<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1998
REGISTRATION NO. 333-59621
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
METAWAVE COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
DELAWARE 3663 91-1673152
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
10735 WILLOWS ROAD NE
P.O. BOX 97069
REDMOND, WA 98073-9769
(425) 702-5600
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ROBERT H. HUNSBERGER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
10735 WILLOWS ROAD NE
P.O. BOX 97069
REDMOND, WA 98073-9769
(425) 702-5600
(NAME, ADDRESS INCLUDING ZIP CODE AND TELEPHONE NUMBER INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
WILLIAM W. ERICSON JEFFREY D. SAPER
SONYA F. ERICKSON PATRICK J. SCHULTHEIS
JOHN W. ROBERTSON ROBERT G. DAY
VENTURE LAW GROUP WILSON SONSINI GOODRICH & ROSATI
A PROFESSIONAL CORPORATION PROFESSIONAL CORPORATION
4750 CARILLON POINT 650 PAGE MILL ROAD
KIRKLAND, WA 98033-7355 PALO ALTO, CA 94304-1050
(425) 739-8700 (650) 493-9300
---------------
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, 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 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
SEPTEMBER , 1998
5,000,000 SHARES
[LOGO OF METAWAVE COMMUNICATIONS CORPORATION]
COMMON STOCK
All of the 5,000,000 shares of Common Stock offered hereby are being sold by
Metawave Communications Corporation ("Metawave" or the "Company"). Prior to
this offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $9.50 and $11.50 per share. See "Underwriting" for information
relating to the method of determining the initial public offering price. The
Company has applied to have the Common Stock listed on the Nasdaq National
Market under the symbol MTWV.
---------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
---------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $ $ $
- ------------------------------------------------------------------------------------------
Total(3)........................ $ $ $
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting estimated expenses payable by the Company estimated at
$950,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 750,000 additional shares of Common Stock solely to cover over-
allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
---------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part and
certain other conditions. It is expected that delivery of the shares of Common
Stock will be made, at the offices of BT Alex. Brown Incorporated, Baltimore,
Maryland, on or about , 1998.
BT ALEX. BROWN
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998
<PAGE>
[Inside front cover and gatefold graphics:
The global communications infrastructure, including wireless communications,
is enabling the worldwide evolution to the digital information age.
The number of worldwide wireless users in 1997 was over 194 million and is
expected to grow to approximately 550 million by the year 2001.
Metawave is dedicated to providing spectrum management solutions to enable
this growth to continue.
Graphic of frequency spectrum and artwork using a depiction of cellular
telephones and the cellular Block A frequency illustrating the Company's
current and potential technology, products and markets.
The Company's current product offerings are for AMPs and AMPs/CDMA dual-mode
networks. The Company is also developing solutions for GSM.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS, IN CONNECTION WITH
THE OFFERING, FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Metawave has applied for federal registration of the marks "Metawave,"
"Metawave Communications," "SpotLight," "LampLighter," "SiteNet" and its
stylized cube logo. All other trademarks or service marks appearing in this
Prospectus are the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. See "Risk Factors." Unless otherwise indicated, the
information in this Prospectus assumes (i) no exercise of the Underwriters'
over-allotment option, (ii) no exercise of outstanding warrants, (iii) the
filing of the Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") authorizing a class of 15,000,000 shares of
undesignated Preferred Stock upon completion of this offering and (iv) the
automatic conversion on a one-for-one basis of an aggregate of 13,130,350
outstanding shares of Series A, Series B, Series C and Series D Preferred Stock
into Common Stock upon completion of this offering. See "Description of
Securities" and "Underwriting." Each of the Company's fiscal quarters is the
13-week period that ends on the Sunday nearest the end of the last calendar
month of such 13-week period. For convenience of presentation, all fiscal
periods in these financial statements are treated as ending on a calendar month
end. This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual events or results could differ materially from those
expressed in or implied by these forward-looking statements as a result of a
number of factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
THE COMPANY
Metawave Communications Corporation ("Metawave" or the "Company") designs,
develops, manufactures and markets spectrum management solutions for the
wireless communications industry. Metawave believes that its spectrum
management solutions, consisting of smart antenna systems, applications
software and engineering services, enable cellular network operators to
increase overall network capacity, reduce network operation costs, better
manage network infrastructure and stimulate end user demand through improved
system quality.
The Company's smart antenna systems utilize fixed beam-switching hardware and
software algorithms to reduce system interference in order to enable more
efficient utilization of finite radio frequency spectrum or "wireless
bandwidth." The Company's products offer highly integrated system solutions
that can reduce the need for costly infrastructure upgrades and additional cell
site deployments, thereby enabling cellular network operators to reduce
otherwise capital intensive outlays and to keep pace with subscriber growth.
The Company's technology is designed to be leveraged across a variety of the
market segments in the wireless communications industry, including the AMPS,
CDMA, GSM, PCS, TDMA and wireless local loop ("WLL") segments. The Company's
customers include ALLTEL Communications Inc. ("ALLTEL"), 360(degrees)
Communications Company ("360(degrees) Communications") (which was recently
acquired by ALLTEL) and Millicom International Cellular S.A. ("Millicom")
affiliates, Telefonica Celular del Paraguay S.A. ("Telefonica Celular") and
OJSC St. Petersburg Telecom ("St. Petersburg Telecom"). The Company has
completed field trials with AirTouch Communications, Inc. ("AirTouch") and GTE
Corporation ("GTE"). St. Petersburg Telecom, Telefonica Celular and ALLTEL
accounted for approximately 27.4%, 24.0% and 44.2%, respectively, of the
Company's net revenue in the six months ended June 30, 1998.
The worldwide demand for wireless communications services has grown
significantly, largely as a result of technological advancements, deregulation
and economies of scale that have substantially reduced the cost and improved
the quality and reliability of wireless services for the business and consumer
mass market. Increased demand for wireless services places a significant strain
on wireless network operators which have a fixed amount of radio frequency
spectrum or wireless bandwidth available to deliver wireless services. Unlike
traditional data and telephony communications bandwidth, which is an expandable
physical medium, wireless spectrum is generally allocated in fixed amounts by
governments in U.S. and foreign markets. Thus, the fundamental challenge for
wireless network operators is to increase capacity, coverage and call quality
within a fixed amount of wireless spectrum.
3
<PAGE>
To address capacity, coverage and call quality issues, cellular network
operators have begun to deploy more spectrum-efficient digital technologies.
However, because analog and digital technologies share the same fixed amount of
spectrum in a cellular network, cellular network operators must remove analog
channels to implement digital technologies, while simultaneously providing
analog cellular service to increasing numbers of subscribers. Traditionally,
cellular network operators have addressed capacity, coverage and call quality
problems by building new cell sites or adopting variations on antenna design
such as sectorized antennas.
Metawave's spectrum management platform, the Spotlight 2000 system, is a
multibeam smart antenna technology that enables the transition from traditional
wireless network infrastructure design to an architecture which actively
optimizes finite spectrum or wireless bandwidth. The SpotLight 2000 system is
compatible with the Motorola, Inc. ("Motorola") HDII and Lucent Technologies
Inc. ("Lucent") Series II base stations and AMPS and CDMA air interface
protocols. Metawave's SpotLight 2000 system is currently deployed in cellular
networks in North America, South America and Europe. Commercial shipment of the
SpotLight 2000 system began in late 1997 for the Motorola HDII analog-only
version and Metawave recently completed a field trial of a Lucent Series II
dual-mode AMPS/CDMA SpotLight 2000 system. The Company has begun development of
a product designed for the GSM market and intends to explore other high-growth
markets such as PCS, TDMA and WLL and, if appropriate, to develop similar
solutions for these markets. There can be no assurance, however, that the
Company will successfully develop these new products or that field trials will
lead to commercial sales.
