technology enhances the efficiency of a
cellular channel, but is transparent within it, allowing the voice system's
capability and quality to remain unaffected. CDPD technology improves the
efficiency of existing cellular channel infrastructure as it detects idle
moments when cellular channels are unused, packages data in small packets and
sends it in short bursts. As a result, CDPD is an extremely cost-effective
solution for cellular carriers to offer data services. CDPD provides for access
at speeds up to 19.2 Kbps.
Metricom. Metricom designs, provisions and operates digital networks and
services for mobile users. Metricom's Ricochet network, which is based upon
modified CDPD network technology, works by broadcasting signals back and forth
from transceivers mounted on utility poles to small radio modems connected to
subscribers' computers. Ricochet is generally available at speeds up to 28.8
Kbps in the greater San Francisco Bay Area, Seattle, Washington DC, selected
areas of New York City and selected airports and college campuses. Metricom is
currently under construction in 21 major service areas to bring
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its higher speed Ricochet II 128 Kbps network to market, and ultimately expects
to deploy a network in 46 markets covering 100 million in population.
EMERGING STANDARDS
Current wireless data technologies work well with text-based applications
such as messaging and securities trading. Next generation wireless data
technologies are expected to allow for higher interaction levels, making
multi-media applications, such as Web browsing, appeal to a broader group of
wireless data users. 2.5G and 3G technologies based on GSM, TDMA, CDMA and
W-CDMA standards, will offer much higher bandwidth performance than existing
technology. These emerging standards, summarized in the following table, will
enable service providers to offer a broader range of wireless data services
relative to those currently available.
<TABLE>
<CAPTION>
TECHNOLOGY DEVELOPMENT STAGE FOR DATA TRANSMISSION CURRENT/EXPECTED 2.5G/3G
STANDARD DATA TRANSMISSION ATTRIBUTES DATA RATES STANDARDS
---------- ---------------------------- ---------------------------- ---------------- ---------
<S> <C> <C> <C> <C>
GSM Circuit-Switched and short Digital Packet, Circuit- 14.4 Kbps/ 384 GPRS/
messaging offered, standard Switched Kbps EDGE
published for packet data
TDMA Circuit-Switched and short Digital Packet, Circuit- 9.6 Kbps/ 384 IS136
messaging offered Switched Kbps GPRS/
EDGE
CDMA Circuit-Switched and short Digital Packet, Internet 14.4 Kbps/ 384 1XRTT/
messaging offered, standard Protocol, Circuit-Switched Kbps 1-2 Mbps 3XRTT
published for packet data
W-CDMA Standard published for Digital Packet 115 Kbps/ 2 3Gpp
digital packet voice, data Mbps
and multimedia
</TABLE>
In addition to the products we offer based on current technology standards,
we are in the process of developing second and third generation versions of our
branded and OEM products that will include new technologies to enhance customer
usability and performance, as well as address new market opportunities. We
intend to develop solutions that build on the following emerging key technology
areas:
GPRS. General Packet Radio Service (GPRS), commonly referred to as a 2.5G
standard, is a high-speed wireless packet data service that runs on GSM or TDMA
networks. GPRS is being adopted by many GSM and TDMA networks in North America,
Europe and Asia. GPRS is a packet network, allowing for always-on connectivity,
that offers data speeds up to 115 Kbps. This technology is expected to be
developed by major GSM carriers by the end of 2000.
1XRTT. CDMAOne 2000 Phase 1 or 1XRTT, commonly referred to as a 2.5G
standard, is a spread spectrum technology, based on CDMA technology standards,
that forms the basis for 3G. CDMA is used primarily in North and South America,
Japan and South Korea. 1XRTT offers access speeds of up to 144 Kbps. This
technology is expected to be implemented by major CDMA carriers by the middle of
2001.
W-CDMA. Wideband CDMA (W-CDMA), commonly referred to as a 3G standard, is a
high-speed wireless packet voice, data and multi-media services based on CDMA
technology. W-CDMA offers data speeds of up to 2 Mbps. W-CDMA technology is
adopted by major carriers and standard organizations as the global standard for
3G. This technology is expected to be implemented in Japan by the end of 2001
and in Europe and North America in 2003.
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OUR TECHNOLOGY FOCUS
In addition to developing products based on the technology standards
mentioned above, we have developed and continue to build on the following key
technology areas:
Advanced Radio Frequency Design. Advanced Radio Frequency (RF) design is
the key technology that determines the performance of wireless devices. We have
specialized in the 800/900 MHz designs for analog and digital cellular, packet
data and spread spectrum systems. Our proprietary RF technology contributes to
the performance, small size and low cost of products. We are currently
developing the 1800 and 1900 MHz RF technology for future high speed wireless
systems including GPRS, 1XRTT and 3G technologies.
Miniaturization and System Integration. Small systems integration is the
integration of application specific integrated circuits, RF, baseband and
packaging technologies. The complete wireless modem is packaged into a
sub-credit card module with the advent of proprietary integrated circuit design,
embedded software modem and multi-layer RF stripline technologies. We have one
of the smallest wireless modems available, the only pocket-sized wireless modem
for the Palm family of personal computing devices, and a Type II PC card modem.
We will continue to augment the miniaturization technology to drive down the
size and cost of current and future products.
CUSTOMERS
Our customers include wireless telecommunications operators, wireless data
content and service providers, OEM customers, professionals and consumers. The
following is a representative selection of our customers:
<TABLE>
<CAPTION>
WIRELESS
TELECOMMUNICATIONS WIRELESS DATA CONTENT AND SERVICE
OPERATOR CUSTOMERS PROVIDER AND RESELLER CUSTOMERS OEM CUSTOMERS
------------------ --------------------------------- -------------
<S> <C> <C>
Verizon Wireless GoAmerica Communications Corp. AirLink
AT&T Wireless(1) CreSenda (Internet content @Road (vehicle tracking)
Cellcom (Middle East) provider) Harvest/Coca Cola (vending)
Movilnet (Latin America) OmniSky IVI Checkmate
NTE (China) KeyCorp (mobile point of sale)
Pivot International (voting
booths)
Symbol (inventory control)
</TABLE>
---------------
(1) AT&T currently sources our products through its distribution partner, Global
Data Wireless.
Each of the customers listed in the table above has accounted for at least
$50,000 in revenue to us since January 1, 1999. OmniSky, @Road and Pivot
International accounted for 24.2%, 23.6% and 13.0% of our revenue, respectively,
for the quarter ended March 31, 2000. @Road, OmniSky and AirLink accounted for
23.1%, 14.3% and 9.2% of our revenue, respectively, for the year ended December
31, 1999.
Many of our customer relationships provide us with the opportunity to
expand our customer base and market reach. Among those mutually beneficial
relationships that augment our sales opportunities are the following:
Wireless Telecommunications Operators. We work closely with our carrier
customers to generate demand for our products. Our carrier customers serve as an
important sales channel for our products. Verizon Wireless, which was recently
formed by AirTouch Communications, Bell Atlantic Mobile, GTE Wireless and
PrimeCo, sources our products through Global Data Wireless. AT&T Wireless also
sources our products, through its distribution partner Global Data Wireless.
Verizon Wireless and AT&T Wireless both maintain large sales forces that develop
sales opportunities for us. These sales leads are either consummated directly by
the carrier or jointly with our account executives. This approach allows us to
combine our wireless data expertise with the carriers' vast end-customer
relationships and broad sales reach. Our carrier customers also provide us and
our customers with important services, including field
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trial participation, first-tier technical support, wireless data marketing and
access to additional indirect distribution channels. To leverage these services,
we provide carriers with early access to new products, technical training and
co-marketing resources.
Wireless Data Content and Service Providers. Wireless data content and
service providers purchase our products either directly from us or from a
distributor and resell them to end-users. These providers typically integrate
our products with other elements and provide an overall wireless access solution
to the end-user in a particular field or vertical market. These solutions
include hardware, software and ongoing service components. Examples of our
content and service-provider customers include OmniSky and CreSenda.
OEM Customers. Our OEM customers integrate our products into devices that
they manufacture and sell to end-users through their own direct sales forces and
indirect distribution channels. Our products are integrated into a broad range
of devices, including but not limited to, handheld computing devices, laptops,
vehicle location devices (AVLs), electric meters, vending machines, industrial
equipment, wireless credit processing and point of sale (POS). Major customers
include @Road, Harvest and KeyCorp. We build strong relationships with our OEM
customers because they rely heavily on our application engineering support
during the process of integrating our products into theirs.
STRATEGIC ALLIANCES
We intend to develop and maintain strategic relationships within the
wireless communications industry which complement and expand our existing
distribution network and extend our technology and market reach. These
arrangements include strategic technology and marketing relationships with
providers of next generation wireless technology, application software
developers focused on wireless products, OEM customers which integrate our
products into other devices, value-added resellers, distributors, systems
integrators and cellular carriers. These strategic relationships allow us to
develop the most compelling wireless data products and provide us with access to
additional markets, channels of distribution and increased sales opportunities.
Our principal strategic alliances to date include the following:
Hewlett-Packard Company. Hewlett-Packard is a leading global provider of
computing and imaging solutions and services and focuses on capitalizing on the
opportunities of the Internet and the proliferation of electronic services. In
March 2000, we entered into a supply agreement under which we will sell and
provide technical support for a wireless modem cradle for use with the HP
Jornada 540 Series Color Pocket PC.
Metricom, Inc. Metricom designs, provisions and operates networks and
services for mobile users. Metricom operates a Ricochet wireless network, which
is a system that broadcasts signals back and forth from transceivers mounted on
utility poles to small radio modems connected to subscribers' computers.
Ricochet network coverage is generally available at speeds up to 28.8 Kbps in
the greater San Francisco Bay Area, Seattle, Washington, DC, selected areas of
New York City and selected airports and college campuses. Metricom is currently
under construction in 21 major service areas to bring the higher speed Ricochet
128 Kbps network to market, and ultimately expects to deploy a network in the
markets covering 100 million in population. In October 1999, we entered into a
license, manufacturing and purchase agreement with Metricom under which we will
custom develop a wireless radio modem compatible with Metricom's Ricochet
network. Metricom will also purchase modems during the term of the agreement,
which lasts until October 2001. We currently expect to begin shipping the modems
later this year.
OmniSky Corporation. OmniSky offers a wireless service under its own brand
for use on handheld mobile devices. In July 1999, we entered into an agreement
with OmniSky, a wireless Internet service provider, for the development and sale
of our Minstrel III and Minstrel V cradle modems for the Palm III and Palm V
handheld computing devices. In November 1999, we began shipments to OmniSky.
Although the term of this agreement ended on May 1, 2000, we are currently
shipping and provisioning modems to OmniSky pursuant to the agreement.
Symbol Technologies, Inc. Symbol is a manufacturer of bar code-driven data
transaction systems and is engaged in the design, manufacture and marketing of
bar code reading equipment, handheld computers
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and radio frequency (RF) data communications systems. In March 2000, we entered
into an agreement with Symbol to integrate our Merlin OEM CDPD modems into
Symbol's radio frequency data communications systems.
VoiceStream Wireless Corporation. VoiceStream is a leading provider of
digital wireless communications. Through a license from the FCC, VoiceStream
constructs and operates Personal Communication Service (PCS) networks. Nearly
three out of every four people in the United States live in areas licensed to be
served by VoiceStream or its affiliates. In March 2000, we entered into an
agreement with VoiceStream, under which we will develop three types of wireless
GPRS-PCS PC card modems for wireless mobile computing devices. The modems may be
co-branded by VoiceStream. VoiceStream will also purchase our modems during the
term of the agreement, which lasts until March 2003.
Novatel Wireless Developer Program. Because of our commitment to mobile
computing platforms such as the Palm family of handheld computing devices,
Microsoft Windows Pocket PC, and Microsoft Windows 9x/NT, we formed the Novatel
Wireless Developer Program, which is a forum for us to work with application
software developers to develop wireless data products and markets. The mission
of the Developer Program is to encourage development of the best wireless data
solutions using our products, and successfully to market those solutions to our
customers. There are currently over 100 software developers enrolled in the
Novatel Wireless Developer Program. We have established a partner community
working together to create, deliver and support the best and most compelling
wireless data applications. Once these companies have a commercial software
package or service available, they are listed and promoted in the Wireless
Solutions Guide. This guide is available on our Web site and is frequently used
as a resource by internal sales personnel as well as carrier staff.
SALES AND MARKETING
As of June 30, 2000, our sales and marketing organization consisted of 63
professionals, including those located in six sales offices throughout the
United States.
Sales
We sell our products using a multi-channel distribution model which
includes both direct and indirect sales. In order to maintain strong sales
relationships, we provide co-marketing, trade show, low-cost sales demo unit and
joint press release support. In addition to our direct sales relationships with
carriers and service providers, OEMs and VARs, we sell our products through the
following channels:
- Domestic Distributors. In the United States, we sell our products through
dedicated domestic distributors. As of June 30, 2000, our domestic
distributors were D&H Distributing Company, Global Data Wireless and
Ingram Micro.
- International Distributors. We sell our products through international
distributors in Latin America, Israel, the Far East and New Zealand. As
of June 30, 2000, our international distributors were Bismark, Insite,
Cellcom and Golden Net.
- Mail-Order and Internet Catalogs. We sell our products to mail-order and
Internet catalogues, including CDW, Mobile Planet, Multiple Zone,
Outpost.com, PC Connection and PC Mall.
- Direct End-User Sales. Some end-users purchase products directly from us.
Direct sales are facilitated through our Web site and our toll-free
telephone number.
Marketing
We support our sales efforts through a variety of marketing initiatives.
Our marketing organization focuses on creating market awareness of and promoting
our products, generating sales leads, maintaining strong customer relationships,
and developing interest in and demand for our products in new market segments.
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We engage in a wide variety of marketing initiatives, which include:
- conducting marketing programs in conjunction with industry, business and
trade publications;
- building awareness for our products and the Novatel Wireless brand
through a wide variety of media;
- participating in industry and technology related trade shows,
associations and conferences; and
- engaging in cooperative marketing programs and partnerships.
We also conduct extensive market research through our end-users,
third-party developer community and channel customers. We use this information
on a continuous basis to refine our product development and the position and
assortment of our products in our sales channels.
PRODUCT DEVELOPMENT
Our product development efforts are focused on developing innovative
products and improving the functionality, design and performance of our existing
products. We intend to continue to identify and respond to our customers' needs
by introducing new product designs with an emphasis on innovations in the
ease-of-use, performance, size, weight, cost and power consumption of our
products. We are also currently developing technology and products for high
bandwidth wireless applications to address opportunities presented by the next
generation of public and private wireless networks.
Our product development effort is driven by a highly skilled and
experienced team. The core members of our research and development team have
worked together for over 16 years, and the entire team has benefited from a low
turnover rate in an intensely competitive environment for skilled engineers.
While we have developed most new products and enhancements to existing products
internally, we have also licensed technology from third parties.
We manage our products through a structured life cycle process, from
identifying customer requirements through development and commercial
introduction to eventual phase-out. Product development emphasis is placed on
time-to-market, meeting industry standards and end-item product specifications,
ease of integration, cost reduction, manufacturability, quality and reliability.
We believe that our future success will depend, in part, on our ability to
identify and respond to emerging technological trends in our target markets,
develop and maintain competitive products, enhance our existing products by
adding features and functionality that differentiate them from those of our
competitors, and bring products to market on a timely basis. As a result, we
have devoted a significant portion of our resources to product development, and
we intend to continue making substantial investments in research and
development.
For the three months ended March 31, 2000, our research and development
expense totaled $2.1 million. Our research and development expense totaled
approximately $3.7 million for the year ended December 31, 1999, $2.3 million
for the year ended December 31, 1998 and $2.7 million for the year ended
December 31, 1997. As of June 30, 2000, we had 123 engineering and technical
professionals in product development and manufacturing, which includes
purchasing, fulfillment, quality assurance, quality control, reliability,
technical documentation and technical publication.
MANUFACTURING
We currently outsource our manufacturing operations to Sanmina Corporation.
In September 1999, we entered into a two-year agreement with Sanmina for the
manufacture of our products. Under the agreement, Sanmina provides all component
procurement, product manufacturing, final assembly, testing, quality control and
delivery services for us. Under this agreement, we are required to provide
Sanmina with firm purchase orders covering a minimum period of three months.
Recently, we moved our principal manufacturing operations from Sanmina's
facility in Calgary, Canada to its facility in Guntersville,
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Alabama. In April 2000, we entered into a manufacturing agreement with GVC
Corporation. We expect GVC to begin manufacturing some of our products at its
facilities in Taiwan in the near future.
Our outsourced manufacturing activity allows us to:
- focus on our core competencies;
- minimize our capital expenditures;
- participate in contract manufacturer economies of scale and achieve rapid
production scalability by adjusting to manufacturing volumes quickly to
meet changes in demand;
- access best-in-class manufacturing resources; and
- operate without dedicating any space to manufacturing operations.
We believe that additional assembly line efficiencies are realized due to
our product architecture and our commitment to process design. The components
that make up our products are supplied by a number of vendors. Direct materials
for our products consist of tooled parts such as printed circuit boards, molded-
plastic components, unique metal components and application-specific integrated
circuits (ASICs), as well as industry-standard components such as transistor,
integrated circuits, piezo-electric filters, duplexers, inductors, resistor and
capacitors, many of which are similar to components used in cellular telephone
handsets. Although we generally use standard components for our products and try
to maintain alternative sources of supply, some components, such as
printed-circuit boards, molded plastic components, unique metal components and
ASICs, are purchased from suppliers for which alternative sources are not
currently available in the quantities and at the prices we require.
We employ our own manufacturing staff that focuses on managing the
relationship with our third-party manufacturers and particularly on
design-for-manufacturing, test procedures, quality, procurement and cost
optimization, production scheduling and continuous improvement. We also perform
certain manufacturing related functions internally, including manufacturing
engineering and the development of manufacturing test procedures and fixtures.
GOVERNMENT REGULATION
Our products are subject to certain mandatory regulatory approvals. In the
United States, the FCC regulates many aspects of communications devices,
including radiation of electromagnetic energy, biological safety and rules for
devices to be connected to the telephone networks. Modems must be approved under
the above regulations by the FCC prior to being offered for sale. We have
obtained from the FCC all necessary approvals for all products we currently
manufacture and sell.
COMPETITION
The wireless data communications market is intense, rapidly evolving and
highly competitive. It is subject to technological changes and is significantly
affected by new product introductions and the market activities of industry
participants. We compete in this market on the basis of price, form factor, time
to market, functionality, quality and variety of product offerings. Moreover, we
expect that this market will experience several new entrants in the future. To
maintain and improve our competitive position, we must continue to develop new
products, expand our customer base, grow our distribution network and leverage
our strategic partnerships.
Our current and prospective competitors generally fall within the following
categories:
- Wireless modem manufacturers, such as Sierra Wireless, Uniden, NextCell
and Tellus;
- Traditional wired modem manufacturers, such as 3Com and Xircom;
- Wireless device manufacturers, such as Handspring, Palm and Research In
Motion;
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- Wireless handset manufacturers and next generation wireless technology
providers, such as Ericsson, Motorola, and Nokia; and
- Non-CDPD private communications network providers, such as Emotiant, Bell
South and Metricom.
We believe the principal competitive factors impacting the market for our
products are functionality, features, performance, convenience, availability,
brand and price. We believe that we compete better than many of our current
competitors with respect to some or all of these factors due to the broad range
of products we offer, the ease-of-use in design and engineering of our products,
our ability to adapt our products to specific customer needs and our price
leadership.
There can be no assurance that our current or potential competitors will
not develop products comparable or superior to those developed by us or adapt
more quickly to new technologies, evolving industry standards, new product
introductions, or changing customer requirements. As a result, we must
continuously introduce new products and educate existing and prospective
customers as to the advantages of our products versus those of our competitors.
Many of our current and potential competitors have had longer operating
histories and significantly greater financial, manufacturing, technical, sales,
customer support, marketing and other resources, as well as greater name
recognition and a larger installed products and technologies base. In addition,
the global acceptance of our products could lead to increased competition as
third parties develop products competitive with our own. Any of these
competitors may be able to respond faster than we can to new or emerging
technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of their products than we can.
We cannot assure you that our current or potential competitors will not develop
products comparable or superior to those that we develop or adapt more quickly
than we do to new technologies, evolving industry trends or changing customer
requirements.
In addition, as the wireless data communications product market develops, a
number of companies with significantly greater resources than we have could
attempt to increase their presence in the market by acquiring or forming
strategic alliances with our competitors, resulting in increased competition.
PROPRIETARY TECHNOLOGY
Our software, hardware and operations rely on and benefit from an extensive
portfolio of intellectual property. We currently hold 11 United States patents
issued for our technology and have four United States patent applications
pending. We also have four foreign patents issued and four foreign patent
applications pending.
We own a number of trademarks, including Contact(R), Expedite(TM), Lancer
3W(TM), Merlin(TM), Minstrel(R), Minstrel III(TM), Minstrel V(TM), Minstrel
Plus(TM), Minstrel S(TM), MissionONE(TM), Sage(R), with the accompanying
designs, and the Novatel Wireless logo.
We license CDMA technology from QUALCOMM, Incorporated for integration into
our products. This license allows us to manufacture CDMA-based wireless modems
and sell or distribute them worldwide. The license does not have a specified
term and may be terminated by us or by QUALCOMM for cause or upon the occurrence
of other specified events. In addition, we may terminate the license for any
reason upon 60 days' prior written notice. We have also granted to QUALCOMM a
nontransferable, worldwide, nonexclusive, fully paid and royalty-free license to
use, in connection with wireless communications applications, certain
intellectual property of ours that is used in our products which incorporate the
CDMA technology licensed to us by QUALCOMM. This license allows QUALCOMM to
make, use, sell or dispose of such products and the components therein.
We primarily rely on a combination of copyright, trade secret and trademark
laws, and nondisclosure and other contractual restrictions on copying and
distribution to protect our proprietary technology. In addition, as part of our
confidentiality procedures, we generally enter into nondisclosure agreements
with our employees, consultants, distributors and corporate partners and limit
access to and distribution of our
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software, documentation and other proprietary information. It may be possible
for a third party to copy or otherwise obtain and use our products or technology
without authorization, or to develop similar technology. In addition, our
products are licensed in foreign countries and the laws of such countries may
treat the protection of proprietary rights differently from and may not protect
our proprietary rights to the same extent as do laws in the United States.
EMPLOYEES
As of June 30, 2000, we had a total of approximately 219 employees,
including 63 in sales and marketing, 123 in engineering, manufacturing, research
and development and 33 in general and administrative functions. Our future
performance depends, in significant part, upon our ability to attract new
personnel and retain existing personnel in key areas including engineering,
technical support and sales. Competition for personnel is intense, especially in
the San Diego area where we are headquartered, and we cannot be sure that we
will be successful in attracting or retaining personnel in the future. Our
employees are not represented by any collective bargaining unit, and we consider
our relationship with our employees to be good.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings which, if adversely determined,
would have a material adverse effect on our business, financial condition and
results of operations. We may, from time to time, become a party to various
legal proceedings arising in the ordinary course of business.
FACILITIES
Our principal executive offices are located in San Diego, California where
we lease approximately 20,000 square feet under a lease that expires in July
2005. We also lease approximately 4,500 square feet in San Diego under a lease
that expires in March of 2005. In addition, we lease approximately 20,000 square
feet in Calgary, Alberta, Canada for our research and development organization
under a lease that expires in January 2002, and 14,500 square feet in Carlsbad,
California utilized for distribution purposes under a lease that expires in
August 2002. We also lease space in various geographic locations primarily for
sales and support personnel or for temporary facilities. We believe that our
existing facilities are adequate to meet our current needs, and that suitable
additional or substitute space will be available as needed.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
John Major.................. 54 Chairman of the Board and Chief Executive Officer
Ambrose Tam................. 44 President, Chief Operating Officer and Chief Technology
Officer
Bruce Gray.................. 45 Senior Vice President, Sales and Marketing
Melvin Flowers.............. 47 Vice President of Finance, Chief Financial Officer and
Secretary
Steven G. Schlief........... 44 Vice President, Operations
Robert Getz(1).............. 38 Director
Nathan Gibb(1).............. 30 Director
H.H. Haight(1)(2)........... 66 Director
David Oros.................. 40 Director
Mark Rossi(2)............... 43 Director
Steven Sherman.............. 54 Director
</TABLE>
---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
John Major has served as our Chairman of the Board and Chief Executive
since July 2000. From November 1999 until July 2000, Mr. Major was Chief
Executive Officer of Wireless Internet Solutions Group, a strategic consulting
services firm. From November 1998 to November 1999, Mr. Major was President and
Chief Executive Officer of WirelessKnowledge, a joint venture between Microsoft
Corporation, a software and Internet technology company, and QUALCOMM,
Incorporated, a digital wireless communications company. From May 1997 to
November 1998, he was an Executive Vice-President of QUALCOMM and served as
President of QUALCOMM Infrastructure Products Division. From 1977 until he
joined QUALCOMM in 1997, Mr. Major held a number of executive positions at
Motorola, Inc., a communications and electronics company, ultimately serving as
Senior Vice President and Chief Technical Officer. Mr. Major currently serves on
the board of directors of Littelfuse Corporation, a circuit protection
technology company; Verilink, an intelligent edge connection wireline modem
company; Identix, Inc., an identification technology company; Advanced Remote
Communications Solutions, Inc., a communications systems company, and Lennox
Corporation, an HVAC products company. He also serves on the Board of Directors'
Executive Committee for the Telecommunications Industry Association and the
Electronics Industry Association. Mr. Major holds a Bachelor of Science degree
in Mechanical and Aerospace Engineering from the University of Rochester, and a
Master of Science degree in Mechanical Engineering from the University of
Illinois. He also holds an Master of Business Administration degree, with
distinction, from Northwestern University and a Juris Doctor from Loyola
University.
Ambrose Tam has served as the President and Chief Operating Officer of our
company since August 1996 and as our Chief Technical Officer since that time as
well. From 1990 to 1993, he was the Research and Development Director of NovAtel
Communications Ltd., which is now NovAtel, Inc., and in 1994 he became the
General Manager of the Personal Communications Products division of NovAtel
Communications. Our company was founded when we acquired the assets of this
division from NovAtel Communications Ltd. Prior to joining NovAtel
Communications, Mr. Tam spent 12 years in various electronic and radio frequency
engineering capacities with Astec Components Ltd., a Hong Kong-based
manufacturing, engineering and distribution company specializing in radio
frequency, satellite receivers and cellular phone components. Mr. Tam holds a
Higher Certificate in Electronic Engineering from Hong Kong Polytechnic
University and a Master of Business Administration degree from the University of
Calgary.
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Bruce Gray has served as our Senior Vice President of Sales and Marketing
since February 2000. Prior to that he was our vice president of sales and
marketing since joining our company in October 1998. From October 1997 to
October 1998, Mr. Gray was the Senior Director of Uniden Electronics
Corporation's Data Products Division, where he was responsible for sales
performance, strategic planning, channel development and new product
development. Prior to joining Uniden, a wireless communications company, Mr.
Gray was a Director of Sales and Marketing for Sensormatic Electronics
Corporation, a supplier of electronic security products, from December 1994 to
October 1997. From May 1992 to January 1994, Mr. Gray was a Director of
Marketing and Product Management for U.S. Robotics Corporation, a communications
products company. Mr. Gray holds a Bachelor of Science degree in Engineering
from the University of Alabama and a Master of Business Administration degree
from the University of San Diego.
Melvin Flowers has served as our Vice President of Finance and Chief
Financial Officer since joining our company in February 2000, and Secretary of
our company since April 2000. Mr. Flowers served as a Vice President and the
Chief Financial Officer of KNC Software, LLC, an Internet software company from
July 1999 until November 1999. Prior to joining KNC Software, Mr. Flowers served
as a Vice President and the Chief Financial Officer of Microwave dB, from
November 1998 until June 1999. Prior to joining Microwave, Mr. Flowers served as
the Chief Financial Officer and Vice President of Finance of ACT Networks, Inc.,
a network access device manufacturer from July 1993 to October 1998. Previously,
Mr. Flowers also served as President and Chief Financial Officer of Pacific
Earth Resources, an ornamental horticultural company, and as Vice President and
Chief Financial Officer of Spectramed, Inc., a medical device manufacturing
company. Mr. Flowers received a Bachelor of Science degree in Accounting from
Northern Illinois University.
Steven Schlief has served as Vice President of Operations since joining our
company in July 2000. Prior to joining us, he was Vice President, Supply Chain
Management, for the Asian operations of Celestica Inc., a contract manufacturer
from September 1997 to July 2000. Prior to that, Mr. Schlief was Director of
Materials at Polycom Inc., a telecommunications and video conferencing company,
from January 1995 to September 1997. Mr. Schlief has also held positions with
Apple Computer, IEC Electronics and Lockheed Corporation where he worked in a
number of areas including materials, supply chain management and operations. Mr.
Schlief holds a Bachelor of Arts degree from San Jose State University and a
Master of Business Administration from Santa Clara University.
Robert Getz has served as a director of our company since December 1999.
Since December 1996, Mr. Getz has served as a Managing Director of Cornerstone
Equity Investors, LLC, a private equity investment firm that specializes in
technology and telecommunications, business service and healthcare information
investments. Prior to joining Cornerstone, Mr. Getz served as a Managing
Director of Prudential Equity Investors, Inc., also a private equity investment
firm, from June 1994 until December 1996. Mr. Getz also serves as a director for
several private companies, including Artel Video Systems, Inc., a developer of
broadband video networking equipment, and Centurion International, Inc. a
designer and manufacturer of antenna and power solutions for the wireless device
industry. Mr. Getz holds a Bachelor of Arts degree from Boston University and a
Master of Business Administration in finance from the Stern School of Business
at New York University.
Nathan Gibb has served as a director of our company since June 1999. Mr.
Gibb is an Investment Manager with Working Ventures Canadian Fund Inc., a
Canadian investment fund. Mr. Gibb joined Working Ventures after receiving his
Masters of Business Administration from the University of Western Ontario in
1997. Mr. Gibb also serves on the board of directors of a number of private
portfolio companies, including InterUnion Asset Management Ltd., an asset
management firm consolidator. Mr. Gibb holds a Bachelor of Arts degree and a
Master of Business Administration degree from the University of Western Ontario.
H.H. Haight has served as a director of our company since August 1996. Mr.
Haight is President, Chief Executive Officer and founder of Argo Global Capital,
Inc., the entity that manages GSM Capital Limited Partnership, a venture capital
firm. Prior to founding Argo Global Capital, Inc., Mr. Haight was a Managing
Director and co-founder of Advent International, a venture capital firm from
June 1983 to June
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1998. Mr. Haight also currently serves as a director of Coast Mountain
Hardwoods, a lumber concern, Genelabs Technologies, Inc., a pharmaceutical
company, Saraide, a wireless service provider, and several other private
companies. Mr. Haight received a Bachelor of Science degree from the University
of California at Berkeley and a Master of Business Administration degree from
Harvard University.
David S. Oros has served as a director of our company since July 2000. In
1996, Mr. Oros founded Aether Systems, Inc., a provider of wireless data
services and systems for wireless handheld devices, and has been Aether's
Chairman, Chief Executive Officer and President since its inception. Mr. Oros
also serves on the board of directors of OmniSky Corporation, which offers a
wireless service for use on handheld mobile devices. From 1994 until 1996, Mr.
Oros was President of NexGen Technologies, L.L.C., a wireless software
development company that contributed all of its assets to Aether. From 1992
until 1994, he was President of the Wireless Data Group at Westinghouse Electric
Company. Prior to that, Mr. Oros spent from 1982 until 1992 at Westinghouse
Electric directing internal research and managing large programs in advanced
airborne radar design and development. Mr. Oros received a Bachelor of Science
degree in mathematics and physics from the University of Maryland and holds a
U.S. patent for a multi-function radar system.
Mark Rossi has served as a director of our company since December 1999.
Since December 1996, Mr. Rossi has served as Managing Director of Cornerstone
Equity Investors, LLC, a private equity investment firm that specializes in
technology and telecommunications, business service and healthcare information
investments. Prior to joining Cornerstone, Mr. Rossi served as the President of
Prudential Equity Investors, Inc., a private equity investment firm, from June
1994 to December 1996. Mr. Rossi also serves as a director of Maxwell
Technologies, Inc., a diversified technology products and services company,
MCMS, Inc. an electronics manufacturing services company, True Temper Sports,
Inc., a designer and manufacturer of golf shafts and specialty tubing products,
and several private companies. Mr. Rossi holds a Bachelor of Arts degree from
Saint Vincent College and a Master of Business Administration in finance from
the Kellogg School of Management at Northwestern University.
Steven Sherman has served as a director of our company since August 1996.
Mr. Sherman also served as our Chief Executive Officer from August 1997 until
November 1998 and as Chairman of the Board from August 1997 until September
1999. In 1990, Mr. Sherman founded Main Street and Main, a restaurant franchise
holding company, and served as its Chairman until 1994. Since 1988, Mr. Sherman
has been the managing member of Sherman Capital Group, L.L.C., a merchant
banking organization. Mr. Sherman founded and served in various capacities,
including Chairman and Chief Executive Officer at Vodavi Communication Systems,
Inc., a telephone hardware and software company, until its acquisition of
Executone Information Systems, Inc. in 1988. He was a director of Executone from
1988 until 1990. Currently, Mr. Sherman is chairman of the board of Airlink
Communications, Inc., a wireless software infrastructure business. Mr. Sherman
holds a Bachelor of Arts degree in Business Administration from City College of
New York.
BOARD COMPOSITION
We currently have authorized eight directors. Our amended and restated
certificate of incorporation provides for a classified board of directors that
consists of three classes of directors, each serving staggered three year terms.
As a result, a portion of the board of directors will be elected each year. The
three classes will be as nearly equal in number as possible, as determined by
the board of directors. The Class I directors will serve an initial term until
the annual meeting of stockholders to be held in 2001, the Class II directors
will serve an initial term until the annual meeting of stockholders to be held
in 2002, and the Class III directors will serve an initial term until the annual
meeting of stockholders to be held in 2003. Each class will be elected for
three-year terms following its respective initial term. Messrs. Gibb and Haight
have been designated Class I directors whose terms expire at the 2001 meeting of
stockholders. Messrs. Rossi and Sherman have been designated Class II directors
whose terms expire at the 2002 annual meeting of stockholders. Messrs. Getz,
Major and Oros have been designated Class III directors whose terms expire at
the 2003 annual meeting of stockholders. At each annual meeting of stockholders,
directors will be elected by the holders of common stock to succeed those
directors whose terms are expiring. Any
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<PAGE> 51
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes of directorships so that, as nearly
as possible, each class will consist of one-third of the total number of
directors. This classification of our board of directors may have the effect of
delaying or preventing changes in control of our company or in our management.
See "Description of Securities -- Delaware Antitakeover Law and Charter and
Bylaw Provisions." The executive officers are elected by and serve at the
discretion of our board of directors. Our non-employee directors devote such
time to the affairs of our company as is necessary to discharge their duties.
There are no family relationships among any of our directors or our executive
officers.
BOARD COMMITTEES
We have established an audit committee composed of independent directors
that reviews and supervises our financial controls, including the selection of
our independent accountants, reviews our books and accounts, meets with our
officers regarding our financial controls, acts upon recommendations of our
auditors and takes further actions as the audit committee deems necessary to
complete an audit of our books and accounts. The audit committee also performs
other duties as may from time to time be determined. The audit committee
currently consists of three directors, Messrs. Getz, Gibb and Haight.
We have also established a compensation committee that reviews and approves
the compensation and benefits of our executive officers, administers our
compensation, stock incentive, and stock purchase plans, makes recommendations
to the board of directors regarding these matters and performs other duties as
may from time to time be determined by our board of directors. The compensation
committee currently consists of two directors, Messrs. Haight and Rossi.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from us for
attending board of directors or committee meetings, except for reimbursement of
reasonable expenses incurred in connection with attending those meetings.
Directors who are employees of ours are eligible to participate in our 2000
stock incentive plan and our 2000 employee stock purchase plan. Non-employee
directors who join our board after this offering are eligible to participate in
our 2000 stock incentive plan. Our 2000 stock incentive plan and our 2000
employee stock purchase plan were adopted by our board on July 24, 2000 and will
be approved by our stockholders prior to the consummation of this offering. Our
2000 stock incentive plan generally provides for an automatic initial grant of
options to purchase 20,000 shares of our common stock to each non-employee
director on the date on which a person first becomes a non-employee director of
our company. After the initial grant, a non-employee director will be granted
each year on the date of our annual meeting of stockholders a subsequent option
to purchase 5,000 shares of our common stock, if he or she continues to serve
after such annual meeting and if he or she received an initial stock option
grant. These options vest over a four-year period with 25% of the option shares
vesting on the first anniversary of the date of grant and the remainder vesting
in 36 equal monthly installments, with accelerated vesting in the event of
certain changes of control. Non-employee directors receive grants solely at the
discretion of the compensation committee. The exercise price of options will be
100% of the fair market value per share of our common stock on its date of
grant. For an additional description of these option plans, please refer to our
discussion under "Compensation Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our compensation committee members has been an officer or employee
of our company or any subsidiary of our company at any time. None of our
executive officers serves on the board of directors or compensation committee of
any entity that has one or more executive officers serving as a member of our
board of directors or our compensation committee. Until April 2000, Mr. Sherman,
one of our directors, was a member of our compensation committee. Mr. Sherman
has been chief executive officer of Novatel Wireless Solutions, Inc., one of our
subsidiaries, since April 1996.
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EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation received for services rendered to us during the fiscal year ended
December 31, 1999 by our Chief Executive Officer and each of the other four most
highly compensated executive officers, each of whose aggregate compensation
during the last fiscal year exceeded $100,000, referred to collectively in this
prospectus as the named executive officers. No individual who would otherwise
have been includable in the table on the basis of salary and bonus earned during
1999 has resigned or otherwise terminated his or her employment during 1999.
In July 2000, Mr. Major was appointed as our Chief Executive Officer. His
annual base salary is $325,000. In September 1999, Mr. Weitzner joined us as our
Vice President of Operations and Research and Development. His annualized salary
for 1999 was $220,000. Mr. Weitzner's employment was terminated in July 2000. In
July 2000, Mr. Schlief was appointed as our Vice President of Operations. His
annual salary is $225,000, and he received a one time sign-on bonus of $28,000.
In February 2000, Mr. Flowers was appointed as our Chief Financial Officer. His
annual salary is $160,000.
Annual compensation listed in the following table excludes other
compensation in the form of perquisites and other personal benefits that is less
than the lesser of $50,000 or 10% of the total annual salary and bonus of each
of the named executive officers in 1999. The options listed in the following
table were originally granted under our 1997 employee stock option plan. These
options will be incorporated into our 2000 stock incentive plan, but will
continue to be governed by their existing terms. See "Management -- 2000 Stock
Incentive Plan."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Robert Corey(1)........................................... $200,000 $50,000 --
Chief Executive Officer
Ambrose Tam(2)............................................ 162,302 48,418 --
President, Chief Operating Officer and Chief Technology
Officer
Bruce Gray................................................ 141,750 -- 50,000
Senior Vice President, Sales and Marketing
Roger Hartman(1).......................................... 157,225 20,000 --
Chief Financial Officer and Vice President
James Palmer(1)........................................... 179,815 -- --
Vice President, Operations and Research & Development
</TABLE>
---------------
(1) Mr. Corey ceased serving as our Chief Executive Officer in July 2000, Mr.