Metawave's objective is to be a leading provider of spectrum management
solutions to the worldwide wireless communications market. Key elements of the
Company's strategy include: (i) identifying rapidly growing wireless markets
and developing highly integrated solutions to their spectrum management
problems; (ii) building and expanding strategic customer relationships; (iii)
leveraging its proprietary core technology, which includes eight issued U.S.
patents and 25 pending patent applications, by investing substantial resources
in the research and the product development necessary to address additional
markets; and (iv) offering system level solutions, including pre-sales system
planning, configurable products and on-site installation and optimization, that
enhance the performance of cellular operators' networks.
Metawave sells its products through a technical direct sales force supported
by systems engineers. Direct sales personnel are assigned on a customer account
basis and are responsible for generating product sales and providing product
and customer support. As of June 30, 1998, the Company had 200 employees,
including 43 in sales, marketing and customer support, located in the Company's
Redmond, Washington, Washington, D.C. and Dallas, Texas offices.
The Company's principal executive offices are located at 10735 Willows Road
NE, Redmond, Washington 98073-9769, and its telephone number is (425) 702-5600.
The Company was originally incorporated in the state of Washington in January
1995 and was reincorporated in the state of Delaware in July 1995.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company........... 5,000,000 shares
Common Stock to be outstanding after the
offering..................................... 21,166,277 shares(1)
Use of proceeds............................... Repayment of approximately
$16.2 million of outstanding
debt for working capital and
general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol........ MTWV
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED SIX MONTHS ENDED
JANUARY 19, 1995 DECEMBER 31, JUNE 30,
(INCEPTION) TO ------------------ -----------------
DECEMBER 31, 1995 1996 1997 1997 1998
----------------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue............. $ -- $ 1,291 $ 1,450 $ 392 $ 6,501
Gross profit (loss)..... -- 194 (278) (124) 105
Total operating
expenses............... 1,135 11,324 22,228 8,976 14,541
Loss from operations.... (1,135) (11,130) (22,506) (9,100) (14,436)
Other income (expense),
net.................... 135 335 402 173 (1,747)
------- -------- -------- ------- --------
Net loss................ $(1,000) $(10,795) $(22,104) $(8,927) $(16,183)
======= ======== ======== ======= ========
Pro forma net loss per
share(2)............... $ (1.54) $ (1.01)
======== ========
Weighted average common
shares and equivalents
pro forma(2)........... 14,383 16,061
======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 20,311 $ 52,111
Working capital........................................ 3,787 51,787
Total assets........................................... 46,557 78,357
Senior Secured Bridge Notes(3)......................... 29,708 13,508
Other debt, including capital lease obligations........ 5,392 5,392
Convertible and redeemable preferred stock............. 49,282 --
Convertible and redeemable preferred stock warrants.... 4,423 --
Accumulated deficit.................................... (50,082) (50,082)
Stockholders' equity (deficit)......................... $(48,797) $ 52,908
</TABLE>
- --------
(1) Based on the number of shares outstanding on June 30, 1998. Excludes as of
June 30, 1998, (i) 3,277,760 shares issuable upon exercise of outstanding
options at a weighted average exercise price of $1.49 per share (ii)
657,005 shares issuable upon exercise of outstanding warrants at a weighted
average exercise price of $0.60 per share and (iii) an aggregate of
2,010,639 shares available for future issuance of such options under the
Company's Amended and Restated 1995 Stock Option Plan (the "1995 Stock
Option Plan"), 1998 Stock Option Plan (the "1998 Stock Option Plan"), 1998
Directors' Stock Option Plan (the "Directors' Plan") and 1998 Employee
Stock Purchase Plan (the "Purchase Plan"). See "Management--Stock Plans,"
"Certain Relationships and Related Transactions," "Description of
Securities" and Notes 4 and 6 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
method employed to determine the number of shares used to compute per share
amounts.
(3) In April 1998, the Company issued $29.0 million in aggregate principal
13.75% Senior Secured Bridge Notes due April 28, 2000 (the "13.75% Senior
Secured Bridge Notes"). In connection with the 13.75% Senior Secured Bridge
Notes, the Company issued warrants to purchase an aggregate of 537,500
shares of Series D Preferred Stock at a purchase price of $0.01 per share
(the "Note Warrants"). Concurrently with the automatic conversion of the
Company's outstanding Preferred Stock on a one-for-one basis into Common
Stock upon the closing of this offering, the Note Warrants will
automatically convert into warrants to purchase 537,500 shares of the
Company's Common Stock at an exercise price of $0.01 per share. See
"Certain Relationships and Related Transactions," "Description of
Securities" and Note 4 of Notes to Financial Statements.
(4) Adjusted to reflect (i) the sale and issuance of the shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $10.50 per share net of offering expenses; (ii) the conversion of
convertible and redeemable Preferred Stock into 13,130,350 shares of Common
Stock and the conversion of Preferred Stock warrants into Common Stock
warrants, and (iii) the application of the estimated net proceeds of the
offering including the repayment of approximately $16.2 million of
outstanding principal and the estimated accrued interest on the Company's
13.75% Senior Secured Bridge Notes. See "Use of Proceeds" and
"Capitalization."
5
<PAGE>
RISK FACTORS
An investment in the shares offered hereby involves a high degree of risk.
The following risk factors should be considered carefully in addition to the
other information in this Prospectus before purchasing the shares of Common
Stock offered hereby. The discussion in this Prospectus contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include those discussed below as well as those discussed elsewhere
herein.
Limited Operating History; Accumulated Deficit; Anticipated Losses. The
Company was incorporated in 1995 and was in the development stage until late
1997, when it commenced shipments for commercial sale of its first spectrum
management system. From inception through June 30, 1998, the Company generated
total revenues of approximately $9.2 million, of which $6.5 million, or 70.6%,
was generated in the six months ended June 30, 1998. For the quarters ended
March 31, 1998 and June 30, 1998, the Company's net losses were $7.0 million
and $9.2 million, respectively and, at June 30, 1998, the Company had a
cumulative net loss of approximately $50.1 million. The revenue and profit
potential of the Company's business is unproven and the Company's limited
operating history makes its future operating results difficult to predict. The
Company believes that its growth and future success will be dependent upon the
widespread acceptance of the SpotLight 2000 system by cellular network
operators. Because the SpotLight 2000 system was only recently introduced, the
Company is unable to predict with any degree of certainty whether the system
will achieve market acceptance. There can be no assurance that the Company
will ever achieve profitability or significant revenues on a quarterly or an
annual basis. The Company intends to continue to make significant investments
in its operations, particularly to support product development, to increase
manufacturing capacity and to market new products. Accordingly, the Company
expects to continue to generate losses for the foreseeable future, even if
revenues increase. In view of the Company's limited production history, an
investment in the Common Stock offered hereby must be considered in light of
the problems, expenses, complications and delays frequently encountered in
connection with the development of new technologies, products, markets and
operations. As a result of the Company's net losses and limited operating
history, period-to-period comparisons of operating results may not be
meaningful and operating results from prior periods may not be indicative of
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Significant Fluctuations in Operating Results. The Company will likely
experience significant fluctuations in its operating results on a quarterly
and an annual basis in the future. In connection with its efforts to increase
production of its recently introduced SpotLight 2000 system, the Company
expects to continue to make substantial investments in capital equipment, to
recruit and train additional personnel and to invest in facilities and
management information systems. These expenditures may be made in advance of,
and in anticipation of, increased sales and, therefore, gross profits may be
adversely affected by short-term inefficiencies associated with the addition
of equipment, personnel or facilities, and costs may increase as a percentage
of revenues from time-to-time on a periodic basis. As a result, the Company's
operating results will vary from period to period. Because of the limited size
of the Company's customer base and the large size of customer orders, revenues
derived from a small number of customers will likely represent a significant
portion of revenue in any given period. Accordingly, a decrease in demand for
the Company's systems from any customer for any reason is likely to result in
significant periodic fluctuations in revenue. In addition, most of the
Company's contracts contain conditional acceptance provisions for certain
product sales and the Company delays recognition of revenues that are subject
to such contingencies until all such conditions are satisfied. If the Company
could not satisfy conditions in such
6
<PAGE>
contracts or satisfaction of conditions were delayed for any reason, revenues
in any particular period could fall significantly below the Company's
expectations.