Hartman ceased serving as our Chief Financial Officer in February 2000 and
Mr. Palmer ceased serving as our Vice President, Operations and Research and
Development, in October 1999.
(2) Mr. Tam's annual salary compensation in 1999 was (Canadian) $238,568, and
his annual bonus compensation in 1999 was (Canadian) $71,280. The amount
shown is based on the daily Noon Buying Rate of (Canadian) $1.46 per (US)
$1.00 on July 26, 2000.
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<PAGE> 53
OPTION GRANTS IN FISCAL YEAR 1999
The following table provides summary information regarding stock options
granted to our named executive officers during the fiscal year ended December
31, 1999. No stock appreciation rights were granted during 1999.
The potential realizable value is calculated assuming the fair market value
of the common stock appreciates at the indicated rate for the entire term of the
option and that the option is exercised and sold on the last day of its term at
the appreciated price. Stock price appreciation of 5% and 10% is assumed
pursuant to the rules of the Securities and Exchange Commission and does not
represent our estimate or projection of future common stock prices. We cannot
assure you that the actual stock price will appreciate over the term of the
options at the assumed 5% and 10% rates or at any other defined rate. Actual
gains, if any, on stock option exercises will depend on the future performance
of our common stock. Unless the market price of the common stock appreciates
over the option term, no value will be realized from the option grants made to
the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
DATE OF OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANT GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------------- ---------- ------------- ----------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Bruce Gray........... October 25, 1999 50,000 17.83% $2.86 October 24, 2009 $ 89,932 $227,905
John Weitzner........ August 18, 1999 75,000 26.74% $2.86 August 17, 2009 $134,898 $341,858
</TABLE>
In 1999, we granted options to purchase up to a total of 280,500 shares to
employees, directors and consultants under our 1997 employee stock option plan
at an exercise price equal to the fair market value of our common stock on the
date of grant, as determined in good faith by our board of directors.
Mr. Gray's options began to vest on January 1, 2000. The options vest over
a four-year period, with 25% of the option shares vesting on the first
anniversary of the date of grant, and the remaining shares vesting in equal
monthly installments over the 36-month period following that date. The vesting
of the options will immediately accelerate upon a sale or merger of our company.
Mr. Weitzner's options began to vest on September 1, 1999. In July 2000, Mr.
Weitzner ceased to be an employee of our company. As of July 25, Mr. Weitzner
held options to purchase 75,000 shares of our common stock at an exercise price
of $2.86 per share, none of which had vested.
In July 2000, Mr. Major was appointed Chief Executive Officer, and we
granted Mr. Major options to purchase 1,012,180 shares of common stock at an
exercise price of $15.00 per share. The option shares will vest and become
exercisable as follows: 202,436 option shares are immediately exercisable;
126,523 option shares vest and become exercisable on July 24, 2001; 126,523
option shares vest and become exercisable on July 24, 2002; and 101,218 option
shares vest and become exercisable on each July 24 of 2001, 2002, 2003 and 2004.
In addition, 151,827 option shares shall vest and become exercisable on the
earlier to occur of (1) our attaining certain milestones before December 31,
2000 and (2) with respect to 75,916 option shares, on July 24, 2003 and with
respect to another 75,916 option shares, on July 24, 2004. The vesting of the
option shares will immediately accelerate upon a change in control of our
company. The options expire on the first to occur of 6 months after termination
(in the event of termination of Mr. Major's employment by death or disability),
90 days after termination (in the event of termination of Mr. Major's employment
for any other reason) or July 24, 2010.
In July 2000, Mr. Schlief was appointed Vice President, Operations, and we
granted Mr. Schlief options to purchase 200,000 shares of common stock at an
exercise price of $15.00 per share. The options are subject to our 1997 employee
stock option plan and will vest over a four-year period, with 25% of the option
shares vesting each year.
In February 2000, Mr. Flowers was appointed Vice President of Finance and
Chief Financial Officer, and we granted Mr. Flowers options to purchase 125,000
shares of common stock at an exercise price of
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<PAGE> 54
$5.00 per share. The options will vest over a four-year period, with 25% of the
option shares vesting on February 17, 2001, and the remainder vesting in equal
monthly installments over the 36-month period following that date. The vesting
of the options will immediately accelerate upon a sale or merger of our company.
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of shares of common stock underlying the unexercised options held by the named
executive officers as of December 31, 1999. The table also sets forth the value
realized upon exercise of stock options in fiscal year 1999, and the year-end
number and value of unexercised options with respect to each of the named
executive officers as of December 31, 1999. The value was calculated by
determining the fair market value of our common stock on the date of exercise,
as determined in good faith by our board of directors, less the exercise price
paid for the shares. The value of unexercised in-the-money options at December
31, 1999 is calculated based on an assumed initial public offering price of
$ , less the exercise prices of the options, multiplied by the number
of shares underlying those options.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS
NUMBER OF 1999 AT DECEMBER 31, 1999
SHARES ACQUIRED --------------------------- ---------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Corey(1)........ -- -- 145,833 354,167
Ambrose Tam............ -- -- 15,000 15,000
John Weitzner(1)....... -- -- -- 75,000
Bruce Gray............. -- -- 10,000 80,000
Roger Hartman(1)....... -- -- 25,000 75,000
James Palmer(1)........ 100,000 $490,000 100,000 --
</TABLE>
---------------
(1) Messrs. Corey and Weitzner left the company in July 2000; Mr. Hartman left
the company in February 2000; Mr. Palmer left the company in October 1999.
EMPLOYMENT-RELATED ARRANGEMENTS
In August 2000, we entered into an employment agreement with John Major
covering an initial term of three years under which Mr. Major will serve as the
Chairman of our board of directors and as our Chief Executive Officer. The
agreement provides for Mr. Major to receive an annual base salary of $325,000,
subject to review by our board at least annually, and an annual performance
incentive bonus payable in a single installment in an amount equal to up to 100%
of Mr. Major's then applicable annual salary. The agreement provides for Mr.
Major to receive half his bonus in cash and the remaining half in shares of our
common stock. In addition, we granted Mr. Major options to purchase up to
1,012,181 shares of our common stock at an exercise price of $15.00 per share.
Twenty percent of these options vested and became exercisable on their date of
grant and the remaining options will vest and become exercisable with the
passage of time or upon the occurrence of specified events. In the event that we
terminate Mr. Major without cause, or in the event he terminates his employment
with us because we have materially breached the terms of his employment
agreement or because a change of control occurs, he is entitled to receive in a
lump sum payment an amount equal to his base salary then in effect and all
unvested options will immediately vest and become exercisable. Mr. Major would
then also be entitled to a bonus equal to the amount of the bonus he had earned
as of the date of his termination as well as to the continuation of certain
employee benefits pursuant to the terms of existing company plans. If we
terminate Mr. Major's employment for cause, or Mr. Major terminates his
employment without good reason, Mr. Major will be entitled to received severance
and other benefits only as may then be established under our existing severance
and benefit plans and policies at the time of such termination.
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<PAGE> 55
On August 21, 1996, Ambrose Tam entered into a five-year employment
agreement with us and one of our subsidiaries, NWT, under which Mr. Tam agreed
to serve as our and NWT's President and Chief Operating Officer. The employment
agreement provides for an annual salary of no less than (Canadian) $187,440 (US
$127,523) adjusted from time to time, and an annual performance incentive bonus
targeted to be 33% of his annual base salary, based on the achievement of
certain performance objectives. The employment agreement provides that if Mr.
Tam is terminated without cause, he will be entitled to (Canadian) $250,000 (US
$170,486), payable in two equal installments, the first of which would occur
upon his termination and the second of which would occur six months thereafter.
In this event, Mr. Tam would also receive a performance bonus prorated for the
period it covers and he would continue to receive certain employee benefits for
12 months. If Mr. Tam terminates his employment because of a material breach of
the employment agreement by either us or NWT, he will be entitled to (Canadian)
$250,000 (US $170,486), his incentive bonus prorated for the year and the
continuation of certain employee benefits for 12 months. In the event of a
change of control of either us or NWT, Mr. Tam will be entitled to (Canadian)
$125,000 (US $85,243) if he resigns from employment within 30 days from the date
of the change of control. All US dollar amounts presented above are based on the
daily Noon Buying Rate of (Canadian) $1.46 per (US)$1.00 on July 26, 2000.
We have entered into arrangements with several of our employees which
provide that the salary of each of these employees will continue for six months
if we cease to do business or if the employee's employment is terminated without
cause.
On April 17, 2000, we entered into a separation agreement and general
release with Roger Hartman pursuant to which, effective April 30, 2000, Mr.
Hartman agreed to terminate his employment with us. As of April 30, 2000, Mr.
Hartman held 100,000 options to purchase shares of our common stock at an
exercise price of $2.86 per share, 25,000 of which had vested. Under our
agreement, Mr. Hartman will serve as a consultant to us for a period of six
months ending October 31, 2000 for a monthly consultant fee of approximately
$12,000 and will be considered an employee for purposes of the vesting of his
stock options and participation in our 401(k) plan. After October 31, 2000, for
the two-month period ending December 31, 2000, Mr. Hartman will serve us as a
part-time consultant for which he will not be paid a consulting fee, though his
stock options will continue to vest.
COMPENSATION PLANS
1997 EMPLOYEE STOCK OPTION PLAN
Our 1997 employee stock option plan provided for the grant to employees of
incentive and nonstatutory stock options. As of July 25, 2000, 2,987,819 shares
were authorized under the plan, 1,888,550 shares were subject to outstanding
options and 1,099,269 shares remain available for future grant. Our board of
directors has determined that no further options will be granted under the 1997
stock option plan after the completion this offering. The remaining shares
issuable under the 1997 employee stock option plan shall be available for
issuance under our 2000 stock incentive plan.
2000 STOCK INCENTIVE PLAN
Our 2000 stock incentive plan was adopted by our board of directors on July
24, 2000 and will be approved by our stockholders prior to consummation of this
offering. The plan will become effective upon our initial public offering. At
that time, all outstanding options under our 1997 employee stock option plan
will be transferred to the 2000 stock incentive plan, and no further option
grants will be made under the 1997 plan. The transferred options will continue
to be governed by their existing terms, unless a committee of our board
administrating the plan decides to extend one or more of those features of the
2000 stock incentive plan to those options.
The 2000 stock incentive plan provides for the discretionary grant of
incentive stock options to employees, including officers and employee directors,
and for the discretionary grant of nonstatutory stock options, stock
appreciation rights, stock units and stock purchase rights to employees,
directors and consultants. A total of 4,500,000 shares of our common stock has
been reserved for issuance under the
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<PAGE> 56
2000 stock incentive plan including the shares attributable to the 1997 employee
stock option plan, excluding shares issuable upon exercise of options granted to
our Chief Executive Officer in connection with his employment agreement.
Beginning with the first fiscal year following the effective date of the 2000
stock incentive plan, on the first day of each fiscal year, shares will be added
to the 2000 stock incentive plan equal to the lesser of (i) 500,000 shares, (ii)
three percent of the shares of our common stock outstanding in the last day of
the prior fiscal year, or (iii) such lesser number of shares as may be
determined by our board in its sole discretion. Unless terminated sooner, the
2000 stock incentive plan will terminate on July 23, 2010.
A committee of our board which is comprised solely of independent directors
will generally serve as administrator of the 2000 stock incentive plan from and
after the date of this offering. The administrator of our 2000 stock incentive
plan generally has the power to select the key employees who are to receive
awards under the plan, interpret and operate the plan, determine the type,
number, vesting requirements and other features and conditions of an award of
the options, restricted stock, stock appreciation rights and stock units
granted. The compensation committee shall consist of at least two independent
directors who shall satisfy the requirements of Rule 16b-3 (or its successor)
promulgated under the Securities Exchange Act of 1934, as amended, with respect
to awards granted to our officers and directors under Section 16 of this Act.
Our board is the administrator of the 2000 stock incentive plan's
non-employee director grant program. Non-employee directors who first join our
board after the effective date of our initial public offering will receive a
grant of an option to purchase 20,000 shares of our common stock when they
become non-employee directors. In addition, all non-employee directors who
receive such an initial grant will receive a grant each subsequent annual
meeting of an option to purchase 5,000 shares, provided they continue to serve
after such annual meeting. These options generally vest over a four-year period
with 25% of the option shares vesting on the first anniversary of the date of
grant and the remainder vesting in 36 equal monthly installments commencing on
the date one month and one year after the date of grant. These options also
provide for accelerated vesting in the event of certain changes of control.
Non-employee directors receive grants solely at the discretion of our
compensation committee.
Our board has the authority to amend, suspend or terminate the 2000 stock
incentive plan at any time for any reason, but no such action shall affect any
award previously granted under the plan. The maximum number of shares subject to
options and/or stock appreciation rights that each optionee may be granted
during a fiscal year is 1,000,000 shares, or 2,000,000 shares in the first
fiscal year of an optionee's employment with us. Restricted stock and stock unit
grants are limited to 500,000 shares per person in any fiscal year, or 1,000,000
shares, in the first fiscal year of a participant's employment with us.
Awards granted under our 2000 stock incentive plan are generally not
transferable by the optionee, and each option and stock appreciation right is
exercisable during the lifetime of the optionee only or by the optionee's
guardian or legal representative. The plan provides that a stock appreciation
rights agreement under the plan may provide for accelerated exercisability in
the event of the optionee's death, disability or retirement or other events and
may provide for expiration prior to the end of its term in the event of the
termination of the optionee's service to us.
In the case of restricted stock and stock units, unless the administrator
determines otherwise, the restricted stock purchase agreement shall grant us a
repurchase option exercisable after the purchaser's employment or other service
relationship with us has ended for any reason, including his or her death or
disability. Each award of restricted stock and stock units will be granted
pursuant to an agreement between us and the participant, and will vest in full
or in installments in accordance with the respective agreement, which may
provide for acceleration upon the occurrence of certain events. The purchase
price for shares repurchased pursuant to the restricted stock purchase agreement
shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to us. The repurchase option
shall lapse at a rate determined by the administrator.
The exercise price of all incentive stock options and nonstatutory stock
options granted automatically to non-employee directors must be at least equal
to the fair market value of our common stock on the date
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<PAGE> 57
of grant. The exercise price of other nonstatutory stock options and stock
purchase rights granted under the 2000 stock incentive plan is determined by the
administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Internal Revenue Code of 1986, as amended (Internal Revenue Code), the
exercise price must be at least equal to the fair market value of our common
stock on the date of the grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of our outstanding
capital stock, the exercise price of any incentive stock option granted must at
least equal 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 2000 stock incentive plan may not exceed ten years.
The 2000 stock incentive plan provides that in the event that our company
is a party to a merger or other reorganization, outstanding awards, other than
grants to directors, shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding awards by the surviving corporation or its parent, for
their continuation by us if we are the surviving corporation, for accelerated
vesting or for their cancellation with or without consideration. The plan
administrator may determine, at the time of granting an award or thereafter,
that such award shall become fully vested as to all shares subject to such award
in the event that a change in control occurs with respect to our company.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 employee stock purchase plan (2000 purchase plan) was adopted by
our board of directors on July 24, 2000 and will be approved by our stockholders
prior to consummation of this offering. The plan will become effective upon our
initial public offering. A total of 500,000 shares of our common stock will be
reserved for issuance under the 2000 purchase plan. Also, beginning with our
first fiscal year beginning after the effective date of the 2000 purchase plan,
on the first day of each fiscal year, shares will be added to the 2000 purchase
plan equal to the lesser of (a) 0.5% of the outstanding shares of our common
stock on the last day of the prior fiscal year, (b) 90,000 shares, or (c) such
lesser number of shares as may be determined by our board in its sole
discretion.
Under the 2000 purchase plan, which is intended to qualify under Section
423 of the Internal Revenue Code, our board of directors may determine the
duration and frequency of stock purchase periods. Initially the plan will
operate using consecutive, overlapping, twenty-four month offering periods. Each
offering period will include four approximately six-month purchase periods. The
offering periods generally start on the first trading day on or after February 1
and August 1 of each year, except for the first such offering period which
commences on the effective date of the initial public offering and ends on the
last trading day on or before January 31, 2002.
Employees of our company or of any designated subsidiary of ours will be
eligible to participate. However, no employee may be granted an opportunity to
purchase stock under the 2000 purchase plan if immediately after the grant, he
or she would own stock possessing 5% or more of the total combined voting power
or value of all classes of our capital stock.
The 2000 purchase plan permits participants to purchase our common stock
through payroll deductions of up to 10% of their total annual compensation.
Amounts deducted and accumulated by the participant are used to purchase shares
of common stock at the end of each purchase period. The price of stock purchased
under the 2000 purchase plan is generally 85% of the lower of the fair market
value of the common stock either at the beginning of the offering period (85% of
the price at which a share is first offered by the underwriters to the public in
the case of the first offering period) or at the end of the purchase period. In
the event the fair market value at the end of a purchase period is less than the
fair market value at the beginning of the offering period, the participants will
be withdrawn from the current offering period following exercise and
automatically re-enrolled in a new offering period. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
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Rights granted under the 2000 purchase plan are not transferable by a
participant other than upon his or her death or by a special determination by
the plan administrator. Each outstanding option under the 2000 purchase plan
will be subject to the acquisition agreement in the event we merge with or into
another corporation or sell substantially all of our assets.
Our board of directors has the authority to amend or terminate the 2000
purchase plan at any time for any reason. Unless earlier terminated by our board
of directors, the 2000 purchase plan will terminate automatically 10 years from
its effective date.
401(K) PLAN
Our 401(k) plan covers our employees located in the United States. The
401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue
Code. Consequently, contributions to the 401(k) plan by the employees or by us,
and the investment earnings thereon, are not taxable to employees until
withdrawn from the 401(k) plan. Further, contributions by us, if any, will be
deductible by us when made. Employees may elect to contribute up to 15% of their
current annual compensation to the 401(k) plan up to the statutorily prescribed
annual limit. The 401(k) plan does not currently permit, but may in the future
be amended to permit, additional matching contributions to the 401(k) plan by us
on behalf of all participants in the 401(k) plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, we have included a
provision in our amended and restated certificate of incorporation to indemnify
our officers and directors against liability for monetary damages for breach or
alleged breach of their fiduciary duties as officers or directors, other than in
cases of fraud or other willful misconduct. Our bylaws provide that we will
indemnify our officers and directors to the maximum extent permitted by Delaware
law and may indemnify our other employees and agents to the maximum extent
permitted by Delaware. In addition, our bylaws provide that we will advance
expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. In addition, we plan
to enter into indemnification agreements with our officers and directors. The
indemnification agreements will require us, among other things, to indemnify
officers and directors against liabilities that may arise by reason of their
status or service as officers and directors (but not for liabilities arising
from willful misconduct of a culpable nature), and to advance sums covering the
expenses they incurred as a result of any proceeding against them as to which
they could be indemnified.
We have obtained an insurance policy covering directors and officers for
claims they would otherwise be required to pay or for which we are required to
indemnify them.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent of ours in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a material claim for
such indemnification. We believe that our charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
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RELATED PARTY TRANSACTIONS
Since January 1, 1997, there has not been any transaction or series of
similar transactions to which we were or are a party in which the amount
exceeded or exceeds $60,000 and in which any executive officer, director or any
holder of more than 5% of any class of our voting securities or any member of
the immediate family or any of the foregoing persons had or will have a direct
or indirect material interest, other than the transactions described below.
SERIES D FINANCING
On June 30, 2000 and on July 14, 2000 we issued and sold an aggregate of
1,964,050 shares of our Series D preferred stock at a purchase price of $17.25
per share. We also issued warrants to purchase an aggregate of 392,800 shares of
our common stock at an exercise price of $17.25 per share. Of the 1,964,050
shares of Series D preferred stock and the 392,800 accompanying warrants that we
issued and sold, we issued and sold a total of 1,752,105 such shares and a total
of 350,418 warrants to the following executive officers, directors, and greater
than 5% stockholders of our company and persons associated with them for a total
purchase price of approximately $30,223,812.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF TOTAL
PURCHASER SHARES WARRANTS PURCHASE PRICE
--------- --------- --------- --------------
<S> <C> <C> <C>
Aether Capital, LLC..................................... 1,159,420 231,884 $19,999,995
Cornerstone Equity Investors IV, L.P. .................. 289,855 57,971 4,999,999
GSM Capital Limited Partnership......................... 172,173 34,434 2,969,984
Bank of Montreal Capital Corporation.................... 60,638 12,127 1,046,006
Working Ventures Canadian Fund, Inc..................... 57,971 11,594 1,000,000
Ventures West Investments Limited....................... 9,096 1,819 156,906
ARGC III, LLC........................................... 1,739 347 29,998
Sam Znaimer............................................. 1,213 242 20,924
</TABLE>
David S. Oros, one of our directors, serves as Chairman, Chief Executive
Officer and President of Aether Systems, Inc., which is the sole member of
Aether Capital, LLC. Mr. Oros is also a director of OmniSky Corporation, in
which Aether Systems, Inc. is an investor. In July 1999, we entered into an
agreement with OmniSky for the development and sale of our Minstrel III and
Minstrel V cradle modems for the Palm III and Palm V handheld computing devices.
Although the term of this agreement ended on May 1, 2000, we are currently
shipping and provisioning modems to OmniSky pursuant to this agreement. For the
year ended December 31, 1999 OmniSky accounted for 14.3% of our revenue.
Robert Getz and Mark Rossi, two of our directors, are each managing
directors of Cornerstone Equity Investors, LLC, which is the managing general
partner of Cornerstone Equity Investors IV, L.P. Sam Znaimer, one of our former
directors, is a senior vice president of Ventures West Capital Ltd., which
wholly owns Ventures West Management TIP, Inc., which in turn manages Bank of
Montreal Capital Corporation. Ventures West Capital Limited also controls
Ventures West Investments Limited.
H.H. Haight, one of our directors, and Bernice Bradin, one of our former
directors, are executives of Argo Global Capital, Inc., which manages GSM
Capital Limited Partnership. They are also both members of ARGC III, LLC and of
ARGC, LLC (the latter of which purchased certain of our convertible subordinated
debentures in our bridge financing transaction which we discuss below) and are
limited partners of Advent Partners Limited Partnership, an entity that
participated in some of our earlier financing rounds. In addition, they are
entitled to receive a percentage of the carried interest payable to the managing
general partner of each of Advent Israel Limited Partnership, Advent Israel
(Bermuda) Limited Partnership, Golden Gate Development & Investment Limited
Partnership and Digital Media & Communications Limited Partnership provided
these funds show a gain on their investments. Each such fund purchased shares of
our preferred stock in earlier rounds of financing.
Nathan Gibb, one of our directors, is an investment manager of Working
Ventures Canadian Fund, Inc.
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<PAGE> 60
SERIES C FINANCING
On December 31, 1999, we issued and sold a total of 3,674,277 shares of
Series C preferred stock at a purchase price of $8.34 per share. We also issued
warrants to purchase a total of 706,357 and 9,856 shares of common stock at an
exercise price of $10.00 and $8.34 per share, respectively, on or prior to
December 31, 2004.
Of the 3,674,277 shares of Series C preferred stock that we issued and
sold, a total of 1,916,628 shares of Series C preferred stock and warrants to
purchase a total of 679,124 shares of common stock were issued and sold to the
following executive officers, directors and greater than 5% stockholders of our
company and persons affiliated with them for a total purchase price of
approximately $16.0 million:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF TOTAL
PURCHASER SHARES WARRANTS PURCHASE PRICE
--------- --------- --------- --------------
<S> <C> <C> <C>
Cornerstone Equity Investors IV, L.P. .................. 1,798,561 359,712 $15,000,000
Bank of Montreal Capital Corporation.................... 100,913 273,001 841,614
Ventures West Investments Limited....................... 15,136 40,950 126,234
Sam Znaimer............................................. 2,018 5,461 16,830
</TABLE>
1999 BRIDGE FINANCING
On June 24, 1999 and July 15, 1999, we issued and sold convertible
subordinated debentures to purchasers in the total original principal amount of
$3,120,000 bearing interest at the rate of 8% per annum. Of this amount,
$500,000 was issued and sold by our subsidiary NWT. We also issued warrants to
purchase a total of 1,310,002 shares of common stock at an exercise price of
$2.00 per share on or prior to June 24, 2004 or July 15, 2004, respectively. NWT
also issued warrants to purchase 250,000 shares of NWT's common stock at an
exercise price of $2.00 per share. Upon the exercise of these NWT Warrants, the
resulting shares of NWT common stock are thereafter exchangeable on a
one-for-one basis for shares of our common stock. Immediately upon the closing
of our Series C preferred stock financing, the principal amount then outstanding
under the convertible subordinated debentures that we and NWT issued, together
with accrued but unpaid interest thereon, automatically converted into an
aggregate of 388,907 shares of Series C preferred stock at a price of $8.34 per
share.
Of the $3,120,000 original principal amount of debentures that we and NWT
issued and sold, we and NWT issued and sold a total original principal amount of
$2,772,522 and warrants to purchase a total of 1,386,261 shares of Series C
preferred stock and NWT common stock to the following executive officers,
directors or greater than 5% stockholders of our company and persons affiliated
with them:
<TABLE>
<CAPTION>
TOTAL PRINCIPAL
AMOUNT OF
CONVERTIBLE
NUMBER OF SUBORDINATED
PURCHASER WARRANTS DEBENTURES
--------- --------- ---------------
<S> <C> <C>
GSM Capital Limited Partnership............................. 438,884 $877,768
Bank of Montreal Capital Corporation........................ 266,078 532,156
Working Ventures Canadian Fund, Inc. ....................... 250,000 500,000
Marco Polo Industries Co., Ltd. ............................ 148,985 297,970
Digital Media & Communications Limited Partnership.......... 95,131 190,262
Robert Corey................................................ 50,000 100,000
Ventures West Investments Limited........................... 39,912 79,824
Golden Gate Development & Investment Limited Partnership.... 39,574 79,148
Advent Israel Limited Partnership........................... 27,158 54,316
Advent Partners Limited Partnership......................... 13,011 26,022
Roger Hartman............................................... 10,000 20,000
Sam Znaimer................................................. 5,322 10,644
ARGC, LLC................................................... 2,206 4,412
</TABLE>
57
<PAGE> 61
Mr. Corey is a former chief executive officer and Mr. Hartman is a former
chief financial officers of ours. Horst Pudwill, who is a former director of
ours, owns a limited partnership interest in Marco Polo Industries Co., Ltd.
SERIES B FINANCING
On December 23, 1997, April 24, 1998 and September 1, 1998, we issued and
sold a total of 2,084,281 shares of our Series B preferred stock at a purchase
price of $4.26 per share. We also issued warrants to purchase a total of 861,710
shares of common stock at an exercise price of $4.26 per share on or prior to
December 31, 2002 or April 24, 2003, depending on their date of issuance. In
addition, on December 23, 1997, our subsidiary NWT issued 213,614 shares of its
Series B preferred stock at a purchase price of $4.26 per share. These NWT
shares are exchangeable on a one-for-one basis for shares of our Series B
preferred stock, which will automatically convert into shares of our common
stock immediately prior to the completion of this offering.
Of the 2,297,895 shares of Series B preferred stock that each of Novatel
Wireless and NWT issued and sold, a total of 1,659,042 shares of Series B
preferred stock and warrants to purchase a total of 622,141 of common stock were
issued and sold to the following executive officers, directors and greater than
5% stockholders of Novatel Wireless and persons associated with them:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF TOTAL
PURCHASER SHARES WARRANTS PURCHASE PRICE
--------- --------- --------- --------------
<S> <C> <C> <C>
GSM Capital Limited Partnership......................... 1,027,523 385,321 $4,377,248
Working Ventures Canadian Fund, Inc. ................... 213,614 80,105 909,996
Bank of Montreal Capital Corporation.................... 176,793 66,297 753,138
Steven Sherman.......................................... 117,371 44,014 500,000
Marco Polo Industries Co., Limited...................... 58,685 22,007 249,998
Sherman Capital Group, LLC.............................. 35,000 13,125 149,100
Ventures West Investments Limited....................... 26,519 9,945 112,971
Sam Znaimer............................................. 3,537 1,327 15,068
</TABLE>
Steven Sherman, who serves on our board of directors, is the managing
member of Sherman Capital Group, LLC.
SERIES A FINANCING
Between August 26, 1996, and December 11, 1997, we issued and sold a total
of 2,263,857 shares of our Series A preferred stock at a purchase price of $2.13
per share. In addition, during that period our subsidiary NWT issued a total of
1,251,798 shares of its Series A preferred stock at a purchase price of $2.13
per share. These NWT shares are exchangeable on a one-for-one basis for shares
of our Series A preferred stock, which will automatically convert into shares of
our common stock immediately prior to the completion of this offering.
58
<PAGE> 62
Of the 3,515,655 shares of Series A preferred stock that we and NWT issued
and sold a total of 3,438,016 shares were issued and sold to the following
executive officers, directors and greater than 5% stockholders of our company
and persons affiliated with them.
<TABLE>
<CAPTION>
NUMBER OF TOTAL
PURCHASER SHARES PURCHASE PRICE
--------- --------- --------------
<S> <C> <C>
Working Ventures Canadian Fund, Inc. ....................... 1,251,798 $2,666,330
Bank of Montreal Capital Corporation........................ 625,947 1,333,267
Digital Media & Communications Limited Partnership.......... 563,265 1,199,754
GSM Capital Limited Partnership............................. 288,534 614,577
Golden Gate Development & Investment Limited................ 234,375 499,219
Advent Israel Limited Partnership........................... 160,800 342,504
Steven Sherman.............................................. 108,010 230,061
Ventures West Investments Limited........................... 93,895 199,996
Advent Partners Limited Partnership......................... 77,040 164,095
Advent Israel (Bermuda) Limited Partnership................. 19,680 41,918
Sam Znaimer................................................. 12,512 26,651
ARGC, LLC................................................... 2,160 4,601
</TABLE>
We believe that each transaction set forth above was made on terms no less
favorable to us than we could have obtained from unaffiliated third parties. All
future transactions, including loans, if any, between us and our officers,
directors and principal stockholders and their affiliates and any transaction
between us and any entity with which our officers, directors or greater than 5%
stockholders are affiliated will be approved by a majority of the members of the
board of directors, including a majority of the independent and disinterested
outside members of our board of directors and will be on terms no less favorable
to us than we could obtain from unaffiliated third parties.
RELATIONSHIPS WITH OFFICERS AND DIRECTORS
In June 1998 we entered into a consulting services agreement with one of
our directors, Steven Sherman. Pursuant to the agreement, Mr. Sherman agreed to
serve us as a special consultant for strategic business development in return
for monthly compensation in the amount of $7,000. In October 1999, this
agreement was terminated.
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<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of July 25, 2000, and as adjusted for this
offering, by:
- each person or entity whom we know beneficially to own more than 5% of
our outstanding stock;
- each of our directors and named executive officers; and
- all directors and executive officers as a group.
Each stockholder's percentage ownership in the following table prior to the
offering is based on 14,838,566 shares of common stock outstanding as of July
25, 2000. For purposes of calculating each stockholder's percentage ownership,
all options and warrants exercisable within 60 days of July 25, 2000 held by the
particular stockholder and that are included in the first column are treated as
outstanding shares, but are not deemed outstanding for computing the percentage
ownership of any other person. The numbers shown in the table below assume no
exercise by the underwriters of their over-allotment option.
Except as otherwise noted, the principal address of each person listed in
the table below is c/o Novatel Wireless, Inc., 9360 Towne Centre Drive, Suite
110, San Diego, CA 92121. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and includes voting and
investment power with respect to shares. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with respect to all
shares beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES ----------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED THE OFFERING THE OFFERING
------------------------------------ ---------------- ------------ ------------
<S> <C> <C> <C>
Cornerstone Equity Investors LLC(1)................... 2,506,099 16.43%
717 Fifth Avenue, Suite 1100
New York, NY 10022.
Robert Getz(1)........................................ 2,506,099 16.43
Marc Rossi(1)......................................... 2,506,099 16.43
Entities affiliated with Argo Global Capital,
Inc.(2)............................................. 2,463,750 15.69
Lynnfield Woods Office Park
210 Broadway, Suite 101
Lynnfield, MA 01949
H.H. Haight(2)........................................ 2,463,750 15.69
Working Ventures Canadian Fund, Inc.(3)............... 1,927,504 12.70
250 Bloor Street, East Suite 1600
Toronto, Ontario
CANADA M4W 1E6
Nathan Gibb(3)........................................ * *
Steven Sherman(4)..................................... 1,874,915 12.57
Entities affiliated with Ventures West Capital
Limited(5).......................................... 1,572,272 10.30
1285 West Pender Street, Suite 280
Vancouver, British Columbia
CANADA V6E 4B1
Aether Capital, LLC(6)................................ 1,391,304 9.23
11460 Cronridge Drive
Owings Mills, MD
David Oros(6)......................................... 1,391,304 9.23
Entities affiliated with Advent International
Corporation(7)...................................... 1,273,702 8.48
75 State Street, 29th Floor
Boston, MA 02109
</TABLE>
60
<PAGE> 64
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES ----------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED THE OFFERING THE OFFERING
------------------------------------ ---------------- ------------ ------------
<S> <C> <C> <C>
Marco Polo Industries Co., Ltd.(8).................... 1,164,091 7.76
1806, 18F, Central Plaza
18 Harbour Road
Wanchai, Hong Kong
Hong Kong
Ambrose Tam(9)........................................ 576,450 3.88
John Major(10)........................................ 354,263 2.36
Bruce Gray(11)........................................ 10,000 *
Melvin Flowers........................................ * *
Steven Schlief........................................ * *
---------- ------
All directors and executive officers as a group (11
persons)............................................ 11,104,285 65.49%
---------- ------
</TABLE>
---------------
* Less than one percent of the outstanding shares of our common stock.
(1) Represents 2,088,416 shares of common stock and warrants to purchase
417,683 shares of common stock. Each of Messrs. Rossi and Getz disclaims
beneficial ownership of these securities except to the extent of his
pecuniary interest.
(2) Represents 1,602,400 shares of common stock and warrants to purchase
861,350 shares of common stock. Mr. Haight disclaims beneficial ownership
of these securities except to the extent of his pecuniary interest.
(3) Represents 1,585,805 shares of common stock and warrants to purchase
341,699 shares of common stock held of record by Working Ventures Canadian
Fund. Mr. Gibb disclaims beneficial ownership of these securities except to
the extent of his pecuniary interest.
(4) Represents 1,795,276 shares of common stock, warrants to purchase 57,139
shares of common stock and options to purchase 22,500 shares of common
stock which are vested and immediately exercisable.
(5) Represents 1,152,318 shares of common stock and warrants to purchase
419,954 share of common stock.
(6) Represents 1,159,420 shares of common stock and warrants to purchase
231,884 shares of common stock. Mr. Oros is Chairman, Chief Executive
Officer and President of Aether Systems, Inc., the sole member of Aether
Capital, LLC, and he disclaims beneficial ownership of the shares held by
Aether Capital LLC except to the extent of his pecuniary interest.
(7) Represents 1,098,828 shares of common stock and warrants to purchase
174,874 shares of common stock.
(8) Represents 993,099 shares of common stock and warrants to purchase 170,992
shares of common stock. Mr. Pudwill, a former director of our company, owns
a limited partnership interest in Marco Polo Industries Co., Ltd. and
disclaims beneficial ownership of these securities except to the extent of
his pecuniary interest.
(9) Represents 553,950 shares of common stock and options to purchase 22,500
shares of our common stock which are vested and immediately exercisable.
(10) Represents 202,436 shares of common stock issuable upon exercise of
immediately exercisable options and 151,827 shares of common stock issuable
upon the exercise of options which may become exercisable before December
31, 2000.
(11) Represents options to purchase 10,000 shares of common stock which are
vested and immediately exercisable.
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<PAGE> 65
DESCRIPTION OF SECURITIES
Upon the completion of this offering, we will be authorized to issue up to
350,000,000 shares of common stock, $0.001 par value per share, and up to 15
million shares of undesignated preferred stock, $0.001 par value per share. All
shares of preferred stock currently outstanding will be converted into shares of
common stock upon the completion of this offering. As of July 15, 2000, assuming
conversion of all outstanding shares of preferred stock (including shares
converted into preferred stock in the NWT Exchange) into common stock and no
exercise of the underwriters' overallotment option, there were outstanding
14,838,566 shares of our common stock, warrants to purchase 3,539,305 shares of
common stock, and options to purchase 2,900,731 shares of common stock.
The following description of our securities does not purport to be complete
and is subject to and qualified by our amended and restated certificate of
incorporation and by our amended and restated bylaws, each of which is included
as an exhibit to the registration statement of which this prospectus forms a
part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of July 25, 2000, we had 70 holders of record of our common stock,
assuming both the conversion exchange of all outstanding shares of our preferred
stock and the NWT Exchange. There will be shares of common stock
outstanding after giving effect to this offering assuming no exercise of the
underwriter's overallotment option or exercise of outstanding options under our
stock option plans after July 25, 2000.
The holders of our common stock are entitled to one vote for each share
held of record on each matter submitted to a vote of our stockholders. Subject
to preferences that may be applicable to any outstanding preferred stock,
holders of our common stock are entitled to receive ratably such dividends as
may be declared by our board of directors from funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
winding up, the holders of our common stock are entitled to share ratably in all
assets remaining after payment of liabilities and subject to the prior
distribution rights of any outstanding preferred stock. Our common stock carries
no preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to it. The outstanding shares
of common stock are, and the shares of common stock to be issued upon completion
of this offering will be, duly authorized, validly issued, fully paid and non-
assessable.
PREFERRED STOCK
Our board of directors has the authority, without the need for further
action by our stockholders, to issue any or all our authorized but unissued
shares of preferred stock in one or more series. Our board of directors also has
the authority to designate the rights, preferences, privileges and restrictions
of each such series, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series. Any series of
preferred stock may possess voting, dividend, liquidation and redemption rights
superior to those of our common stock.
The issuance of preferred stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of entrenching our board of directors or of delaying, deferring or preventing a
third party from acquiring a majority of our outstanding voting stock. The
issuance of preferred stock with voting or conversion rights may also adversely
affect the voting power of the holders of our common stock. In certain
circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of shares of our common stock and delaying or
preventing a change of control. As of the closing of the offering, no shares of
preferred stock will be outstanding. We currently have no plans to issue any
shares of, or designate any series of, our preferred stock.
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<PAGE> 66
WARRANTS
As of July 25, 2000, there were warrants outstanding to purchase a total of
3,539,305 shares of our common stock. The warrants to purchase shares of
preferred stock that survive the closing of this offering will convert into
warrants to purchase shares of our common stock on the closing of this offering
on a one-for-one basis. Generally, each warrant contains provisions for the
adjustment of its exercise price and the number of shares issuable upon its
exercise upon the occurrence of any stock dividend, stock split, reorganization,
reclassification, consolidation and certain dilutive issuances of securities at
prices below the then existing applicable warrant exercise price. In addition,
the shares of our common stock issuable upon any exercise of the warrants
provide their holders with rights to have those shares registered and qualified
under federal and state securities laws, as discussed more fully below. Some of
these warrants have net exercise provisions under which the holder may, in lieu
of payment of the exercise price in cash, surrender the warrant and receive a
net amount of shares based on the fair market value of our common stock at the
time of exercise of the warrant after deduction of the aggregate exercise price.
REGISTRATION RIGHTS
Upon completion of this offering, under an amended and restated
registration rights agreement dated August 21, 1996, the holders of
approximately 5,813,550 shares of our common stock and warrants to purchase
approximately 944,156 shares of our common stock will be entitled to certain
rights with respect to the registration of shares under the Securities Act.