A delay in a shipment or customer acceptance of the Company's product near
the end of a particular quarter, due to, for example, an unanticipated
shipment rescheduling, cancellation or deferral by a customer, competitive or
economic factors, unexpected manufacturing, installation or other
difficulties, failure to satisfy customer acceptance conditions,
unavailability or delays in deliveries of components, subassemblies or
services by suppliers, or the failure to receive an anticipated order, may
cause revenue in a particular period to fall significantly below the Company's
expectations and may materially adversely affect the Company's business and
operating results for such period. A significant portion of the Company's
expenses are fixed in advance and based in large part on revenue forecasts. If
revenues do not meet the Company's expectations in any given period, the
adverse impact on operating results of such a shortfall may be magnified by
the Company's inability to adjust spending to compensate for the shortfall. In
addition, the Company plans to increase operating expenses to fund additional
research and development, sales and marketing and general and administrative
activities. To the extent that these expenses are not accompanied by an
increase in revenues, the Company's business and operating results would be
materially adversely affected.
Other factors that may cause the Company's revenue, gross profits and
results of operations to vary significantly from period to period include:
gain or loss by the Company of significant customers; delays in, or
prohibition of, installing the Company's systems due to topological or zoning
issues or customer installation schedules; the Company's ability to reduce
costs; existing and new product development; market acceptance and the timing
of availability of new products by the Company or its customers; changes in
pricing by the Company, its customers or suppliers; introduction and
enhancement of products by the Company and its competitors; increases in
warranty and customer support expenses; limitations on manufacturing capacity;
inventory obsolescence; introduction of new distribution and sales channels;
fluctuations in foreign currency exchange rates; delays or changes in
regulatory approval of the Company's systems or those of its customers;
natural disasters or adverse weather; and general economic and political
conditions. In addition, the Company's results of operations have been, and
will continue to be, influenced significantly by competitive factors including
the pricing and availability of, and demand for, competitive or substitute
products. It is likely that, in a future period, the Company's operating
results will not meet the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, while the
Company's revenues have not been impacted by seasonality to date, the
telecommunications industry historically has been subject to some degree of
seasonality, with lower sales in the first calendar quarter. There can be no
assurance that the Company's business and operating results will not be
adversely affected by such seasonal fluctuations in the future.
The Company's current backlog consists of a relatively small number of
orders for its SpotLight 2000 system. Purchase orders are received and
accepted in advance of shipment and are generally cancelable prior to
shipment. As a result, backlog may not result in revenues and, as of any
particular date, may not be a reliable indicator of sales for any future
period. Furthermore, the Company intends to increase production capacity in
order to reduce the period of time between receipt and shipment of orders.
Thus, the Company does not expect backlog will remain at current levels as a
percentage of sales. Furthermore, due to the many factors affecting decisions
by customers to place orders and the impact of a small number of large orders,
backlog at any given time may fluctuate significantly. Such fluctuations may
adversely affect the Company's business and operating results. See "Business--
Sales, Marketing and Customer Support."
Significant Customer Concentration. The Company has derived a substantial
portion of its revenue from sales of the SpotLight 2000 system to a limited
number of cellular network operators, and the
7
<PAGE>
Company expects this customer concentration to continue for the foreseeable
future. To date, four customers have accounted for all of the Company's
product sales. For the six months ended June 30, 1998, three customers, St.
Petersburg Telecom, Telefonica Celular and ALLTEL, accounted for approximately
27.4%, 24.0% and 44.2%, respectively, of the Company's net revenues. Due to
the highly concentrated nature of the cellular industry and industry
consolidation, the Company believes that the number of potential customers for
future products, if any, will be small. In this regard, on July 1, 1998,
ALLTEL completed the acquisition of 360(degrees) Communications, another
customer of the Company. Failure by the Company to capture a significant
number of the cellular network operators as customers could have a material
adverse effect on the Company's business and operating results. The Company
expects that a small number of customers will continue to represent a
significant percentage of its total revenues for the foreseeable future,
although the companies that comprise the largest percentage of sales in any
given quarter may change from quarter to quarter. Because of the small size of
the Company's customer base, the loss of any customer or reduced demand for
systems from any customer, could have a material adverse effect on the
Company's business and operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Customers."
Uncertainty of Market Acceptance; Lengthy Sales Cycle. The Company's future
success will depend upon the degree of market acceptance of the Company's
spectrum management solutions. The Company believes that substantially all of
its revenues in the foreseeable future will be derived from sales of its
SpotLight 2000 system. In light of the recent introduction of the SpotLight
2000 system and the rapidly evolving nature of the wireless communications
industry, the Company is unable to predict with any degree of assurance
whether its current or future products will achieve market acceptance. There
can be no assurance that the Company will be able to reduce its reliance on
sales of its SpotLight 2000 system by developing interfaces to other wireless
protocols or base stations manufactured by vendors other than Motorola or
Lucent, or that if developed, such new system versions will achieve market
acceptance. If the SpotLight 2000 system fails to achieve broad market
acceptance, the Company's business and operating results would be materially
adversely affected. See "Business--Metawave Products."
In order for its spectrum management solutions to achieve market acceptance,
the Company must demonstrate to cellular network operators that the systems
provide a spectrum management solution that addresses the cellular network
operators' challenges of capacity, coverage and call quality in a cost-
effective manner. The Company must demonstrate product performance to a
cellular network operator based on such operator's unique network
configuration and specifications. The Company's ability to optimize its
product in any given cell site varies greatly depending on such operator's
specifications and the local geographical terrain. Typically, performance of
the Company's product must be accepted in an initial cell site or cluster of
cell sites prior to completing any additional sales to such cellular network
operator. If the Company's spectrum management solutions are not accepted by
cellular network operators in a timely manner, or at all, the Company's
business and operating results could be materially adversely affected. See "--
Risks Related to Base Station Manufacturers," "--Competition" and "Business--
Metawave Products."
Because the SpotLight 2000 system represents a new approach to increasing
network capacity and affects the key function of a cellular operator's
network, purchase of the SpotLight 2000 system is typically a strategic
decision that requires approval at senior levels of customers' organizations,
significant technical evaluation and a substantial commitment of customers'
personnel, financial and other resources. Historically, the Company has
conducted field trials and has been required to satisfy performance conditions
prior to the completion of a sale. For these and other reasons, the sales
process associated with the purchase of the Company's systems is typically
complex, lengthy and subject to a number of significant risks, including
changes in customers' budgets and approval at senior levels of customers'
organizations and approval by governmental agencies. In addition, given the
regional divisions of many cellular networks, an order from one region does
not necessarily result in subsequent orders from other regions of the same
cellular network without additional trials and substantial selling efforts by
the Company. The Company's sales cycle can last up to 18 months or more and
varies substantially from
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customer to customer. Because of the lengthy sales cycle and the dependence of
the Company's quarterly revenues upon a small number of orders that represent
large dollar amounts, if revenues from any order forecasted for a particular
quarter are not received in that quarter, the Company's business and operating
results could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Sales, Marketing and Customer Support."
Dependence on Cellular Network Operator Capital Spending. The Company
expects that it will derive substantially all of its revenues for the
foreseeable future from sales of its SpotLight 2000 system to cellular network
operators. These operators are located in the United States and foreign
markets. Demand for the Company's products will depend to a significant degree
upon the magnitude and timing of capital spending by cellular network
operators for constructing, rebuilding or upgrading their systems. The capital
spending patterns of cellular network operators depend on a variety of
factors, including access to financing, the status of federal, local and
foreign government regulation and deregulation, changing standards for
cellular technology, overall demand for analog and digital cellular services,
competitive pressures and general economic conditions. In addition, capital
spending patterns in the cellular industry can be subject to some degree of
seasonality, with lower levels of spending in the first calendar quarter,
based on annual budget cycles. Capital spending levels in the U.S. cellular
industry have fluctuated significantly in the past, and there can be no
assurance that such fluctuations will not occur in the future. Any substantial
decrease or delay in capital spending by cellular network operators in the
United States or abroad would have a material adverse effect on the Company's
business and operating results.