Under the terms of this agreement, if we propose to register any of our
securities under the Securities Act, these holders are entitled to notice of the
registration and are entitled to include shares of common stock in the
registration. The rights are subject to conditions and limitations, among them
the right of the underwriters of an offering to limit the number of shares
included in the registration. At any time following 180 days after this offering
and prior to five years after this offering, the holders of a majority of these
securities may require us to file registration statements under the Securities
Act with respect to their shares of common stock, and we are required to use our
best efforts to effect the registrations, subject to conditions and limitations.
Additionally, if any holder of these securities requests that we file a
registration statement on Form S-3 when such form becomes available to us, we
are required to effect such registration as long as the holders propose to sell
such securities at an aggregate price to the public of not less than $500,000.
Subject to the limitations contained in the agreement, we will be responsible
for paying all registration expenses and the holders selling their shares will
be responsible for paying all selling expenses.
In addition, upon completion of this offering, under an amended and
restated investors' rights agreement dated June 30, 2000, the holders of
approximately 5,638,327 shares of common stock and warrants to purchase up to
approximately 2,690,879 shares of common stock will be entitled to certain
rights with respect to the registration of shares under the Securities Act. If
we propose to register any of our securities under the Securities Act, these
holders are entitled to notice of the registration and are entitled to include
shares of common stock in the registration. The rights are subject to conditions
and limitations, among them the right of the underwriters of an offering to
limit the number of shares included in the registration. At any time following
the first anniversary of this offering, the holders of at least 33 1/3% of these
securities may require that we file up to two registration statements under the
Securities Act with respect to their shares of common stock, and we are required
to use our best efforts to effect those registrations, subject to conditions and
limitations. Additionally, if any holder of these securities requests that we to
file a registration statement on Form S-3 when such form becomes available to
us, we are required to effect such registration as long as the holders propose
to sell such securities at an aggregate price to the public of not less than
$1,000,000.
The registration rights granted in this amended and restated investors'
rights agreement will expire on the third anniversary of this offering, or
earlier with respect to a particular stockholder if that holder can resell all
its securities in a three month period under Rule 144 of the Securities Act.
Subject to the limitations contained in the amended and restated investors'
rights agreement, we will be responsible for paying all registration expenses
and the holders selling their shares will be responsible for paying all selling
expenses.
63
<PAGE> 67
DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our amended and restated certificate
of incorporation and bylaws could make it more difficult for a third party to
acquire us through a tender offer, a proxy contest or otherwise and the removal
of incumbent officers and directors. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of us to negotiate with us first.
We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure us outweigh the disadvantages of discouraging such proposals
because, among other things, negotiation of such proposals could result in an
improvement of their terms.
Our amended and restated certificate of incorporation authorizes our board
to establish one or more series of undesignated preferred stock, the terms of
which can be determined by our board at the time of issuance. Our amended and
restated certificates of incorporation also provides that stockholder action can
be taken only at an annual or special meeting of stockholders and may not be
taken by written consent. In addition, our amended and restated certificate of
incorporation and bylaws provide that special meetings of stockholders can be
called only by our board of directors, the chairman of our board or our chief
executive officer, but do not permit our stockholders to call a special meeting
of stockholders. Our amended and restated certificate of incorporation also
provides that our board of directors is divided into three classes, with each
director assigned to a class with a term of three years, and that the number of
directors may only be determined by our board of directors. Our bylaws establish
an advance notice procedure with regard to stockholder proposals and the
nomination of candidates for election of directors other than by or at the
direction of our board of directors.
We are subject to Section 203 of the Delaware General Corporation Law,
which includes anti-takeover provisions. In general, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date that
the person became an interested stockholder unless, subject to exceptions, the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior to the determination of interested
stockholder status, did own, 15% or more of the corporation's voting stock.
These provisions may have an anti-takeover effect, including discouraging
attempts that might result in the payment of a premium over the market price for
the shares of common stock held by stockholders, or delaying, deferring or
preventing a change in control without further action by the stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for shares of our common stock is U.S.
Stock Transfer Corporation. The transfer agent's address and telephone number is
1745 Gardena Avenue, Glendale, California 91204, (818) 502-1404.
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<PAGE> 68
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no market for our common stock.
Future sales of substantial amounts of common stock, including shares issuable
upon the exercise of outstanding options and warrants, in the public market
could adversely affect prevailing market prices. Sales of substantially all
amounts of our common stock in the public market after contractual restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon completion of the offering, we will have outstanding
shares of common stock, and if the underwriters exercise their
overallotment option in full, which excludes:
- 2,900,731 shares of common stock that could be issued upon the exercise
of options outstanding as of July 25, 2000;
- 3,539,305 shares of common stock that could be issued upon the exercise
of warrants outstanding as of July 25, 2000;
- 1,099,269 shares of common stock that could be issued in the future under
our stock option plans as of July 25, 2000;
- 500,000 shares of common stock that could be issued in the future under
our 2000 employee stock purchase plan.
Of the outstanding shares, all the shares of common stock sold in this
offering will be freely tradable without restriction under the Securities Act,
except that shares purchased by our affiliates, as Rule 144 promulgated under
the Securities Act defines that term, may be sold only in compliance with the
limitations described below. The remaining 14,862,376 shares of common stock
will be deemed "restricted securities" as defined under Rule 144. Restricted
shares may be sold in the public market only if they are registered under the
Securities Act or if they qualify for an exemption from registration under Rules
144 or 701 promulgated under the Securities Act, which we summarize below.
Subject to the lock-up agreements described below and the provisions of Rules
144 and 701, shares will be available in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<C> <S>
After the date of this prospectus, freely tradable shares
sold in this offering and shares eligible for resale under
Rule 144(k) that are not subject to the 180-day lock-up.
16,000,021 After 180 days from the date of this prospectus, the 180-day
lock-up is released and these share are saleable under Rule
144 (subject, in some cases, to volume limitations).
1,341,232 After 180 days from the date of this prospectus, the 180-day
lock-up is released and these share are saleable under Rule
701.
2,356,850 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not
yet saleable under Rule 144.
</TABLE>
LOCK-UP AGREEMENTS WITH THE UNDERWRITERS
Each of our directors and officers and substantially all our security
holders have signed lock-up agreements with the underwriters of this offering
under which they have agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for any shares of
common stock, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, without the prior consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
any shares sold to the underwriters pursuant to the underwriting agreement or
any shares acquired in the open market. See "Underwriting."
Credit Suisse First Boston Corporation may, in its sole discretion and at
any time without notice, release some or all of these securities from these
restrictions prior to the expiration of this 180-day period, although we are not
aware of any current intention for them to do so.
65
<PAGE> 69
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the number of shares of our common stock then outstanding, which will equal
approximately shares immediately after this offering; or the
average weekly trading volume of the common stock on the Nasdaq National Market
during the four calendar weeks preceding the filing with the Securities and
Exchange Commission of a notice on Form 144 with respect to the proposed sale.
Sales under Rule 144 are also subject to manner-of-sale provisions and notice
requirements and to the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a proposed disposition of the subject
securities and who has beneficially owned the shares proposed to be sold for at
least two years is entitled to sell those shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. However, because substantially all shares that we have issued are
subject to lock-up agreements, they will become eligible for re-sale only when
the 180-day lock-up agreements expire. As a result, they may be sold 90 days
after the offering only if the holder obtains our prior written consent.
RULE 701
Any of our employees, officers, directors or consultants who purchased his
or her shares under a written compensatory plan or contract may be entitled to
sell those shares in reliance on Rule 701. Rule 701 permits our affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell these shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. Under this rule, all holders of Rule 701 shares are required to wait
until 90 days after the date of this prospectus before selling those shares.
However, because substantially all shares that we have issued under Rule 701 are
subject to lock-up agreements, they will become eligible for sale only when the
180-day lock-up agreements expire. As a result, they may be sold 90 days after
the offering only if the holder obtains our prior written consent.
REGISTRATION RIGHTS
Following this offering, under specified circumstances and subject to
customary conditions, holders of approximately 15,086,912 shares of our common
stock, including approximately 3,635,035 shares that may be acquired upon the
exercise of warrants to purchase our common stock, will have registration rights
with respect to their shares of common stock. These registration rights require
us to register their shares of common stock under the Securities Act, and permit
these holders to participate in any future registrations of our securities. If
the holders of these registrable securities request that we register their
shares, and if the registration is declared effective, these shares will become
freely tradable without restriction under the Securities Act. Any sales of
securities by these stockholders could have a material adverse effect on the
trading price of our common stock. See "Description of
Securities -- Registration Rights."
66
<PAGE> 70
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation, U.S.
Bancorp Piper Jaffray Inc. and Banc of America Securities LLC are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
U.S. Bancorp Piper Jaffray Inc..............................
Banc of America Securities LLC..............................
--------
Total.....................................................
========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares from us at the initial
public offering price less the underwriting discounts and commissions. The
option may be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us.................. $ $ $ $
Expenses payable by us.................... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or any securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers and directors and each holder of shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of our
common stock have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any
shares of our common stock, enter into a transaction which would have the same
effect, or enter into any swap, hedge or other arrangement that transfers, in
whole or in part, any of the economic consequences of ownership of our
67
<PAGE> 71
common stock, whether any such aforementioned transaction is to be settled by
delivery of our common stock or such other securities, in cash or otherwise, or
publicly disclose the intention to make any such offer, sale, pledge or
disposition, or to enter into any such transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of Credit Suisse
First Boston Corporation for a period of 180 days after the date of this
prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for sale
to the general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "NVTL".
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include the following:
- the information included in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our business development and our current financial
condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that an active trading market for the common stock will develop
and continue after this offering.
U.S. Bancorp Piper Jaffray Inc. and its affiliates have provided financial
services to us in the past for which they received customary compensation.
Prior to this offering, U.S. Bancorp Piper Jaffray Inc. participated in our
private placement as placement agent in which it received warrants to purchase
our common stock as compensation and its affiliates purchased our Series C
preferred stock and warrants to purchase our common stock. In addition, U.S.
Bancorp Piper Jaffray's affiliates purchased Series D preferred stock and
warrants to purchase our common stock. U.S. Bancorp Piper Jaffray and its
affiliates currently hold 18,585 shares of our Series C preferred stock, 9,563
shares of our Series D preferred stock and warrants to purchase 64,765 shares of
our common stock. U.S. Bancorp Piper Jaffray and its affiliates are in
compliance with section 2710 of the National Association of Securities Dealers
Rules of Conduct regarding underwriter compensation.
68
<PAGE> 72
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option -- a naked short position -- that
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares
in the open market after pricing that could adversely affect investors
who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of the common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of the common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of the common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
69
<PAGE> 73
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, such purchaser is purchasing as a principal and not as an
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All the issuer's directors and officers as well as the experts we name
herein may be located outside Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences in their particular circumstances
of an investment in our common stock and with respect to the eligibility of our
common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Orrick, Herrington & Sutcliffe LLP, Los Angeles, California. Orrick,
Herrington & Sutcliffe LLP owns a total of 5,797 shares of our preferred stock
and warrants to purchase 1,159 shares of our common stock. Individuals who are
partners of Orrick, Herrington & Sutcliffe LLP own 3,797 shares of our preferred
stock and warrants to purchase 751 shares of our common stock. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Latham & Watkins, Los Angeles, California.
EXPERTS
The consolidated balance sheets as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31, 1999
included in the prospectus and elsewhere in the registration statement
70
<PAGE> 74
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in accounting and auditing
in giving said report.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus does not contain all the information
set forth in the registration statement and its exhibits and schedules. For
further information about us and our common stock, we refer you to the
registration statement and to its exhibits and schedules. Statements made in
this prospectus concerning the contents of any document referred to in this
prospectus are not necessarily complete. With respect to each such document
filed as an exhibit to the registration statement, we refer you to the exhibit
for a more complete description of the matter involved. Each statement in this
prospectus relating to a contract or document filed as an exhibit to the
registration statement is qualified in all respects by the filed exhibit. You
may read or obtain a copy of the registration statement with exhibits at the
SEC's public reference room located at 450 Fifth Street, N.W., Washington, DC
20549. You may obtain information on the operation of the public reference room
by calling the SEC at 1-800-SEC-0300. The SEC maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of the site is
http://www.sec.gov.
As a result of the offering, the information and reporting requirements of
the Securities Exchange Act of 1934, as amended, will apply to us. We will
fulfill our obligations with respect to those requirements by filing periodic
reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm.
71
<PAGE> 75
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
------------------
The information required by the applicable financial statement schedules has
been disclosed in the financial statements and notes thereto and, accordingly,
the schedules have been omitted.
F-1
<PAGE> 76
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Novatel Wireless, Inc.:
We have audited the accompanying consolidated balance sheets of Novatel
Wireless, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Novatel Wireless, Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
July 26, 2000
F-2
<PAGE> 77
NOVATEL WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
--------------------------- MARCH 31, EQUITY
1998 1999 2000 MARCH 31, 2000
------------ ------------ ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 3,497,000 $ 25,455,000 $ 14,065,000
Short-term investments.................... 296,000 -- --
Accounts receivable, net of reserve of
$44,000
(1998), $181,000 (1999), and $212,000
(2000)............................... 607,000 1,345,000 2,753,000
Inventories............................... 656,000 4,706,000 6,758,000
Due from supplier......................... -- 4,732,000 4,712,000
Prepaid expenses and other................ 224,000 480,000 742,000
------------ ------------ ------------
Total current assets.................... 5,280,000 36,718,000 29,030,000
------------ ------------ ------------
Property and equipment, net............... 904,000 1,346,000 2,280,000
Intangible asset.......................... -- -- 225,000
Other assets.............................. -- 54,000 138,000
------------ ------------ ------------
$ 6,184,000 $ 38,118,000 $ 31,673,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................... $ 1,169,000 $ 11,560,000 $ 13,297,000
Accrued expenses.......................... 728,000 1,174,000 1,531,000
Deferred revenues......................... -- 8,134,000 5,733,000
Current portion of capital lease
obligations............................. -- 81,000 74,000
------------ ------------ ------------
Total current liabilities............... 1,897,000 20,949,000 20,635,000
------------ ------------ ------------
Capital lease obligations, net of current
portion................................... -- 106,000 89,000
Convertible and redeemable minority
interest.................................. 4,100,000 4,386,000 4,457,000
Convertible and redeemable preferred stock,
4,348,138 (1998), 8,022,415 (1999 and
2000), and 0 (Pro Forma) shares issued and
outstanding, at liquidation value, net of
unamortized offering costs of $127,000
(1998), $2,875,000 (1999) and $2,729,000
(2000).................................... 14,812,000 43,805,000 44,833,000
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.001, 26,500,000
shares authorized, 3,237,210 (1998),
3,250,960 (1999), 3,366,960 (2000) and
12,854,787 (Pro Forma) shares issued and
outstanding............................. 3,000 3,000 3,000 $ 13,000
Additional paid-in capital................ 782,000 4,791,000 5,131,000 54,411,000
Deferred stock compensation............... (161,000) (800,000) (986,000) (986,000)
Accumulated deficit....................... (15,249,000) (35,122,000) (42,489,000) (42,489,000)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit).... (14,625,000) (31,128,000) (38,341,000) $ 10,949,000
------------ ------------ ------------ ------------
$ 6,184,000 $ 38,118,000 $ 31,673,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 78
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
---------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................ $ 3,354,000 $ 5,378,000 $ 9,556,000 $ 1,273,000 $ 6,837,000
Cost of revenue................ 1,136,000 3,433,000 11,955,000 1,076,000 7,865,000
----------- ----------- ------------ ----------- -----------
Gross margin.............. 2,218,000 1,945,000 (2,399,000) 197,000 (1,028,000)
----------- ----------- ------------ ----------- -----------
Operating costs and expenses:
Research and development..... 2,715,000 2,333,000 3,717,000 457,000 2,076,000
Sales and marketing.......... 2,058,000 2,685,000 4,480,000 391,000 2,319,000
General and administrative... 1,944,000 2,611,000 4,663,000 878,000 1,066,000
----------- ----------- ------------ ----------- -----------
6,717,000 7,629,000 12,860,000 1,726,000 5,461,000
----------- ----------- ------------ ----------- -----------
Operating loss............ (4,499,000) (5,684,000) (15,259,000) (1,529,000) (6,489,000)
Other income (expense):
Interest income.............. 23,000 178,000 47,000 17,000 215,000
Interest expense............. -- -- (3,267,000) -- (11,000)
Other, net................... -- -- 10,000 (1,000) 17,000
----------- ----------- ------------ ----------- -----------
Net loss.................. $(4,476,000) $(5,506,000) $(18,469,000) $(1,513,000) $(6,268,000)
=========== =========== ============ =========== ===========
Per share date (Note 14):
Net loss applicable to common
stockholders.............. $(4,979,000) $(6,657,000) $(19,873,000) $(1,863,000) $(7,367,000)
Weighted average shares used
in computation of basic
and diluted net loss per
common share.............. 3,237,210 3,237,210 3,242,807 3,237,210 3,339,998
----------- ----------- ------------ ----------- -----------
Basic and diluted net loss
per common share.......... $ (1.54) $ (2.06) $ (6.13) $ (0.58) $ (2.21)
=========== =========== ============ =========== ===========
Shares used in computation of
pro forma basic and
diluted net loss per
share..................... 9,066,423 9,050,760 12,827,825
------------ ----------- -----------
Pro forma basic and diluted
net loss per share........ $ (2.19) $ (0.21) $ (0.57)
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 79
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY (DEFICIT)
--------- ------ ---------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997...................... 3,237,210 $3,000 $ 506,000 $ (3,613,000) $ -- $ (3,104,000)
Accretion of dividends on minority interest
in NWT.................................... -- -- -- (189,000) -- (189,000)
Accretion of dividends on convertible and
redeemable preferred stock of NWI......... -- -- -- (308,000) -- (308,000)
Amortization of offering costs for
convertible and redeemable preferred
stock..................................... -- -- -- (6,000) -- (6,000)
Net loss.................................... -- -- -- (4,476,000) -- (4,476,000)
--------- ------ ---------- ------------ --------- ------------
Balance, December 31, 1997.................... 3,237,210 3,000 506,000 (8,592,000) -- (8,083,000)
Deferred compensation for stock options
issued.................................... -- -- 276,000 -- (276,000) --
Amortization of deferred compensation....... -- -- -- -- 115,000 115,000
Accretion of dividends on minority interest
in NWT.................................... -- -- -- (273,000) -- (273,000)
Accretion of dividends on convertible and
redeemable preferred stock of NWI......... -- -- -- (859,000) -- (859,000)
Amortization of offering costs for
convertible and redeemable preferred
stock..................................... -- -- -- (19,000) -- (19,000)
Net loss.................................... -- -- -- (5,506,000) -- (5,506,000)
--------- ------ ---------- ------------ --------- ------------
Balance, December 31, 1998.................... 3,237,210 3,000 782,000 (15,249,000) (161,000) (14,625,000)
Additional paid-in capital from stock
options exercised......................... 13,750 -- 30,000 30,000
Deferred compensation for stock options
issued.................................... -- 859,000 -- (859,000) --
Amortization of deferred compensation....... -- -- -- -- 220,000 220,000
Accretion of dividends on minority interest
in NWT.................................... -- -- -- (286,000) -- (286,000)
Accretion of dividends on convertible and
redeemable preferred stock of NWI......... -- -- -- (1,096,000) -- (1,096,000)
Amortization of offering costs for
convertible and redeemable preferred
stock..................................... -- -- -- (22,000) -- (22,000)
Imputed value of warrants issued with
convertible subordinated debentures....... -- -- 3,120,000 -- -- 3,120,000
Net loss.................................... (18,469,000) (18,469,000)
--------- ------ ---------- ------------ --------- ------------
Balance, December 31, 1999.................... 3,250,960 3,000 4,791,000 (35,122,000) (800,000) (31,128,000)
Additional paid-in capital from stock
options exercised (unaudited)............. 116,000 -- 45,000 -- -- 45,000
Deferred compensation for stock options
issued (unaudited)........................ -- -- 295,000 -- (295,000) --
Amortization of deferred compensation
(unaudited)............................... -- -- -- -- 109,000 109,000
Accretion of dividends on minority interest
in NWT (unaudited)........................ -- -- -- (71,000) -- (71,000)
Accretion of dividends on convertible and
redeemable preferred stock of NWI
(unaudited)............................... -- -- -- (882,000) -- (882,000)
Amortization of offering costs for
convertible and redeemable preferred stock
(unaudited)............................... -- -- -- (146,000) -- (146,000)
Net loss (unaudited)........................ -- -- -- (6,268,000) -- (6,268,000)
--------- ------ ---------- ------------ --------- ------------
Balance, March 31, 2000 (unaudited)........... 3,366,960 $3,000 $5,131,000 $(42,489,000) $(986,000) $(38,341,000)
========= ====== ========== ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 80
NOVATEL WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss.......................................... $(4,476,000) $(5,506,000) $(18,469,000) $(1,513,000) $ (6,268,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 462,000 442,000 672,000 89,000 200,000
Provision for bad debt.......................... -- -- 137,000 -- 31,000
Compensation for stock options issued below fair
value......................................... -- 115,000 220,000 69,000 109,000
Compensation for warrants issued in connection
with convertible subordinated debentures...... -- -- 3,120,000 -- --
Changes in assets and liabilities:
Accounts receivable........................... (56,000) (214,000) (875,000) (391,000) (1,439,000)
Due from supplier............................. -- -- (4,732,000) -- 20,000
Inventories................................... 22,000 (226,000) (4,050,000) (102,000) (2,052,000)
Prepaid expenses and other.................... (86,000) (127,000) (256,000) (67,000) (262,000)
Other assets.................................. -- -- (54,000) -- (84,000)
Accounts payable.............................. 544,000 332,000 10,391,000 179,000 1,737,000
Accrued expenses.............................. 78,000 156,000 576,000 (8,000) 357,000
Deferred revenues............................. -- -- 8,134,000 -- (2,401,000)
----------- ----------- ------------ ----------- ------------
Net cash used in operating activities....... (3,512,000) (5,028,000) (5,186,000) (1,744,000) (10,052,000)
----------- ----------- ------------ ----------- ------------
Investing activities:
Purchases of property and equipment............... (521,000) (313,000) (880,000) (179,000) (1,134,000)
Purchase of intangibles........................... -- -- -- -- (225,000)
Net change in short-term investments.............. (260,000) (36,000) 296,000 296,000 --
----------- ----------- ------------ ----------- ------------
Net cash (used in) provided by investing
activities................................ (781,000) (349,000) (584,000) 117,000 (1,359,000)
----------- ----------- ------------ ----------- ------------
Financing activities:
Borrowings on promissory notes.................... 500,000 -- -- -- --
Payments on promissory notes...................... (1,000,000) (500,000) -- -- --
Issuance of convertible and redeemable preferred
stock........................................... 4,128,000 7,197,000 24,625,000 -- --
Issuance of convertible and redeemable minority
interest shares................................. 1,070,000 510,000 -- -- --
Proceeds from exercise of stock options........... -- -- 30,000 -- 45,000
Proceeds from issuance of convertible subordinated
debentures...................................... -- -- 3,120,000 -- --
Payments under capital lease obligation........... -- -- (47,000) -- (24,000)
----------- ----------- ------------ ----------- ------------
Net cash provided by financing activities... 4,698,000 7,207,000 27,728,000 -- 21,000
----------- ----------- ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents............................... 405,000 1,830,000 21,958,000 (1,627,000) (11,390,000)
Cash and cash equivalents, beginning of period...... 1,262,000 1,667,000 3,497,000 3,497,000 25,455,000
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents, end of period............ $ 1,667,000 $ 3,497,000 $ 25,455,000 $ 1,870,000 $ 14,065,000
=========== =========== ============ =========== ============
Supplemental disclosures of non-cash investing and
financing activities:
Conversion of convertible subordinated debentures
and related accrued interest into Series C
convertible and redeemable preferred stock...... $ -- $ -- $ 3,250,000 $ -- $ --
Accretion of dividends on minority interest....... (189,000) (273,000) (286,000) (71,000) (71,000)
Accretion of dividends on convertible and
redeemable preferred stock...................... (308,000) (859,000) (1,096,000) (274,000) (882,000)
Amortization of offering costs for convertible and
redeemable preferred stock...................... (6,000) (19,000) (22,000) (5,000) (146,000)
Deferred compensation for stock options issued.... -- 276,000 859,000 -- 295,000
Property and equipment acquired under capital
lease obligations............................... -- -- 234,000 -- --
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest........................................ $ -- $ -- $ 7,000 $ -- $ 2,000
Income taxes.................................... 1,000 1,000 1,000 1,000 1,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 81
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
1. THE COMPANY
Novatel Wireless, Inc., a Delaware corporation ("Novatel," "NWI," the
"Company," or "we") is headquartered in San Diego, California. We are a provider
of wireless data communications access solutions. We provide wireless data
modems and enabling software for use with handheld computing devices and
portable personal computers. We also provide wireless data modems that can be
integrated into other devices for vertical OEM applications. Our products enable
professionals and consumers to access enterprise networks and the Internet.