Risk of Declining Prices; No Assurance of Cost Reductions. The Company
believes that for its systems to achieve broad market acceptance and to
compete effectively with alternative systems, the Company's average selling
prices must decline. The Company may be subject to price competition from base
station manufacturers which could lower base station prices thereby making the
addition of new base stations a more cost-effective alternative for cellular
network operators seeking increased capacity. In order to achieve lower
average selling prices without adversely affecting gross profits, the Company
must successfully reduce the manufacturing costs of its product through
engineering improvements and economies of scale in production and purchasing.
There can be no assurance that the Company will achieve cost savings at a rate
needed to keep pace with competitive pricing pressures. In addition, if the
cellular industry does not shift to digital protocols that yield higher
product margins for the Company, the Company's gross profits could be
adversely affected in future periods. To the extent that the Company is unable
to reduce costs sufficiently to offset declining average selling prices or the
mix of the Company's sales is comprised substantially of analog-based
technologies, the Company may not achieve positive gross profits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Research and Development."
Risks Related to Base Station Manufacturers. The Company's product strategy
relies on ensuring the compatibility of the Company's systems with base
stations sold by cellular equipment manufacturers. The Company's product
strategy is competitive in some respects with such manufacturers, and it may
be difficult or impossible for the Company to obtain technical cooperation
from such manufacturers, which may be required to make the Company's systems
compatible with their base stations. The initial version of the SpotLight
system relied on analog technologies and did not require significant
cooperation from such base station manufacturers. As the cellular industry
continues the conversion to digital technologies, increased signal and
connection complexity may require the Company, at a minimum, to obtain
customer or manufacturer cooperation on technical specifications and may
possibly require the Company to obtain manufacturer cooperation to embed the
Company's systems in the base station equipment. There can be no assurance
that the Company will be able to obtain cooperation to make the Company's
products compatible with manufacturers' base stations on reasonable terms, or
at all, and the failure to do so could materially and adversely affect the
Company's business and operating results.
Competition. The market for spectrum management solutions is relatively new
but is expected to become increasingly competitive. The Company's products
compete with other smart antenna systems
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and alternative wireless infrastructure devices such as repeaters, cryogenic
filters and tower-top amplifiers. The Company believes the principal
competitive factors are the cost-effective delivery of increased capacity,
expanded coverage and improved call quality to cellular network operators.
There can be no assurance that the Company will compete favorably with respect
to the foregoing factors.
The Company believes that base station manufacturers, who provide cellular
network capacity through sales of additional base stations, represent a
significant competitive threat to the Company. These manufacturers, including
Ericsson LM Telephone Co. ("Ericsson"), Lucent, Motorola, Nokia Corporation
("Nokia"), Northern Telecom, Ltd. ("Northern Telecom") and Siemens Corporation
("Siemens"), have long-term, established relationships with the cellular
network operators. Deployment of the Company's SpotLight 2000 system by
cellular network operators can improve base station performance, and therefore
may result in fewer sales opportunities for base station manufacturers. Smart
antenna technology represents an area of opportunity for such manufacturers.
The Company believes that certain of these manufacturers are developing smart
antenna systems and are likely to offer smart antenna capabilities in the
future. In addition to having more established relationships with cellular
network operators, these manufacturers have significantly greater financial,
technical, manufacturing, sales, marketing and other resources than the
Company and have significantly greater name recognition for their existing
products and technologies than has the Company.
The Company's current primary direct competitors for spectrum management
solutions are ArrayComm, Inc. and GEC-Marconi Hazeltine Corporation. In
addition, Ericsson recently began a commercial trial of a GSM base station
which utilizes adaptive antenna technology. Other companies, such as Raytheon
E-Systems, Watkins-Johnson Company, Texas Instruments Incorporated and
ARGOSystems, Inc. (a subsidiary of The Boeing Company), offer systems that
utilize digital signal processing and interference cancellation techniques to
extend cell site coverage and improve call quality. Several companies offer
alternative technologies such as cryogenic filters, tower-top low noise
amplifiers and repeaters that can be used to provide service in network
coverage holes and improve call quality. The Company may also face competition
in the future from new market entrants offering competing technologies.
The Company believes that its ability to compete in the future will depend
in part on a number of competitive factors outside its control, including the
development by others of products that are competitive with the Company's
products and the price at which others offer comparable products. To be
competitive, the Company will need to continue to invest substantial resources
in engineering, research and development and sales and marketing. There can be
no assurance that the Company will have sufficient resources to make such
investments or that the Company will be able to make the technological
advances necessary to remain competitive. Accordingly, there can be no
assurance that the Company will be able to compete successfully in the future.
See "Business--Competition."
Management of Growth; New Management Team. The growth of the Company's
operations has placed, and is expected to continue to place, a significant
strain on the Company's financial and management resources as well as its
product design, manufacturing, sales and customer support capabilities. In May
1998, the Company moved to significantly larger facilities to accommodate the
Company's expanded research and development and manufacturing needs. As the
Company expands its operations to multiple locations, including
internationally, management of the Company's operations will become
increasingly complex. To manage its anticipated growth, the Company must,
among other things, continue to implement and improve its operational,
financial and management information systems, hire and train additional
qualified personnel, continue to expand and upgrade core technologies and
effectively manage multiple relationships with various customers, suppliers
and other third parties. The Company recently upgraded its financial and
accounting software to an enterprise resource planning software package that
integrates manufacturing, finance and sales order management. The Company
anticipates that additional upgrades to its management information systems
will be required in the near future to address
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<PAGE>
the expected increased volume and complexity of the Company's transactions.
There can be no assurance that the Company will successfully integrate the
newly purchased software with its existing systems or that the integration of
the new systems will not cause unanticipated system disruptions, slower
response times, degradation in levels of performance or reliability, impaired
quality of production, and delays in reporting accurate financial information.
Failure to successfully implement and integrate these systems, procedures and
controls to effectively manage the Company's growth in operations in a timely
manner could have a material adverse effect on the Company's business and
operating results.
From January 1, 1997 to June 30, 1998, the Company expanded from 91 to 200
employees. A majority of the Company's executive officers joined the Company
within the last 18 months and many of these officers have no prior experience
as executive officers of publicly traded companies. The Company's new
employees include the Chief Executive Officer and Chief Financial Officer as
well as a number of other key managerial, technical and operations personnel
who have not yet been fully integrated into the Company, and the Company
expects to add additional key personnel in the near future. There can be no
assurance that the Company's current and planned personnel will be adequate to
support the Company's future operations, that management will be able to hire,
train, retain, motivate and manage required personnel or that Company
management will be able to successfully identify, manage and exploit existing
and potential market opportunities. If the Company is unable to manage growth
effectively, its business and operating results will be materially adversely
affected.
Rapid Technological Change and Requirement for Frequent New Product
Introductions. The Company's future success will depend in large part on its
ability to develop new products designed to operate with different digital
technologies such as CDMA and GSM as well as across other principal
manufacturer base stations. There can be no assurance that the Company will
successfully develop and introduce such products in a timely manner. In this
regard, the Company is currently conducting trials of its recently developed
dual-mode AMPS/CDMA based SpotLight 2000 system. There can be no assurance
that the trials will be successful or that the cellular network operators will
accept the product.
The market for the Company's current products and planned future products is
subject to rapid technological change, frequent new product introductions and
enhancements, product obsolescence, changes in customer requirements and
evolving industry standards. To be competitive, the Company must successfully
develop, introduce and sell new products or product enhancements that respond
to changing customer requirements on a timely and cost-effective basis. The
Company's success in developing new and enhanced products will depend on a
variety of factors, many of which are beyond the Company's control. Such
factors include the timely and efficient completion of system design; the
timely and efficient implementation of assembly, calibration and test
processes; sourcing of components; the development and completion of related
software; the reliability, cost and quality of new products; the degree of
market acceptance; and the development and introduction of competitive
products by competitors. The Company has experienced and may continue to
experience delays in development and introduction of products. In addition,
the Company may be required to obtain licenses to intellectual property rights
held by third parties to develop new products or product enhancements and
there can be no assurance that such licenses will be available on acceptable
terms, if at all. The inability of the Company to introduce in a timely manner
new products or product enhancements that contribute to sales could have a
material adverse effect on the Company's business and operating results. In
addition, changes in manufacturing operations to incorporate new products and
processes could cause disruptions in production of existing products, which,
in turn, could adversely affect customer relationships and the market's
acceptance of the Company's products, and have a material adverse effect on
the Company's business and operating results. See "Business--Research and
Development" and "--Manufacturing."
Limited Manufacturing Experience; No Assurance of Successful Expansion of
Operations. The Company's manufacturing operations consist primarily of
supplier and commodity management and assembling finished goods from
components and subassemblies purchased from outside suppliers.
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<PAGE>
Because the Company configures each SpotLight 2000 system to meet customer
specifications, the Company's ability to achieve manufacturing efficiencies by
assembling products before orders are received is limited. The Company intends
to expand its manufacturing capacity by purchasing additional equipment,
hiring additional personnel, further developing its proprietary test software
to improve productivity, increasing the efficiency of its production
processes, and, in certain instances, subcontracting additional assembly,
calibration and testing processes. If the Company is to achieve its
objectives, it will also be required to significantly expand its sales,
marketing and customer support capabilities. The Company intends to
subcontract a significant portion of its field installation work to third
parties. There can be no assurance that the Company will be successful in
identifying subcontractors with adequate experience or will be able to retain
experienced subcontractors on acceptable terms, if at all, or that the Company
will effectively manage multiple subcontractors working on multiple
installation projects. Due to the Company's limited experience with large
scale operations, there can be no assurance that the Company will be able to
develop internally, or contract with third parties for, additional
manufacturing capacity and field support on acceptable terms, that it will be
able to maintain the quality of its products as production increases, or that
it will develop the administrative and other structures necessary to support
expanded operations. The Company's success depends on its ability to
significantly increase its production capacity and field support.
The Company's arrangements with its customers typically require that orders
be shipped not more than 90 days after the order. There can be no assurance
that the Company will be able to increase its production capacity at an
acceptable cost or rapidly enough to fill its orders. The failure to assemble
and ship products on a timely basis could damage relationships with customers
and result in cancellation of orders or lost orders, which would have a
material adverse effect on the Company's business and operating results. See
"Business--Manufacturing."
The Company currently manufactures all of its products in a single facility
in Redmond, Washington. If the Company's facilities or the facilities of its
suppliers were incapable of operating, even temporarily, or were unable to
operate at or near full capacity for any extended period, the Company's
business and operating results could be materially adversely affected. In
connection with its capacity expansion, the Company may seek to develop one or
more additional manufacturing facilities, including, possibly, facilities
located outside the Redmond, Washington area. Although there can be no
assurance that such a facility will be added, the operation of any such
facility would significantly increase the complexity of the Company's
operations.
No Assurance of Product Quality, Performance and Reliability. Manufacturing
and installing the Company's SpotLight 2000 system is a complex process and
requires significant expertise. Because of the Company's limited operating
history and the short time that the SpotLight 2000 system has been in
production, the Company's personnel have limited experience in installing and
integrating the Company's systems. If the Company were unable to successfully
and efficiently deploy its systems in the field, or were unable to attract and
retain the required trained technicians to deploy products in the field, the
Company's business and operating results would be materially adversely
affected.
The Company's ability to achieve future revenue growth will depend in
significant part upon its ability to obtain and fulfill orders from, maintain
good relationships with and provide support to existing and new customers, and
to manufacture products on a timely and cost-effective basis to meet stringent
customer performance requirements and shipment and delivery dates. Because of
the Company's limited operating history and the short time that the SpotLight
2000 system has been in production, there can be no assurance that problems
will not occur with respect to the integration, quality, performance and
reliability of the Company's systems. If such problems occur, the Company
could experience significant warranty claims or increased costs or delays in,
cancellations of, or rescheduling of orders or shipments, any of which could
have a material adverse effect on the Company's business and operating
results.
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<PAGE>
Dependence on Attraction and Retention of Key Personnel. The Company's
future operating results depend in significant part upon the continued
contributions of each of its key technical and senior management personnel,
including Douglas O. Reudink, the Company's founder and Chief Technical
Officer, each of whom would be difficult to replace, as there is a limited
number of people with the necessary skills and experience to develop and
manufacture the Company's products. The Company has not entered into
employment agreements with any of its employees other than severance
arrangements with Richard Henderson, Robert H. Hunsberger, Vito E. Palermo,
Dr. Reudink and Victor K. Liang. See "Management--Severance Arrangements."
Except for Dr. Reudink, the Company has not entered into any non-competition
agreements with any of its employees. The Company does not maintain key-man
life insurance on any of its key technical or senior management personnel. In
addition, the Company anticipates that it will need additional management
personnel if it is to be successful in increasing production capacity and the
scale of its operations. There can be no assurance that it will be able to
obtain and retain such personnel on acceptable terms.
The Company's future operating results also depend in significant part upon
its ability to attract and retain qualified engineering, manufacturing,
quality assurance, sales, marketing and customer support personnel.
Competition for such personnel, particularly qualified engineers, is intense.
The Company has experienced difficulties in recruiting sufficient numbers of
qualified engineers, and there can be no assurance that the Company will be
successful in attracting or retaining such personnel. There may be only a
limited number of persons with the requisite skills to serve in these
positions, particularly in the market where the Company is located, and it may
be increasingly difficult for the Company to hire such personnel over time. As
the Company's product development efforts relate to cellular standards that
are widely deployed in foreign countries, the Company may be required to
recruit foreign engineers who have expertise in such standards. Current U.S.
immigration laws restrict the Company's ability to hire foreign employees,
which could have a material adverse effect on the Company's product
development efforts. The loss of any key employee, the failure of any key
employee to perform in his or her current position, the Company's inability to
attract and retain skilled employees as needed or the inability of the
officers and key employees of the Company to expand, train and manage the
Company's employee base could materially adversely affect the Company's
business and operating results. See "Business--Employees" and "Management."
Sole Source Suppliers; Dependence on Key Suppliers. Certain parts and
components used in the Company's products, including linear power amplifiers
supplied by Powerwave Technologies, Inc. ("Powerwave") are presently only
available from a sole source. Certain other parts and components used in the
Company's products are available from a limited number of sources. The
Company's reliance on these sole or limited source suppliers involves certain
risks and uncertainties, including the possibility of a shortage or the
discontinuation of certain key components and reduced control over delivery
schedules, manufacturing capability, quality and cost. Any reduced
availability of such parts or components when required could materially impair
the Company's ability to manufacture and deliver its products on a timely
basis and result in the cancellation of orders, which could have a material
adverse effect on the Company's business and operating results. In addition,
the purchase of certain key components involves long lead times and, in the
event of unanticipated increases in demand for the Company's products, the
Company may be unable to obtain such components in sufficient quantities to
meet its customers' requirements. The Company does not have guaranteed supply
arrangements with any of its sole or limited source suppliers, does not
maintain an extensive inventory of parts or components and customarily
purchases sole or limited source parts and components pursuant to purchase
orders. Business disruptions, quality issues, production shortfalls or
financial difficulties of a sole or limited source supplier could materially
and adversely affect the Company by increasing product costs, or eliminating
or delaying the availability of such parts or components. In such event, the
inability of the Company to develop alternative sources of supply quickly and
on a cost-effective basis could materially impair the Company's ability to
manufacture and deliver its products on a timely basis and could have a
material adverse effect on its business and operating results. See "Business--
Manufacturing."
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Dependence on Growth of Cellular Communications Market. The future operating
results of the Company will depend to a significant extent upon the continued
growth and increased availability and acceptance of cellular communications
services internationally and in the United States. There can be no assurance
that the volume and variety of cellular services or the markets for and
acceptance of such services will grow, or that such services will create a
demand for the Company's systems. If the cellular communications market fails
to grow, or grows more slowly than anticipated, the Company's business and
operating results may be materially adversely affected.
The cellular communications industry has developed different technologies
and standards based on the type of service provided and geographical region.