Prior to being established as an independent operating entity in April of
1996, the Company was formerly the Personal Communications Product Division of
NovAtel Communications, a Canadian telecommunications company. The Company's
subsidiaries include wholly owned Novatel Wireless Solutions, Inc., incorporated
in Delaware, and fifty-percent owned Novatel Wireless Technologies Ltd. ("NWT"),
incorporated in Alberta, Canada.
2. RISKS AND UNCERTAINTIES
Company Operations
The Company is subject to a number of risks and uncertainties associated
with companies at a similar stage of maturity, has only a limited operating
history and the revenue and income potential of the Company's business and
market are unproven. Further, the market for wireless Internet products and
services is relatively new and rapidly evolving both technologically and
competitively.
The Company has experienced net losses in each year since its inception and
had an accumulated deficit of $35.1 million at December 31, 1999 and $42.5
million (unaudited) at March 31, 2000. The Company incurred net losses of $4.5
million, $5.5 million, $18.5 million, $1.5 million (unaudited) and $6.3 million
(unaudited) and negative cash flows from operations of $3.5 million, $5.0
million, $5.2 million, $1.7 million (unaudited) and $10.1 million (unaudited)
for the years ended December 31, 1997, 1998 and 1999 and the quarters ended
March 31, 1999 and 2000, respectively. The Company expects to continue to incur
net losses for at least the next several quarters. While the Company is unable
to predict accurately its future operating expenses, the Company currently
expects these expenses to increase substantially, as it, among other things,
expands its selling and marketing activities, increases its research and
development efforts to upgrade its existing services and develop new services
and technologies, upgrades its operational and financial systems, procedures and
controls, and hires and trains additional personnel.
The Company will need to significantly increase its revenues to achieve and
maintain profitability. If we fail to significantly increase our revenues, the
Company will continue to experience losses indefinitely and, accordingly, the
Company may be required to obtain additional financing in the future. Management
believes that the Company's cash reserves including net proceeds from the Series
D financing (see Note 3) will be sufficient to fund operations for at least the
next twelve months.
Initial Public Offering
In April 2000, the Company's Board of Directors authorized management to
file a registration statement with the Securities and Exchange Commission to
permit the Company to offer shares of common stock to the public. In April 2000,
the Company's Board of Directors authorized an increase in the capitalization of
the Company to 350,000,000 shares of common stock, par value $.001 per share,
and up to 15,000,000 shares of undesignated preferred stock, par value $.001 per
share, upon the effective date of the Company's public offering. If the offering
is consummated under terms presently anticipated, all
F-7
<PAGE> 82
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
outstanding shares of convertible and redeemable preferred stock and minority
interest shares outstanding at March 31, 2000 will convert into 9,487,827 shares
of common stock. Unaudited pro forma stockholders' equity reflects the assumed
conversion of the convertible and redeemable preferred stock and minority
interest shares outstanding at March 31, 2000 into common stock.
3. RECENT FINANCINGS
Series D
In June and July of 2000, the Company issued 1,964,050 shares of Series D
preferred stock to accredited investors in a private offering. Net proceeds from
the financing amounted to approximately $33.6 million, or $17.25 per share,
after offering costs of approximately $320,000. We also issued warrants to
purchase a total of 392,800 shares of NWI common stock at an exercise price of
$17.25 expiring June 30, 2005.
The Company amended its Certificate of Incorporation to authorize 2,600,000
shares of Series D Convertible Preferred Stock, par value $0.001.
Line of Credit Commitment
In July 2000, the Company entered into a commitment for credit facility
with a bank, which will allow the Company to borrow up to the lesser of $10
million or 80% of eligible accounts receivable. This credit facility will bear
interest at prime plus 1%, will be collateralized by substantially all assets of
the Company and will expire in June 2001.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Novatel and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. Certain reclassifications have been made to
amounts included in the prior years' financial statements to conform to the
presentation for the year ended December 31, 1999.
Unaudited Interim Results
The accompanying balance sheet as of March 31, 2000, the statements of
operations and cash flows for the three months ended March 31, 1999 and March
31, 2000 and the statement of stockholders' equity (deficit) for the three
months ended March 31, 2000 are unaudited. The unaudited interim financial
statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
Company's financial position and its results of operations and its cash flows
for the three months ended March 31, 1999 and March 31, 2000. The financial data
and other information disclosed in these notes to financial statements related
to these periods are also unaudited. The results for the three months ended
March 31, 2000 are not necessarily indicative of the results to be expected for
the year ending December 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions. These estimates and
F-8
<PAGE> 83
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
assumptions affect the reported amounts of assets, liabilities, revenues,
expenses and disclosures of contingent assets and liabilities. Actual results
could differ from these estimates.
Revenue Recognition
Revenues from product sales and services are recognized upon the later of
transfer of title or upon shipment of the product to the customer and upon
rendering services. Our customers include distributors, resellers and individual
end users. We recognize contract research and development agreements when
certain criteria stipulated under the terms of those agreements have been met.
We record deferred revenue for cash payments received from customers in advance
of the revenue recognition criteria being met.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB No. 101 is effective during the fourth quarter of fiscal 2000. Management
has reviewed and adopted the provisions of SAB No. 101 which did not have a
material impact on the Company's financial position or results of operations.
Research and Development Costs
Research and development costs are expensed as incurred. To date, we have
not incurred significant software development costs that would be capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed."
Warranty Costs
We accrue warranty costs based on our best estimates, with reference to our
past experience.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. Cash and cash equivalents consist of money
market and mutual funds and are carried at market, which approximates cost.
Short-Term Investments
From time to time, the Company invests its excess cash in U.S. government
securities and debt instruments of financial institutions and corporations with
strong credit ratings. The Company has established guidelines to diversify its
short-term investments and their maturities to manage safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company has not experienced any
significant losses on its short-term investments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company provides reserves against inventories which it believes to
be excess or obsolete to state such inventories at realizable value.
F-9
<PAGE> 84
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
Due from Supplier
Due from supplier represents amounts due from the Company's outsourced
product manufacturer from the sale of materials inventories by the Company to
the manufacturer. These sales represented a transfer of assets and were not
recognized as revenues in the accompanying consolidated statements of
operations.
Property and Equipment
Property and equipment are stated at cost and depreciated primarily using
the straight-line method. Test equipment, computer equipment and software,
furniture and fixtures and product tooling are depreciated over lives between
one and five years and leasehold improvements are depreciated over the shorter
of the related lease period or useful life.
Intangible Asset
Intangible asset consists of a non-exclusive and perpetual worldwide
software product license. The Company capitalized the cost to acquire the
license and will amortize the cost on a straight-line basis over the estimated
useful life of the asset.
Long-Lived Assets
The Company continually evaluates the carrying value of the unamortized
balances of its long-lived assets to determine whether any impairment of these
assets has occurred or whether any revision to the related amortization periods
should be made. This evaluation is based on management's projections of the
undiscounted future cash flows associated with each asset. If management's
evaluation were to indicate that the carrying values of these assets were
impaired, such impairment would be recognized by a write down of the applicable
asset to its estimated fair value and expensed through operations.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method of
accounting for deferred income taxes. Under this method, deferred income taxes
are recorded to reflect the tax consequences on future years of temporary
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end. If it is more likely than not that some
portion or all of a deferred tax asset will not be realized, a valuation
allowance is recognized.
Stock-Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for costs of stock-based employee compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, the Company discloses the pro forma
effect on net loss and related per share amounts as if the fair-value method
prescribed by SFAS No. 123 had been used to account for its stock-based employee
compensation. The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of SFAS No. 123 and related
interpretations.
F-10
<PAGE> 85
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
Computation of Net Loss Per Share
SFAS No. 128, "Earnings Per Share," requires companies to compute basic and
diluted per share data for all periods for which a statement of operations is
presented. Basic net loss per share is computed by dividing the net loss
applicable to common stockholders by the weighted average number of common
shares that were outstanding during the period. Diluted earnings per share is
computed by giving effect to all potentially dilutive securities that were
outstanding for the periods presented. Potentially dilutive securities
consisting of options, warrants, convertible and redeemable minority interest
and convertible and redeemable preferred stock were not considered in the
calculation of diluted earnings per share as their impact would be antidilutive.
For the periods presented, there is no difference between the basic and diluted
net loss per share.
Pro forma net loss per share (unaudited) is computed by dividing net loss
applicable to common stockholders by the weighted average number of common
shares outstanding and the weighted average number of shares of convertible and
redeemable preferred stock, including the minority interest shares, outstanding
as if such shares were converted to common stock at the time of issuance.
Foreign Currency Translation
Monetary balance sheet accounts of the Company's Canadian subsidiary are
translated from Canadian dollars into U.S. dollars at the exchange rate in
effect at the balance sheet date, non-monetary balance sheet accounts are
translated at historical rates and revenue and expense accounts are translated
using an average exchange rate during the period of recognition. The functional
currency of the Canadian subsidiary is the U.S. dollar, thus translation gains
and losses are reflected in operations. Exchange gains and losses arising from
transactions denominated in foreign currencies are recorded using the actual
exchange differences on the date of the transaction and are reflected in
operations.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, primarily
including cash, accounts receivable, accounts payable and accrued expenses
approximate their fair value due to their short term nature. The Company
performs credit evaluations of key customers and management believes it is not
exposed to significant credit risk on its accounts receivable in excess of
established reserves.
Comprehensive Income
SFAS No. 130, "Comprehensive Income," requires that all items recognized
under accounting standards as components of comprehensive income be reported
with the same prominence as other financial statements. The Company has no items
requiring separate display of comprehensive income.
Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires public companies to report financial and descriptive
information about their reportable operating segments. The Company identifies
its operating segments based on how management internally evaluates separate
financial information, business activities and management responsibility. The
Company believes it operates in a single business segment consisting of the
development, manufacture and sale of wireless Internet products.
F-11
<PAGE> 86
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board, ("FASB"), issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and in
June 1999 issued SFAS No. 137, "Accounting for Derivatives and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." Under
SFAS No. 133, derivatives not meeting hedge criteria are recorded in the balance
sheet as either an asset or liability measured at fair value and changes in fair
value are recognized currently in earnings. The Company will be required to
implement SFAS No. 133, as amended by SFAS No. 137, in fiscal 2001. The Company
does not anticipate that the adoption of SFAS No. 133, as amended by SFAS No.
137, will have a material impact on its financial position or results of
operations.
5. FINANCIAL STATEMENT DETAILS
Due from Supplier
Due from supplier represents amounts due from the Company's third party
product manufacturer from the sale of materials inventories by the Company to
the manufacturer. These sales represented a transfer of assets and were not
recognized as revenues in the accompanying consolidated statements of
operations. At December 31, 1999, the inventory amount sold to and due from
supplier was $4.7 million. Subsequent to year-end, we received $4.5 million of
this receivable from our supplier.
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1998 1999 2000
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods......................................... $656,000 $3,377,000 $ 4,063,000
Raw materials and components........................... -- 1,942,000 3,645,000
-------- ---------- -----------
656,000 5,319,000 7,708,000
Less -- reserve for estimated excess and
obsolescence...................................... -- (613,000) (950,000)
-------- ---------- -----------
$656,000 $4,706,000 $ 6,758,000
======== ========== ===========
</TABLE>
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Test equipment...................................... $ 449,000 $ 650,000 $ 1,071,000
Computer equipment and purchased software........... 1,013,000 1,550,000 2,001,000
Furniture and fixtures.............................. 291,000 396,000 407,000
Product tooling..................................... 235,000 491,000 507,000
Leasehold improvements.............................. -- 15,000 250,000
----------- ----------- -----------
$ 1,988,000 3,102,000 4,236,000
Less -- accumulated depreciation and
amortization................................... (1,084,000) (1,756,000) (1,956,000)
----------- ----------- -----------
$ 904,000 $ 1,346,000 $ 2,280,000
=========== =========== ===========
</TABLE>
F-12
<PAGE> 87
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
Depreciation expense was $462,000, $442,000, $672,000, $89,000 (unaudited)
and $200,000 (unaudited) for the years ended December 31, 1997, 1998, 1999 and
the quarters ended March 31, 1999 and 2000, respectively. At December 31, 1999,
assets held under capital leases had a net book value of $190,000, net of
accumulated amortization of $31,000.
Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1998 1999 2000
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Sales taxes............................................. $ 5,000 $ 346,000 $ 310,000
Payroll and related..................................... 80,000 430,000 739,000
Product warranty........................................ 244,000 236,000 347,000
Royalties............................................... 176,000 62,000 --
Other................................................... 223,000 100,000 135,000
-------- ---------- ----------
$728,000 $1,174,000 $1,531,000
======== ========== ==========
</TABLE>
6. LINE OF CREDIT
The Company has a line of credit agreement with a bank that allows the
Company to borrow the lesser of $2.5 million, or 80%, of eligible accounts
receivable balances plus 40% of raw materials and finished goods inventories, as
defined in the agreement. The line of credit bears interest at prime rate plus
0.5% (9.0% at December 31, 1999), is collateralized by substantially all assets
of the Company and expires during September 2000. In connection with this line
of credit, 23,810 NWI warrants were granted to purchase shares of Series C
convertible and redeemable preferred stock. As of December 31, 1999 and March
31, 2000 (unaudited), there were no borrowings outstanding under the line of
credit. However, the Company was in violation of certain covenants defined in
the line of credit agreement. The Company has obtained a waiver from the bank
related to such covenant violations through March 31, 2000. (See Note 3)
7. CONVERTIBLE AND REDEEMABLE MINORITY INTEREST
Minority interest consists of 1,251,798 Series A convertible and redeemable
preferred shares (Series A shares) and 213,614 Series B (Series B shares)
convertible and redeemable preferred shares of NWT at December 31, 1998 and
1999.
In 1996, we issued 937,500 Series A shares to accredited investors in a
private offering. Proceeds from the financing were approximately $1,997,000, or
$2.13 per share.
In 1997, we issued 314,298 Series A shares to accredited investors in a
private offering. Proceeds from the financing were approximately $669,000, or
$2.13 per share. Additionally, we issued 93,896 Series B shares to accredited
investors in a private offering. Proceeds from the financing were approximately
$400,000, or $4.26 per share. In connection with this offering, we also issued
warrants to purchase a total of 35,211 shares of NWT common stock at an exercise
price of $4.26 on or prior to December 31, 2002.
In 1998, we issued 119,718 Series B shares to accredited investors in a
private offering. Proceeds from the financing were approximately $510,000, or
$4.26 per share. We also issued warrants to purchase a total of 44,894 shares of
NWT common stock at an exercise price of $4.26 on or prior to April 24, 2003.