There is uncertainty as to whether all existing cellular technologies will
continue to achieve market acceptance in the future. If a digital technology
for which the Company develops a product is not widely adopted, the potential
size of the market for the Company's product will be limited, and the Company
may not recover the cost of development of such product. Further, the Company
may not be able to re-direct its development efforts toward digital cellular
technologies that do sustain market acceptance in a timely manner, which would
have a material adverse effect on the Company's business and operating
results.
Need for Additional Capital. The Company requires substantial working
capital to fund its business and expects to use a portion of the net proceeds
of this offering to fund its operating losses. The Company has experienced
negative cash flow from operations since inception and expects to continue to
experience significant negative cash flow from operations for the foreseeable
future. The Company's future capital requirements will depend upon many
factors, including the success or failure of the Company's efforts to expand
its production, sales and marketing efforts, the status of competitive
products, and the requirements of the Company's efforts to develop new
products and product enhancements. The Company believes that current capital
resources, together with the estimated net proceeds from this offering, are
adequate to fund its operations for at least twelve months. Thereafter, the
Company may be required to raise additional capital. There can be no assurance
that additional financing will be available to the Company on acceptable
terms, if at all, or that such financing may not result in further dilution to
existing stockholders. The Company may be required to obtain funds through its
arrangements with partners or others that may require the Company to
relinquish rights to certain of its technologies or potential products or
other assets. If adequate funds are not available, the Company may be required
to delay, scale back or eliminate expansion of its production, administration
or research and development programs. Any inability to obtain needed financing
by the Company could have a material adverse effect on its business and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Associated with International Markets. Approximately 51.4% of net
revenue for the six months ended June 30, 1998 was from sales of the Company's
SpotLight 2000 system to customers located outside of the U.S. For the quarter
ended June 30, 1998, 39.0% of net revenue was related to the sale of the
SpotLight 2000 system to a single customer in Paraguay.
Although the Company believes that international sales will decline as a
percentage of net revenues over time, the Company anticipates that
international sales will continue to account for a significant portion of its
revenue for the foreseeable future. To date, the Company's international sales
have been denominated in U.S. dollars; however, in the future a portion of the
Company's international sales may be denominated in foreign currencies. The
Company does not currently engage in foreign currency hedging transactions as
all sales to date have been in U.S. dollars. However, if a material amount of
future sales are denominated in foreign currency, a decrease in the value of
foreign currencies relative to the U.S. dollar could result in losses from
such transactions. In such event, the Company might seek to limit its exposure
to foreign currency transactions by engaging in hedging activities. There can
be no assurance that any such activity would be successful in avoiding
exchange-related losses. With respect to the Company's international sales
that are United States dollar denominated, an increase in the relative value
of the U.S.
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<PAGE>
dollar could make the Company's systems less price-competitive, or could cause
customers to renegotiate prices for subsequent purchases, both of which could
have a material adverse effect upon the Company's business and operating
results. Additional risks inherent in the Company's international business
activities include delays due to customs inspections and procedures, changes
in regulatory requirements, tariffs and other trade barriers, political and
economic instability in developing countries, difficulties in staffing and
managing foreign operations, difficulties in managing distributors,
potentially adverse tax consequences, the burden of complying with a wide
variety of complex foreign laws and treaties, difficulties in obtaining
necessary equipment authorizations and the possibility of difficulty in
accounts receivable collections. Distribution and sales agreements entered
into with foreign customers may be governed by foreign laws which may differ
significantly from U.S. laws. Therefore, the Company may be limited in its
ability to enforce its rights under such agreements and to collect damages, if
awarded. There can be no assurance that any of these factors will not have a
material adverse effect on the Company's business and operating results.
To date, the Company has sold its products directly to cellular network
operators. In the future, it may be desirable to establish distribution
relationships in the international market. The Company has not established any
distribution relationships and there can be no assurance that the Company will
be able to establish such distribution relationships on acceptable terms, if
at all. The failure to establish any distribution relationships, or the
failure to implement an alternative distribution strategy in a cost-effective
manner, or any delays in establishing such channels, could reduce or eliminate
the Company's opportunity to sell its systems in foreign markets, which could
have a material adverse effect on the Company's business and operating
results. Further, if the Company is unable to produce and sell its systems at
margins that permit it to provide distribution partners with a sufficient
financial incentive to distribute the Company's systems without adversely
affecting the Company's profitability, the Company's distribution strategy
could adversely affect the Company's business and operating results.
Risks Associated with Potential Acquisitions. The Company intends to review
acquisition prospects that would complement its existing product offerings,
augment its market coverage or enhance its technological capabilities.
Although the Company has no current agreements or negotiations underway with
respect to any material acquisitions, the Company may make acquisitions of
businesses, products or technologies in the future. However, there can be no
assurance that the Company will be able to locate suitable acquisition
opportunities. Future acquisitions by the Company could result in potentially
dilutive issuances of equity securities, large write-offs, the incurrence of
debt and contingent liabilities or amortization expenses related to goodwill
and other intangible assets, any of which could materially adversely affect
the Company's operating results or the price of the Company's Common Stock.
Further, acquisitions entail numerous operational risks, including
difficulties in the assimilation of operations, potential loss of key
employees, technologies, products and the information systems of the acquired
companies, diversion of management's attention from other business concerns
and risks of entering geographic and business markets in which the Company has
no or limited prior experience. Since the Company has not made any material
acquisitions in the past, no assurance can be given as to the ability of the
Company to successfully integrate any businesses, products, technologies or
personnel that might be acquired in the future, and the failure of the Company
to do so could have a material adverse effect on the Company's business and
operating results.
Government Regulation. Wireless communications are subject to extensive
regulation by foreign and U.S. laws and international treaties. The Company's
systems must conform to certain international and domestic regulations
established to, among other things, avoid interference among users of
frequencies. In order for the Company's products to be used, regulatory
approval must be obtained. In the United States, the products must be
certified by the Federal Communications Commission before sales to customers
may commence. Other countries have similar regulations that must be complied
with before product sales may commence. This governmental approval process
frequently involves substantial delay which could result in the cancellation,
postponement or rescheduling of orders by the Company's customers, which in
turn may have a material adverse effect on the sale of systems by the Company
to
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<PAGE>
such customers. The Company believes that its SpotLight 2000 system currently
complies with all applicable U.S. and foreign regulations in countries in
which its sales are material. However, changes in these regulations, the need
to comply with regulations in additional countries in the event of sales to
cellular network operators in those countries, or a failure to obtain
necessary approvals or permits in connection with sales to cellular network
operators in a country could preclude sales of the Company's products to such
operators or could require the Company to change the features of its SpotLight
2000 system and thereby incur substantial costs and experience delays in
system installation or operation.
The regulatory environments in which the Company operates are subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly affect the Company's
operations by increasing or reallocating the amount of spectrum available to
wireless operators, restricting network development efforts by the Company's
customers or end users, making current systems obsolete, increasing the
opportunity for additional competition or requiring the Company's products to
comply with new regulations. Any such regulatory changes could have a material
adverse effect on the Company's business and operating results. The Company
might deem it necessary or advisable to modify its systems to operate in
compliance with such regulations. Such modifications could be expensive and
time-consuming. See "--Risks Associated with International Markets" and
"Business--Government Regulation."
Uncertainty Regarding Protection of Intellectual Property. The Company
relies on a combination of patent, trade secret, copyright and trademark
protection, nondisclosure agreements and other measures to protect its
proprietary rights. The Company currently has eight issued U.S. patents and 25
pending U.S. patent applications. The Company's future success will depend in
large part on its ability to obtain patent protection in the U.S. and foreign
markets, to defend patents once obtained, to maintain trade secrets and to
operate without infringing upon the patents and proprietary rights of others.
The patent positions of companies in the worldwide wireless communications
industry, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any issued patents
owned by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. Further, there can be no assurance that patents
will issue from any patent applications or that, if patents do issue, the
claims allowed would be sufficiently broad to protect the Company's
technology. In addition, there can be no assurance that patents issued in the
U.S. will receive corresponding patent protection in foreign markets or that
the Company will pursue similar patent protection in all foreign markets.
Patents and patent applications relating to products used in the wireless
communications industry are numerous and current and potential competitors and
other third parties may have filed or may in the future file applications for,
or may have been issued or in the future may be issued, patents or may obtain
additional proprietary rights relating to products used or proposed to be used
by the Company. The Company may not be aware of all patents or patent
applications that may materially affect the Company's ability to make, use or
sell any current or future products. From time to time, third parties have
asserted patent, copyright and other intellectual property rights to
technologies that are important to the Company. The Company expects that it
will increasingly be subject to infringement claims as the number of products
and competitors in the spectrum management market grows and the functionality
of products overlaps. Third parties may assert infringement claims against the
Company in the future, and such assertions could result in costly litigation
or require the Company to obtain a license to intellectual property rights of
such parties. There can be no assurance that any such licenses would be
available on terms acceptable to the Company, if at all. Any failure to obtain
a license from any third party asserting claims in the future or defense of
any third party lawsuit could have a material adverse effect on the Company's
business and operating results.
The Company also relies on unpatented trade secrets to protect its
proprietary technology, and there can be no assurance that others will not
independently develop or otherwise acquire the same or substantially
equivalent technologies or otherwise gain access to the Company's proprietary
technology
16
<PAGE>
or disclose such technology or that the Company can ultimately protect its
rights to such unpatented proprietary technology. Further, third parties may
obtain patent rights to such unpatented trade secrets, which patent rights
could be used to assert infringement claims against the Company. The Company
also relies on confidentiality agreements with its employees, suppliers,
consultants and customers to protect its proprietary technology. There can be
no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known to or be independently developed by
competitors. Failure to obtain or maintain patent and trade secret protection,
for any reason, could have a material adverse effect on the Company's business
and operating results. See "Business--Intellectual Property."
Year 2000 Compliance. Many existing computer systems and applications, and
other control devices, use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century.
As a result, such systems and applications could fail or create erroneous
results unless corrected so that they can process data related to the year
2000. The Company relies on its systems, applications and devices in operating
and monitoring all major aspects of its business, including financial and
accounting systems, customer services, networks and telecommunications
equipment and end products. The Company also relies, directly and indirectly,
on external systems of business enterprises such as customers, suppliers,
creditors, financial organizations, and of governmental entities, both
domestic and international, for accurate exchange of data. Although the
Company believes that its internally developed products, systems and
applications are designed to be year 2000 compliant, the Company utilizes
third party equipment and software that may not be year 2000 compliant. The
Company has not fully assessed the compliance of its third party systems.
Failure of such third party systems to properly process data related to the
year 2000 could cause interruptions in the Company's operations and could
require the Company to incur unanticipated expenses to remedy any problems. In
addition, if the Company's customers or suppliers experience difficulties with
year 2000 issues, it could adversely impact sales of the Company's products to
such customers or disrupt the supply of necessary components to the Company by
such suppliers. The Company is in the early stages of assessing the risk and
impact of its customers' and suppliers' year 2000 issues and significant
uncertainty exists concerning the potential costs and effects associated with
any year 2000 compliance issues. Any year 2000 compliance problems of either
the Company, its customers or its suppliers could have a material adverse
effect on the Company's business, results of operations and financial
condition.
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock. The initial
public offering price of the Common Stock will be determined by negotiations
between the Company and the Representatives of the Underwriters and may not be
indicative of the market price for the Common Stock in the future. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. There can be no assurance that an active
trading market will develop or be sustained after this offering. The Company
believes that factors such as announcements of developments related to the
Company's business, announcements of technological innovations or new products
or enhancements by the Company or its competitors, sales by competitors,
including sales to the Company's customers, sales of the Company's Common
Stock into the public market, including by members of management, developments
in the Company's relationships with its customers, partners, distributors and
suppliers, shortfalls or changes in revenues, gross profits, earnings or
losses or other financial results from analysts' expectations, regulatory
developments, fluctuations in results of operations, and general conditions in
the Company's market, of the markets served by the Company's customers, or the
economy could cause the price of the Company's Common Stock to fluctuate,
perhaps substantially. In addition, in recent years the stock market, in
general, and the market for shares of small capitalization and technology
stocks in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. There
can be no assurance that the market price of the Company's Common Stock will
not experience significant fluctuations in the future, including fluctuations
that are unrelated to the
17
<PAGE>
Company's performance. Such fluctuations could materially adversely affect the
market price of the Company's Common Stock.
Broad Discretion of Management to Allocate Offering Proceeds. The Company
will use approximately $16.2 million of the proceeds from this offering to
repay one-half of the outstanding principal and estimated interest on its
13.75% Senior Secured Bridge Notes and the remaining $31.8 million for working
capital and other general corporate purposes including working capital to fund
anticipated operating losses and capital expenditures. The Company may, when
and if the opportunity arises, use a portion of the proceeds to acquire or
invest in complimentary business, products or technologies. The Company's
management will have broad discretion to allocate the remaining proceeds of
this offering, and the amounts actually expended for each use listed above may
vary significantly depending on a number of factors, including the amount of
future revenues, the amount of cash generated or used by the Company's
operations, the progress of the Company's product development efforts,
technological advances, and the status of competitive products. There can be
no assurance that the proceeds will be utilized in a manner that the
stockholders deem optimal, or that the proceeds can or will be invested to
yield a significant return.
Shares Eligible for Future Sale After the Offering. Sales of substantial
amounts of Common Stock in the public market after this offering or the
anticipation of such sales could materially affect then prevailing market
prices. All of the 5,000,000 shares offered hereby may be resold immediately
in the public market. Beginning 90 days after the date of this Prospectus,
approximately 288,301 additional shares may be resold in the public market.
Beginning 180 days after the date of this Prospectus, upon expiration of pre-
existing lock-up agreements and lock-up agreements between the representatives
of the Underwriters and officers, directors and certain stockholders of the
Company, approximately 987,916 total shares will be eligible for sale without
restriction under Rule 144(k) or Rule 701 under the Securities Act of 1933, as
amended (the "Securities Act"), and 14,901,578 shares will be eligible for
sale subject to compliance with the restrictions of Rule 144 and, under
certain circumstances, Rule 701 under the Securities Act. Any early release of
the lock-up agreement by the Underwriters, which, if granted, could permit
sales of a substantial number of shares and could adversely affect the trading
price of the Company's shares, may not be accompanied by an advance public
announcement by the Company. Holders of approximately 15,338,305 shares of
Common Stock and the holders of the Note Warrants (the "Registrable
Securities") also will have the right to include such shares in any future
registration of securities effected by the Company and to require the Company
to register their shares for future sale, subject to certain exceptions. See
"Description of Securities--Registration Rights of Certain Holders" and
"Shares Eligible for Future Sale."
Control by Existing Stockholders. Following the completion of this offering,
members of the Board of Directors and the officers of the Company, together
with entities that may be deemed affiliates of or related to such persons or
entities, will beneficially own approximately 58.5% (approximately 55.5% on a
fully diluted basis, assuming the exercise of all warrants and vested and
unvested options held by such persons and outstanding at June 30, 1998) of the
outstanding shares of Common Stock of the Company. Accordingly, these
stockholders are able to significantly influence the election of the members
of the Company's Board of Directors and significantly influence the outcome of
corporate actions requiring stockholder approval, such as mergers and
acquisitions. This level of ownership may have a significant effect in
delaying, deferring or preventing a change in control of the Company and may
adversely affect the voting and other rights of other holders of Common Stock.
See "Management--Directors and Executive Officers," "--Principal Stockholders"
and "Description of Capital Stock."