F-13
<PAGE> 88
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
The NWT Series A shares are exchangeable at the option of the holder, on a
1:1 basis to NWI Series A preferred shares without the payment of any additional
consideration any time after issuance but before August 21, 2002. The NWT Series
B shares are exchangeable, at the option of the holder, on a 1:1 basis to NWI
Series B preferred shares without the payment of any additional consideration
any time after issuance but before December 23, 2003. In the event that NWI
becomes listed on a public exchange, the Company has the right to require
holders of the Series A and Series B shares to exchange all such shares into NWI
Series A and NWI Series B shares. In the event that NWT becomes listed on a
public exchange, merges or consolidates with or into another company or sells
all or substantially all of its assets, these Series A and Series B shares would
be automatically converted into NWT common shares, provided certain minimum
proceeds requirements are met. Further, automatic conversion into NWT common
shares for each Series would occur provided two-thirds of the preferred
stockholders of that Series voted to convert.
NWT's preferred stockholders may elect, after August 21, 2000 for Series A
preferred shares and after December 23, 2001 for Series B preferred shares, to
have NWT redeem the shares provided that funds are legally available. After
August 21, 2002 for Series A preferred shares and after December 23, 2003 for
Series B preferred shares, NWT must redeem all of the outstanding preferred
shares provided that funds are legally available. If funds legally available are
not sufficient to redeem the total number of shares submitted for redemption, or
those subject to mandatory redemption, those shares not redeemed will carry a
dividend rate of 12%.
Each of NWT's preferred stockholders are entitled to receive, from funds
legally available, a cumulative annual dividend of 8% per annum based on their
respective purchase price upon any liquidation, dissolution or winding up of the
affairs of NWT, redemption, or when declared by the Board of Directors provided
that, upon optional or automatic conversion of the preferred shares, all accrued
and unpaid dividends are forfeited. Dividends on these shares of $189,000,
$273,000, $286,000, $71,000 (unaudited) and $71,000 (unaudited) for the years
ended December 31, 1997, 1998 and 1999 and for the quarters ended March 31, 1999
and 2000, respectively, have been accrued and recorded in the accompanying
consolidated financial statements.
8. CONVERTIBLE AND REDEEMABLE PREFERRED STOCK
The Company has three classes of convertible and redeemable preferred stock
as follows.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Convertible and redeemable preferred stock, Series
A, par value $.001, 5,500,000 shares authorized,
2,263,857 shares issued and outstanding........... $ 5,472,000 $ 5,870,000 $ 5,969,000
Convertible and redeemable preferred stock, Series
B, par value $.001, 2,500,000 shares authorized
(161,747 are non-voting), 2,084,281 shares issued
and outstanding................................... 9,340,000 10,060,000 10,240,000
Convertible and redeemable preferred stock, Series
C, par value $.001, 5,500,000 shares authorized,
3,674,277 shares issued and outstanding........... -- 27,875,000 28,624,000
----------- ----------- -----------
$14,812,000 $43,805,000 $44,833,000
=========== =========== ===========
</TABLE>
F-14
<PAGE> 89
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
In 1996, the Company issued 1,029,855 shares of Series A convertible and
redeemable preferred stock (Series A) to accredited investors in a private
offering. Proceeds from the financing were approximately $2,194,000, or $2.13
per share.
In 1997, the Company issued 1,234,002 shares of Series A preferred stock to
accredited investors in a private offering. Proceeds from the financing were
approximately $2,628,000, or $2.13 per share and related offering costs were
approximately $83,000. Additionally, we issued 375,587 shares of Series B
convertible and redeemable preferred stock (Series B) to accredited investors in
a private offering. Proceeds from the financing were approximately $1,600,000,
or $4.26 per share and related offering costs were approximately $17,000. We
also issued warrants to purchase a total of 140,845 shares of NWI common stock
at an exercise price of $4.26 on or prior to December 31, 2002.
In 1998, the Company issued 1,708,694 shares of Series B preferred stock to
accredited investors in a private offering. Proceeds from the financing were
approximately $7,279,000, or $4.26 per share and related offering costs were
approximately $82,000. We also issued warrants to purchase a total of 640,760
shares of NWI common stock at an exercise price of $4.26 on or prior to December
31, 2004.
In December 1999, the Company issued 3,674,277 shares of Series C
convertible and redeemable preferred stock (Series C) to accredited investors in
a private offering at a price of $8.34 per share. Proceeds from the financing
were approximately $27,875,000, including conversion of subordinated debentures
of $3,120,000 and related accrued interest of $130,000 after deducting offering
costs and underwriters' commissions of approximately $2,768,000.
Subject to adjustment under certain circumstances, the Series A, Series B,
and Series C shares are convertible to NWI common shares on a 1:1 basis without
the payment of additional consideration at the option of the holder at any time
after issuance but before August 21, 2002 for Series A, before December 23, 2001
for Series B, and before June 30, 2001 for Series C. Automatic conversion occurs
if:
a. NWI becomes listed on a public exchange with minimum net proceeds
of $10 million and the offering price is not less than $4.26 per share for
Series A, $7.50 per share for Series B, and $14.60 per share for Series C.
b. NWI sells all or substantially all of its assets, merges or
consolidates into or with another corporation provided the portion of
proceeds distributable are not less than $4.26 per share for Series A,
$7.50 per share for Series B, and $14.60 per share for Series C.
c. Two-thirds of each Series of the preferred stockholders vote to
convert.
Holders of the Series A, Series B and Series C shares may elect, after
January 1, 2005 to have the Company redeem the shares, provided that funds are
legally available. After January 1, 2005, the Company must redeem all of the
outstanding preferred shares, provided that funds are legally available. If
funds legally available are not sufficient to redeem the total number of shares
submitted for redemption, or those subject to mandatory redemption, those shares
not redeemed will carry a dividend rate of 12%.
The holders of the Series A, Series B and Series C shares are entitled to
receive, from funds legally available, a cumulative annual dividend of 8% of the
purchase price upon any liquidation, dissolution or winding up of the affairs of
the Company, upon redemption, or when declared by the Board of Directors,
provided that upon optional or automatic conversion of the preferred shares all
accrued and unpaid dividends shall be forfeited. Dividends on these shares of
$308,000, $859,000, $1,096,000, $274,000 (unaudited) and $882,000 (unaudited)
for the years ended December 31, 1997, 1998 and 1999, and the quarters ended
March 31, 1999 and 2000, respectively, have been accrued and recorded in the
accompanying consolidated financial statements.
F-15
<PAGE> 90
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
9. STOCKHOLDERS' EQUITY
During fiscal 1999, the Company amended its Certificate of Incorporation to
change its authorized share capital. As a result, the Company is authorized to
issue 26,500,000 shares of common stock, par value $.001; 5,500,000 shares of
Series A convertible and redeemable preferred stock, par value $.001; 2,500,000
shares of Series B convertible and redeemable preferred stock (of which 161,747
are non-voting), par value $.001; and 5,500,000 shares of Series C convertible
and redeemable preferred stock, par value $.001. With the exception of 18,788
outstanding shares of Series B convertible and redeemable preferred stock, all
outstanding shares carry voting rights (see Note 3).
Convertible Subordinated Debentures
On June 24, 1999 and July 15, 1999, the Company issued convertible
subordinated debentures to accredited investors in the total principal amount of
$3,120,000 bearing interest at the rate of 8% per annum. The Company also issued
warrants to purchase a total of 1,310,002 common shares of NWI and 250,000
common shares of NWT at an exercise price of $2.00 per share. Of these warrants,
1,550,207 expire on June 24, 2004 and 9,795 expire on July 15, 2004. Immediately
upon the closing of the Series C preferred stock financing, the principal amount
under convertible subordinated debentures and accrued interest of approximately
$130,000 thereon converted into shares of Series C preferred stock at $8.34 per
share.
Warrants
Since inception, NWI and NWT have issued warrants to purchase shares of NWI
and NWT stock to various investors and lenders as approved by the Board of
Directors.
A summary of warrant activity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
NWI WARRANTS
Outstanding, beginning of year......... -- -- 140,845 $4.26 781,605 $4.26
Granted.............................. 140,845 $4.26 640,760 $4.26 2,050,025 $4.84
------- ------- ---------
Outstanding, end of year............... 140,845 $4.26 781,605 $4.26 2,831,630 $4.68
======= ======= =========
NWT WARRANTS
Outstanding, beginning of year......... -- 35,211 $4.26 80,105 $4.26
Granted.............................. 35,211 $4.26 44,894 $4.26 250,000 $2.00
------- ------- ---------
Outstanding, end of year............... 35,211 $4.26 80,105 $4.26 330,105 $2.55
======= ======= =========
</TABLE>
In connection with Series C financing in 1999 (see Note 8), the Company
issued warrants to buy 716,213 common shares of the Company. These warrants may
be exercised at $10.00 per share (for 706,357 warrants) and $8.34 per share (for
9,856 warrants) at any time up to December 31, 2004. The Company estimated the
fair market value of these warrants at the date of issuance was nominal and,
accordingly, no value has been assigned to them.
F-16
<PAGE> 91
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
In connection with the convertible subordinated debenture transaction, the
Company issued warrants to buy 1,310,002 common shares of NWI and 250,000 common
shares of NWT. These warrants may be exercised at $2.00 per share. The Company
estimated that the fair value of the warrants at the date of issuance was
approximately $4.3 million as the exercise price per common share was less than
deemed fair value per common share. Accordingly, the Company allocated the gross
debenture proceeds of $3,120,000 toward the value of these warrants. This also
resulted in non-cash interest expense totaling $3,120,000 in fiscal 1999 to
accrete the debt discount (resulting from the allocation of proceeds to the
warrant) from the time of debenture issuance to conversion to Series C.
In connection with line of credit financing (see Note 6), the Company
issued warrants to buy 23,810 Series C convertible and redeemable preferred
shares of the Company. These warrants may be exercised at $6.30 per share at any
time up to expiration at December 31, 2004. The Company believes the fair value
of these warrants at the date of issuance was nominal and, accordingly, no value
has been assigned to them.
In connection with the Series B financing in 1997 and 1998 (see Note 8),
NWI issued warrants to buy 140,845 and 640,760 common shares of NWI,
respectively, and NWT issued warrants to buy 35,211 and 44,894 common shares of
NWT, respectively. These warrants may be exercised at $4.26 per share at any
time up to December 31, 2002 (for 176,056 of the warrants) and April 24, 2003
(for 685,654 of the warrants). The Company believes the fair market value of
these warrants at the date of issuance was nominal and, accordingly, no value
has been assigned to them.
Stock Option Plans
The Company's June 1997 stock option plan (the "1997 Plan") for employees
authorizes the granting of options for up to 2,000,000 shares of the Company's
common stock as of December 31, 1999. Generally, options are to be granted at
prices equal to at least 100% of the fair value of the stock at the date of
grant, expire not later than ten years from the date of grant and become
exercisable ratably over a four-year period following the date of grant. From
time to time, as approved by the Company's Board of Directors, options with
differing terms have also been granted. The Plan provides that any shares issued
come from the Company's authorized but unissued or reacquired common stock.
In July 2000 the Company's Board of Directors approved the 2000 Stock
Incentive Plan (the "2000 Plan"). The Company will implement the 2000 Plan upon
the effective date of an initial public offering (see Note 2). Options granted
under the 2000 Plan generally vest on the same terms as the 1997 Plan and are
exercisable for a period of ten years.
F-17
<PAGE> 92
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OPTIONS AVAILABLE EXERCISE PRICE
OUTSTANDING FOR GRANT PER SHARE
----------- --------- ----------------
<S> <C> <C> <C>
Options authorized at inception (June 2, 1997)....... -- 600,000 --
Granted............................................ 507,000 (507,000) $2.16
Cancelled.......................................... (38,500) 38,500 $2.13
New authorized options............................. -- 196,050 --
--------- --------- -----
Options outstanding, December 31, 1997............... 468,500 327,550 $2.16
New authorized options............................. -- 500,000 --
Granted............................................ 779,000 (779,000) $2.51
Cancelled.......................................... (107,500) 107,500 $2.28
--------- --------- -----
Options outstanding, December 31, 1998............... 1,140,000 156,050 $2.39
New authorized options............................. -- 703,950 --
Granted............................................ 284,000 (284,000) $2.86
Exercised.......................................... (13,750) $2.13
Cancelled.......................................... (66,250) 66,250 $2.34
--------- --------- -----
Options outstanding, December 31, 1999............... 1,344,000 642,250 $2.49
Granted (unaudited)................................ 125,000 (125,000) $5.00
Exercised (unaudited).............................. (116,000) -- $ .39
Cancelled (unaudited).............................. (28,000) 28,000 $2.31
--------- --------- -----
Options outstanding, March 31, 2000 (unaudited)...... 1,325,000 545,250 $2.91
========= ========= =====
Exercisable, December 31, 1997....................... 1,667 $2.13
========= =====
Exercisable, December 31, 1998....................... 109,584 $1.94
========= =====
Exercisable, December 31, 1999....................... 442,584 $1.98
========= =====
Exercisable, March 31, 2000 (unaudited).............. 366,083 $2.58
========= =====
</TABLE>
Additional information relating to stock options outstanding and
exercisable at December 31, 1999, summarized by exercise price is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE ------------------------------ ------------------
PRICE LIFE EXERCISE EXERCISE
PER SHARE SHARES (YEARS) PRICE SHARES PRICE
--------------------- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.10 100,000 8.77 $0.10 100,000 $0.10
$2.13 303,250 7.00 2.13 157,001 2.13
$2.86 937,250 9.10 2.86 185,583 2.86
--------- -------
1,340,500 442,584
========= =======
</TABLE>
In 1998, the Company granted 100,000 options to an employee at $0.10 per
share. On the grant date, the deemed fair value of a share of common stock was
in excess of the exercise price. Accordingly, the Company has recognized gross
deferred compensation of $276,000, of which $115,000 and $161,000 were
recognized in 1998 and 1999, respectively.
In 1999, the Company issued 284,000 options at $2.86 per share to
employees. On the grant dates the deemed fair value of a share of common stock
was in excess of $2.86 per share. Accordingly, the
F-18
<PAGE> 93
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
Company has recognized gross deferred compensation related to these grants of
$859,000 of which $800,000 is unamortized as of December 31, 1999. This deferred
charge will be amortized to expense over the four-year vesting period of these
options.
Of the remaining 1,186,000 options granted through December 31, 1999,
507,000 and 679,000 were granted in 1997 and 1998, respectively. These options
were granted at exercise prices which the Company believes approximated fair
value at the date of grant.
In February 2000, the Company granted 125,000 additional stock options at
$5.00 per share. In connection with this grant, the Company has recorded
$295,000 (unaudited) of gross deferred stock compensation in the first quarter
of fiscal 2000. The deferred compensation will be amortized over the four year
vesting from the date of the grant.
As permitted, the Company has adopted the disclosure only provisions of
SFAS No. 123. Accordingly, no compensation expense, except as specifically
described above, has been recognized for the stock option plans. The fair value
of these option grants were estimated on the date of grant using an
option-pricing model with the following weighted-average assumptions: zero
dividend yield; risk-free interest rates between 5.28% and 6.45%; and an
expected life of five years. Had compensation expense been determined based on
the fair value at the dates of grant for the years ended December 31, 1997,
1998, 1999 and for the quarters ended March 31, 1999 and 2000 consistent with
the provisions of SFAS No. 123, the Company's net loss per share would have been
reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
---------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss applicable to common
stockholders, as reported.... $(4,979,000) $(6,657,000) $(19,873,000) $(1,863,000) $(7,367,000)
Net loss applicable to common
stockholders, pro forma...... $(5,031,000) $(6,789,000) $(20,201,000) $(1,939,000) $(7,556,000)
Net loss per share, as
reported..................... $ (1.54) $ (2.06) $ (6.13) $ (0.58) $ (2.21)
Net loss per share, pro
forma........................ $ (1.55) $ (2.10) $ (6.23) $ (0.60) $ (2.26)
</TABLE>
The option pricing model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
Option valuation models also require the input of highly subjective assumptions.
Because the Company's employee stock-based compensations plans have
characteristics significantly different from these of traded options and because
changes in the subjective input assumptions can materially affect fair value
estimates, the Company believes that existing option valuation models do not
necessarily provide a reliable single measure of the fair value of awards from
the plans.
F-19
<PAGE> 94
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
Common Shares Reserved for Future Issuance
The Company has reserved shares of common stock as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Stock options outstanding................................... 1,344,000 1,325,000
Stock options available for future grant.................... 642,250 545,250
Conversion of:
Series A NWI convertible and redeemable preferred stock... 2,263,857 2,263,857
Series B NWI convertible and redeemable preferred stock... 2,084,281 2,084,281
Series C NWI convertible and redeemable preferred stock... 3,674,277 3,674,277
Series A NWT convertible and redeemable preferred stock... 1,251,798 1,251,798
Series B NWT convertible and redeemable preferred stock... 213,614 213,614
Stock warrants -- NWI..................................... 2,831,630 2,831,630
Stock warrants -- NWT..................................... 330,105 330,105
---------- ----------
Total reserved shares for issuance of common stock..... 14,635,812 14,519,812
========== ==========
</TABLE>
Employee Stock Purchase Plan
In July 2000, the Company's Board of Directors approved the 2000 Employee
Stock Purchase Plan (ESPP), subject to stockholder approval. The Company will
implement the ESPP upon the effective date of an initial public offering (see
Note 2). The ESPP, subject to certain limitations, will permit eligible
employees of the Company to purchase common stock through payroll deductions of
up to 10% of their compensation. The Company has authorized the issuance of
500,000 shares of common stock under the ESPP, plus an automatic annual
increase, to be added on the first day of the fiscal year beginning in 2001,
equal to the lesser of (a) 0.5% of the outstanding shares on the last day of the
prior fiscal year, (b) 90,000 shares, or such lesser number of shares as may
determined by the Board in its sole discretion. If purchases of stock through
the plan deplete this supply, we will limit, suspend or discontinue purchases
under the plan until additional shares of stock are available.
F-20
<PAGE> 95
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
10. INCOME TAXES
The Company's deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Current deferred taxes:
Accounts receivable reserve............................... $ 18,000 $ 327,000
Accrued expenses.......................................... 125,000 393,000
Other..................................................... -- 183,000
----------- -----------
Deferred tax asset -- current............................. 143,000 903,000
Valuation allowance....................................... (143,000) (903,000)
----------- -----------
Net current deferred taxes................................ -- --
=========== ===========
Long-term deferred taxes:
Depreciation and amortization............................. 879,000 1,095,000
Research and development costs............................ 205,000 205,000
Net operating loss and credit carryforwards............... 3,802,000 8,462,000
----------- -----------
Deferred tax asset -- noncurrent.......................... 4,886,000 9,762,000
Valuation allowance....................................... (4,886,000) (9,762,000)
----------- -----------
Net long-term deferred taxes.............................. -- --
----------- -----------
Net deferred income taxes................................... $ -- $ --
=========== ===========
</TABLE>
Management has established a valuation allowance against its net deferred
tax assets due to the uncertainty surrounding the realization of such assets. At
December 31, 1999 the Company has U.S. federal net operating loss carryforwards
of approximately $13.6 million, which expire at various dates through 2020. The
Company has California net operating loss carryforwards of approximately $8.2
million, which expire at various dates through 2004. In addition, the Company
has state operating loss carryforwards of approximately $9.2 million, which
expire at various dates through 2006. The Company's use of net operating loss
carryforwards in future years will be substantially limited due to previous
ownership changes as defined under Internal Revenue Code section 382.
The provision for income taxes reconciles to the amount computed by
applying the statutory federal income tax rate to income before provision for
income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------- QUARTER ENDED
1997 1998 1999 MARCH 31, 2000
----------- ----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal tax provision, at statutory
rate............................... $(1,567,000) $(1,927,000) $(6,464,000) $(1,991,000)
State tax, net of federal benefit.... (42,000) (195,000) (543,000) (167,000)
Change in valuation allowance........ 1,602,000 2,069,000 5,636,000 2,135,000
Interest expense on convertible
subordinated debentures............ -- -- 1,279,000 --
Other................................ 7,000 53,000 92,000 23,000
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
F-21
<PAGE> 96
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES
Operating and Capital Leases
The Company leases its office space and certain equipment under
non-cancelable operating and capital leases. Rental expense under operating
leases in fiscal 1997, 1998 and 1999 was approximately $327,000, $370,000 and
$517,000, respectively. The minimum future lease payments under non-cancelable
operating leases and future minimum capital lease payments as of December 31,
1999 are:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- --------
<S> <C> <C>
2000........................................................ $1,053,000 $108,000
2001........................................................ 1,104,000 76,000
2002........................................................ 826,000 24,000
2003........................................................ 742,000 19,000
2004........................................................ 759,000 13,000
Thereafter.................................................. 87,000 --
---------- --------
Total minimum lease payments...................... $4,571,000 240,000
==========
Less -- amount representing interest (at rates ranging from
9.9% to 20.1%)............................................ (53,000)
--------
Present value of net minimum lease payments................. 187,000
Less -- current installments of obligations under capital
leases.................................................... (81,000)
--------
Obligations under capital leases, excluding current
installments.............................................. $106,000
========
</TABLE>
Royalties
The Company is required to pay quarterly royalties for its products shipped
with CDPD technology. The Company incurred royalty expenses of $27,000, $136,000
and $353,000 in fiscal 1997, 1998 and 1999, respectively.
Employment Agreements
The Company has entered into an employment agreement with its President and
Chief Operating Officer that provides for compensation in the event of
termination of employment of 250,000 Canadian dollars (approximately $168,000 at
December 31, 1999) or 125,000 Canadian dollars (approximately $84,000 at
December 31, 1999) in the event of resignation within 30 days of a change in
control of the Company, plus continuation of certain benefits and pro rata
payment of incentive bonuses. The Company has also entered into an employment
agreement with its Chief Executive Officer that provides for a lump sum payment
equivalent to annual base salary and certain additional benefits upon
termination without cause or upon a change in control of the Company. Employment
agreements with certain other key employees provide for six months salary
payment in the event of termination without cause.
Legal Matters
The Company is party to various legal matters and subject to claims in the
ordinary course of business. In the opinion of management, such matters will not
have a material adverse impact on the Company's financial position or results of
operations.
F-22
<PAGE> 97
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
12. SEGMENT INFORMATION AND CONCENTRATIONS OF RISK
Segment Information
The Company operates in the wireless data modem technology industry and all
sales of the Company's products and services are made in this segment.
Management makes decisions about allocating resources based on this one
operating segment.
The Company has operations in the United States and Canada. The
distribution of the Company's assets in the United States and Canada as of
December 31, 1998, December 31, 1999, and March 31, 2000 are $3.5 million and
$2.7 million, $27.4 million and $10.7 million, and $21.4 and $10.3 million,
respectively.
Concentrations of Risk
Two customers accounted for 23% and 14%, respectively, of 1999 revenues. No
customer accounts for more than 10% of 1998 revenues and one customer accounts
for 19% of 1997 revenues. Substantially all of the Company's revenues come from
wireless Internet products. Any decline in market acceptance of the Company's
products may impair the Company's ability to operate effectively.
The Company currently outsources substantially all of its manufacturing
operations to a single third party. This outsource manufacturer provides the
Company with procurement, manufacturing, assembly, test, quality control and
delivery services. Subsequent to December 31, 1999, the Company has entered into
a manufacturing agreement with another vendor, but manufacturing activities have
not begun with this new vendor. If there were disruptions to, or terminations
of, the Company's outsourced manufacturing relationships, the Company's
financial position and results of operations would be materially adversely
effected.
13. RETIREMENT SAVINGS PLAN
The Company has a defined contribution 401(k) retirement savings plan (the
"Plan"). Substantially all of the Company's U.S. employees are eligible to
participate in the Plan after meeting certain minimum age and service
requirements. Employees may make discretionary contributions to the Plan subject
to Internal Revenue Service limitations. As of December 31, 1999, there are no
provisions for employer contributions to the Plan. Participants are fully vested
in all contributions to the Plan.
14. UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA STOCKHOLDERS'
EQUITY (DEFICIT)
Upon the closing of the Company's initial public offering, all outstanding
NWI Series A, B and C convertible and redeemable preferred stock will be
converted into NWI common stock. In addition, the NWT Series A and B will be
exchanged and converted into NWI common stock with the initial public offering.
The pro forma effect of this conversion has been presented as a separate column
in the accompanying balance sheet.
Pro forma basic and diluted net loss per share have been computed to give
effect to common equivalent shares from convertible and redeemable preferred
stock and minority interest shares that will convert upon the closing of the
Company's initial public offering (using the as-if-converted method) for the
year ended December 31, 1999 and the quarters ended March 31, 1999 and 2000.
F-23
<PAGE> 98
NOVATEL WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
AND MARCH 31, 2000 (UNAUDITED)
A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and diluted net loss per common share follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
---------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss....................... $(4,476,000) $(5,506,000) $(18,469,000) $(1,513,000) $(6,268,000)
Adjustments to net loss used in
computing basic and diluted
net loss applicable to common
stockholders:
Accretion of dividends on
minority interest............ (189,000) (273,000) (286,000) (71,000) (71,000)
Accretion of dividends on
convertible and redeemable
preferred stock.............. (308,000) (859,000) (1,096,000) (274,000) (882,000)
Amortization of offering costs
for convertible and
redeemable preferred stock... (6,000) (19,000) (22,000) (5,000) (146,000)
----------- ----------- ------------ ----------- -----------
Net loss applicable to common
stockholders................. $(4,979,000) $(6,657,000) $(19,873,000) $(1,863,000) $(7,367,000)
=========== =========== ============ =========== ===========
Denominator:
Weighted average common
shares outstanding........ 3,242,807 3,237,210 3,339,998
Adjustments to reflect
assumed conversion of
convertible and redeemable
preferred stock and
warrants from the date of
issuance:
Series A NWI.............. 2,263,857 2,263,857 2,263,857
Series B NWI.............. 2,084,281 2,084,281 2,084,281
Series C NWI.............. 10,066 -- 3,674,277
Class A NWT............... 1,251,798 1,251,798 1,251,798
Class B NWT............... 213,614 213,614 213,614
------------ ----------- -----------
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share...... 9,066,423 9,050,760 12,827,825
============ =========== ===========
</TABLE>
F-24
<PAGE> 99
The inside back cover contains a diagram showing the relationship and
architecture of our product line to the Internet through wireless networks.
<PAGE> 100
[NOVATEL LOGO]
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee........................................ $ 27,720
NASD filing fee............................................. 11,000
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 250,000
Blue Sky qualification fees and expenses.................... 25,000
Transfer Agent and Registrar fees........................... 15,000
Miscellaneous fees and expenses............................. 50,000
--------
Total..................................................... $ *
========
</TABLE>
---------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under some circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the Securities Act). Article XIV of our amended and restated
certificate of incorporation (Exhibit 3.1 to this registration statement) and
Article VI of our bylaws (Exhibit 3.2 to this registration statement) provide
for indemnification of our directors, officers, employees and other agents to
the maximum extent permitted by Delaware law. In addition, we have entered into
Indemnification Agreements (Exhibit 10.6 to this registration statement) with
our officers and directors. The underwriting agreement (Exhibit 1.1 to this
registration statement) also provides for cross-indemnification among us and the
underwriters with respect to certain matters, including matters arising under
the Securities Act. Our amended and restated certificate of incorporation
provides that subject to Delaware law, our directors will not be personally
liable for monetary damages awarded as a result of a breach of their fiduciary
duty owed to Novatel Wireless, Inc. and its stockholders. This provision does
not eliminate our directors' fiduciary duty and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we have issued and sold the following
securities:
1. On June 30 and July 14, 2000, we issued and sold a total of
1,964,050 shares of our Series D preferred stock to accredited investors at
a purchase price of $17.25 per share. We also issued and sold warrants to
purchase a total of 392,800 shares of our common stock at an exercise price
of $17.25 per share. These warrants are exercisable upon the earliest to
occur of June 30, 2001, the closing of this offering or a transaction which
results in a change of control of our company.
II-1
<PAGE> 102
2. On December 31, 1999, we issued and sold a total of 3,674,277
shares of our Series C preferred stock to accredited investors at a
purchase price of $8.34 per share. We also issued and sold warrants to
purchase a total of 706,357 and 9,856 shares of common stock at an exercise
price of $10.00 and $8.34 per share, respectively, on or prior to December
31, 2004.
3. On October 12, 1999, we issued and sold a warrant to purchase
23,810 shares of our Series C preferred stock to a financial institution in
connection with a working line of credit at an exercise price of $6.30 per
share.
4. On June 24, 1999 and on July 15, 1999, we and NWT issued and sold
convertible subordinated debentures to accredited investors in the total
original principal amount of $3,120,000 bearing interest at the rate of 8%
per annum. Of this amount, $500,000 in original principal amount was issued
by our subsidiary NWT. We also issued warrants to purchase a total of
1,310,002 shares of common stock at an exercise price of $2.00 per share on
or prior to June 24, 2004 or July 15, 2004 depending on their date of
issuance. In connection with this financing, NWT issued warrants to
purchase 250,000 shares of NWT's common stock, which shares of NWT common
stock are thereafter exchangeable on a one-for-one basis for shares of our
common stock. Immediately upon the closing of our Series C preferred stock
financing, the principal amount then outstanding under these convertible
subordinated debentures, together with accrued interest thereon,
automatically converted into 388,907 shares of our Series C preferred stock
at a price of $8.34 per share without the payment of additional
consideration.
5. On December 23, 1997, April 24, 1998 and September 1, 1998, we
issued and sold a total of 2,084,281 shares of our Series B preferred stock
to accredited investors at a purchase price of $4.26 per share. In
addition, on December 23, 1997, our subsidiary NWT issued an aggregate of
213,614 shares of its Series B preferred stock. These NWT shares are
exchangeable on a one-for-one basis for shares of our Series B preferred
stock. During this period, we also issued warrants to purchase 781,605
shares of our common stock at an exercise price of $4.26 per share. In
connection with this financing, NWT issued warrants to purchase 80,105
shares of NWT's common stock at an exercise price of $4.26 per share which
shares of NWT common stock are thereafter exchangeable on a one-for-one
basis for shares of our common stock. 176,056 of the warrants that each of
Novatel and NWT issued in connection with this Series B financing are
exercisable on or before December 31, 2002 and 685,654 of such warrants are
exercisable on or before April 24, 2003.
6. At July 25, 2000, we have outstanding options to purchase 2,900,731
shares of our common stock to a number of our employees, directors and
consultants.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements under the Securities
Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or
Rule 701 with respect to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment purposes only and not with a view to or for sale in connection with
any distribution thereof, and appropriate legends were affixed to the stock
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
II-2
<PAGE> 103
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- -----------------------
<C> <S>
1.1* Form of underwriting agreement.
3.1* Amended and Restated Certificate of Incorporation of Novatel
Wireless, Inc., to be effective upon consummation of this
offering.
3.2* Amended and Restated Bylaws of Novatel Wireless, Inc., to be
effective upon consummation of this offering.
4.1* Form of Specimen Common Stock Certificate.
5.1* Opinion of Orrick, Herrington & Sutcliffe LLP regarding the
legality of the common stock being registered.
10.1** 1997 Stock Option Plan of Novatel Wireless, Inc.
10.2* 2000 Stock Incentive Plan of Novatel Wireless, Inc.
10.3* 2000 Employee Stock Purchase Plan of Novatel Wireless, Inc.
10.4** Amended and Restated Registration Rights Agreement, dated as
of June 15, 1999, by and among Novatel Wireless, Inc. and
some of its stockholders.
10.5** Amended and Restated Investors' Rights Agreement, dated as
of June 30, 2000, by and among Novatel Wireless, Inc. and
some of its stockholders.
10.6* Form of Indemnification Agreement to be entered into by and
between Novatel Wireless, Inc. and its officers and
directors.
10.7* Loan and Security Agreement, dated as of October 12, 1999,
by and between Novatel Wireless, Inc. and Venture Banking
Group, a division of Cupertino National Bank.
10.8* Sublease Agreement, dated as of July 7, 2000, by and between
Sicor Inc. (formerly Gensia Sicor, Inc.) and Novatel
Wireless, Inc., for 9360 Towne Centre Drive, San Diego,
California.
10.9** Real Property Lease, dated as of February 1, 1997, by and
between Novatel Wireless Technologies Ltd. and Sun Life
Assurance Company of Canada, for 6715 8th St., N.E.,
Calgary, Alberta.
10.10+ Supply Agreement, dated as of March 31, 2000, by and between
Novatel Wireless, Inc. and Hewlett-Packard Company.
10.11+** Technology License, Manufacturing and Purchase Agreement,
dated as of October 13, 1999, by and between Novatel
Wireless, Inc. and Metricom, Inc.
10.12+** Supply Agreement, dated as of July 15, 1999, by and between
Novatel Wireless, Inc. and OpenSky Corporation (currently
known as OmniSky Corporation).
10.13+** Electronic Manufacturing Services, dated as of September 3,
1999, by and between Novatel Wireless, Inc. and Sanmina
(Canada) ULC.
10.14+** Letter Agreement, dated as of March 15, 2000, by and between
Novatel Wireless, Inc. and Symbol Technologies, Inc.
10.15+** Agreement for Purchase and Sale of Novatel Wireless, Inc.
Mobile Terminal Units dated as March 2000 by and between
Novatel Wireless, Inc. and VoiceStream Wireless Corporation.
21.1** Subsidiaries of Novatel Wireless, Inc.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2* Consent of Orrick, Herrington & Sutcliffe LLP (contained in
their opinion filed as Exhibit 5.1).
24.1** Power of Attorney (included in the signature page to this
registration statement).
27.1** Financial Data Schedule.
</TABLE>
---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to some portions of this exhibit.
II-3
<PAGE> 104
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
We undertake to provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names the underwriters require to permit prompt delivery to each purchaser in
the offering.
To the extent indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, our certificate of
incorporation, our bylaws, indemnification agreements entered into between the
company and our officers and directors, the underwriting agreement, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission this indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against these liabilities (other than our payment of
expenses incurred or paid by any of our directors, officers or controlling
persons in the successful defense of any action, suit or proceeding) is asserted
by a director, officer or controlling person in connection with the securities
being registered, we will, unless our legal counsel opines that controlling
precedent has settled the matter, submit to a court of appropriate jurisdiction
the question whether this indemnification by us is against public policy as
expressed in the Securities Act and we will be governed by the final
adjudication of the issue.
The undersigned registrant undertakes:
(1) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus we filed pursuant to Rule 424(b)(1) or (4) or 497(h) of
the Securities Act shall be deemed to be part of this registration
statement as of the time the registration statement was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of those securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 105
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of San Diego,
State of California on August 1, 2000.
NOVATEL WIRELESS, INC.
By: /s/ JOHN MAJOR
------------------------------------
John Major
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, John Major
and Melvin Flowers, and each of them, as his or her attorney-in-fact, with full
power of substitution, for him or her in any and all capacities, to sign any and
all amendments to this registration statement (including any and all
post-effective amendments), and any and all registration statements filed
pursuant to Rule 462 under the Securities Act, in connection with or related to
the offering contemplated by this registration statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said registration statement.
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
the registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN MAJOR Chief Executive Officer and August 1, 2000
--------------------------------------------------- Chairman of the Board (Chief
John Major Executive Officer)
/s/ AMBROSE TAM President, Chief Operating August 1, 2000
--------------------------------------------------- Officer and Chief Technology
Ambrose Tam Officer
/s/ MELVIN FLOWERS Chief Financial Officer (Chief August 1, 2000
--------------------------------------------------- Financial and Accounting Officer)
Melvin Flowers
* Director August 1, 2000
---------------------------------------------------
H. H. Haight
* Director August 1, 2000
---------------------------------------------------
Nathan Gibb
* Director August 1, 2000
---------------------------------------------------
Robert Getz
</TABLE>
II-5
<PAGE> 106
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Director August 1, 2000
---------------------------------------------------
David Oros
* Director August 1, 2000
---------------------------------------------------
Mark Rossi
* Director August 1, 2000
---------------------------------------------------
Steven Sherman
*By: /s/ JOHN MAJOR Director August 1, 2000
---------------------------------------------
John Major, Attorney-In-Fact
</TABLE>
II-6
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
------- ----------------------- ------
<C> <S> <C>
1.1* Form of underwriting agreement..............................
3.1* Amended and Restated Certificate of Incorporation of Novatel
Wireless, Inc., to be effective upon consummation of this
offering....................................................
3.2* Amended and Restated Bylaws of Novatel Wireless, Inc., to be
effective upon consummation of this offering................
4.1* Form of Specimen Common Stock Certificate...................
5.1* Opinion of Orrick, Herrington & Sutcliffe LLP regarding the
legality of the common stock being registered...............
10.1** 1997 Stock Option Plan of Novatel Wireless, Inc. ...........
10.2* 2000 Stock Incentive Plan of Novatel Wireless, Inc. ........
10.3* 2000 Employee Stock Purchase Plan of Novatel Wireless,
Inc. .......................................................
10.4** Amended and Restated Registration Rights Agreement, dated as
of June 15, 1999, by and among Novatel Wireless, Inc. and
some of its stockholders....................................
10.5** Amended and Restated Investors' Rights Agreement, dated as
of June 30, 2000, by and among Novatel Wireless, Inc. and
some of its stockholders....................................
10.6* Form of Indemnification Agreement to be entered into by and
between Novatel Wireless, Inc. and its officers and
directors...................................................
10.7* Loan and Security Agreement, dated as of October 12, 1999,
by and between Novatel Wireless, Inc. and Venture Banking
Group, a division of Cupertino National Bank................
10.8* Sublease Agreement, dated as of July 7, 2000, by and between
Sicor Inc. (formerly Gensia Sicor, Inc.) and Novatel
Wireless, Inc., for 9360 Towne Centre Drive, San Diego,
California..................................................
10.9** Real Property Lease, dated as of February 1, 1997, by and
between Novatel Wireless Technologies Ltd. and Sun Life
Assurance Company of Canada, for 6715 8th St., N.E.,
Calgary, Alberta............................................
10.10+ Supply Agreement, dated as of March 31, 2000, by and between
Novatel Wireless, Inc. and Hewlett-Packard Company..........
10.11+** Technology License, Manufacturing and Purchase Agreement,
dated as of October 13, 1999, by and between Novatel
Wireless, Inc. and Metricom, Inc. ..........................
10.12+** Supply Agreement, dated as of July 15, 1999, by and between
Novatel Wireless, Inc. and OpenSky Corporation (currently
known as OmniSky Corporation)...............................
10.13+** Electronic Manufacturing Services, dated as of September 3,
1999, by and between Novatel Wireless, Inc. and Sanmina
(Canada) ULC................................................
10.14+** Letter Agreement, dated as of March 15, 2000, by and between
Novatel Wireless, Inc. and Symbol Technologies, Inc. .......
10.15+** Agreement for Purchase and Sale of Novatel Wireless, Inc.
Mobile Terminal Units dated as March 2000 by and between
Novatel Wireless, Inc. and VoiceStream Wireless
Corporation.................................................
21.1** Subsidiaries of Novatel Wireless, Inc. .....................
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.................................................
23.2* Consent of Orrick, Herrington & Sutcliffe LLP (contained in
their opinion filed as Exhibit 5.1).........................
24.1** Power of Attorney (included in the signature page to this
registration statement).....................................
27.1** Financial Data Schedule.....................................
</TABLE>
---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to some portions of this exhibit.
II-7