Effect of Certain Charter and Bylaw Provisions. Certain provisions of the
Company's Restated Certificate of Incorporation and Bylaws may have the effect
of making it more difficult for a third party to acquire or of discouraging a
third party from attempting to acquire, control of the Company. Such
provisions could limit the price that certain investors might be willing to
pay in the future for shares of
18
<PAGE>
the Company's Common Stock. Certain of these provisions allow the Company to
issue up to 15,000,000 shares of Preferred Stock and fix the rights and
preferences thereof without any vote or further action by the stockholders,
eliminate the right of stockholders to act by written consent without a
meeting and eliminate cumulative voting in the election of directors. The
rights of holders of Common Stock will be subject to, and may be adversely
affected by, the rights of holders of any Preferred Stock that may be issued
in the future. These provisions may make it more difficult for stockholders to
take certain corporate actions and could have the effect of delaying or
preventing a change in control of the Company. Certain provisions of Delaware
law and Washington law applicable to the Company could also delay or make more
difficult a merger, tender offer or proxy contest involving the Company. Such
provisions include Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years unless certain
conditions are met, and Chapter 23B.19 of the Washington Business Corporation
Act, which prohibits a corporation operating in Washington from engaging in
certain significant business transactions with a person or group of persons
who beneficially own 10% of the voting securities of such corporation for a
period of five years unless certain conditions are met. After the five-year
period, such significant business transaction must still comply with certain
fair price provisions of such statute. See "Management" and "Description of
Securities--Anti-Takeover Provisions of Delaware and Washington Law and
Charter Documents."
Immediate and Substantial Dilution. Investors in Common Stock in this
offering will experience immediate dilution in the net tangible book value of
their shares. At the initial public offering price of $10.50 per share,
dilution to new investors will be $8.00 per share. Additional dilution will
occur upon exercise of outstanding stock options and warrants. If the Company
seeks additional capital in the future, the issuance of shares or convertible
debt to obtain such capital may lead to further dilution. See "Dilution."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale and issuance of the 5,000,000
shares of Common Stock offered hereby, at an assumed initial public offering
price of $10.50 per share, are estimated to be $48.0 million ($55.3 million if
the Underwriters' over-allotment option is exercised in full). The Company
will use approximately $16.2 million of the net proceeds to repay one-half of
the outstanding principal and estimated accrued interest on its 13.75% Senior
Secured Bridge Notes and the remaining proceeds for general corporate
purposes, including working capital to fund anticipated operating losses and
capital expenditures. The Company may, when and if the opportunity arises, use
a portion of the proceeds to acquire or invest in complimentary businesses,
products or technologies. The Company's management will have broad discretion
to allocate the remaining proceeds of this offering, and the amounts actually
expended for each use listed above may vary significantly depending on a
number of factors, including the amount of future revenues, the amount of cash
generated or used by the Company's operations, the progress of the Company's
product development efforts, technological advances, and the status of
competitive products. Pending such uses, the Company intends to invest such
funds in short-term, investment grade, interest-bearing obligations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock or other securities. The Company currently anticipates that it will
retain all of its future earnings for use in the expansion and operation of
its business and does not anticipate paying cash dividends in the foreseeable
future. See Note 5 of Notes to Financial Statements.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 (i) on an actual basis the conversion of convertible and redeemable
Preferred Stock to Common Stock and the conversion of Preferred Stock warrants
to Common Stock warrants, and the receipt by the Company of the net proceeds
from the sale of the 5,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $10.50 per share, (ii) and as
adjusted to give effect to the sale by the Company of the 5,000,000 shares of
Common Stock offered hereby at an assumed offering price of $10.50 per share,
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company, and the application of the
estimated net proceeds therefrom as set forth in "Use of Proceeds." This table
should be read in conjunction with the Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30,
1998
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
13.75% Senior Secured Bridge Notes........................... $29,708 $13,508
Other debt, including capital lease obligations.............. 5,392 5,392
Convertible and redeemable preferred stock................... 49,282 --
Convertible and redeemable preferred stock warrants.......... 4,423 --
Stockholders' equity:........................................
Preferred stock, 20,000,000 shares authorized, 13,130,350
shares which have been designated as convertible and
redeemable, actual; 15,000,000 shares authorized, none
issued or outstanding, as adjusted........................ -- --
Common stock, 40,000,000 shares authorized, 3,035,927
shares issued and outstanding, actual; 150,000,000 shares
authorized, 21,166,277 shares issued and outstanding, as
adjusted(1)............................................... 2,162 103,867
Deferred stock compensation.................................. (877) (877)
Accumulated deficit.......................................... (50,082) (50,082)
------- -------
Total stockholders' equity (deficit)..................... (48,797) 52,908
------- -------
Total capitalization..................................... $40,008 $71,808
======= =======
</TABLE>
- --------
(1) Based on the number of shares outstanding on June 30, 1998. Excludes as of
June 30, 1998 (a) 3,277,760 shares issuable upon exercise of outstanding
options at a weighted average exercise price of $1.49 per share as of June
30, 1998, (b) 657,005 shares issuable upon exercise of outstanding
warrants at a weighted average exercise price of $0.60 per share as of
such date and (c) an aggregate of 2,010,639 shares available for future
issuance of stock options under the 1995 Stock Option Plan, the 1998 Stock
Option Plan, the Directors' Plan and the Purchase Plan. See "Management--
Stock Plans" and Note 6 of Notes to Financial Statements.
21
<PAGE>
DILUTION
As of June 30, 1998, the Company had a pro forma net tangible book value of
approximately $4.9 million, or $0.30 per share of Common Stock. Pro forma net
tangible book value represents total tangible assets less total liabilities
divided by the pro forma number of shares of Common Stock outstanding,
assuming the conversion of convertible and redeemable Preferred Stock to
Common Stock and the conversion of Preferred Stock warrants to Common Stock
warrants. Without taking into account any other changes in the pro forma net
tangible book value after June 30, 1998, other than to give effect to the
receipt by the Company of the net proceeds from the sale of the 5,000,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $10.50 per share, and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the pro forma net tangible book value at June 30, 1998 would have
been approximately $52.9 million, or $2.50 per share. This represents an
immediate increase in net tangible book value of $2.20 per share to existing
stockholders and an immediate dilution of $8.00 per share to new investors
purchasing shares in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $10.50
Pro forma net tangible book value per share as of June 30,
1998........................................................ $0.30
Increase per share attributable to new investors............. 2.20
-----
Pro forma net tangible book value per share after the offering. 2.50
------
Dilution per share to new investors............................ $ 8.00
======
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by (i) existing
stockholders and (ii) new investors (before deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
------------------ -------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).... 16,166,277 76.4% $ 49,562,804 48.6% $ 3.07
New investors............... 5,000,000 23.6 52,500,000 51.4% 10.50
---------- ----- ------------ -----
Total..................... 21,166,277 100.0% $102,062,804 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Based on the pro forma number of shares outstanding on June 30, 1998.
Excludes as of June 30, 1998 (a) 3,277,760 shares issuable upon exercise
of outstanding options at a weighted average exercise price of $1.49 per
share as of June 30, 1998, (b) 657,005 shares issuable upon exercise of
outstanding warrants at a weighted average exercise price of $0.60 per
share as of such date and (c) an aggregate of 2,010,639 shares available
for future issuance under the 1995 Stock Option Plan, the 1998 Stock
Option Plan, the Directors' Plan and the Purchase Plan. See "Management--
Stock Plans" and Note 6 of Notes to Financial Statements.
22
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the period from January 19, 1995
(inception) to December 31, 1995, and for the years ended December 31, 1996
and 1997 and the balance sheet data as of December 31, 1996 and 1997, have
been derived from the audited financial statements of the Company included
elsewhere in this Prospectus that have been audited by Ernst & Young LLP,
independent auditors. The balance sheet data as of December 31, 1995 have been
derived from the audited financial statements of the Company not included
herein. The statement of operations data for the six months ended June 30,
1997 and 1998 and the balance sheet data at June 30, 1998 are derived from
unaudited financial statements included elsewhere in this Prospectus and
contain all adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the financial position and results of operations
for such periods. The results of operations for the six months ended June 30,
1998 are not necessarily indicative of results to be expected for the full
fiscal year. The data set forth below should be read in conjunction with the
financial statements of the Company, including the notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 19, 1995 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------ -----------------
1995 1996 1997 1997 1998
---------------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue............. $ -- $ 1,291 $ 1,450 $ 392 $ 6,501
Cost of sales........... -- 1,097 1,728 516 6,396
------- -------- -------- ------- --------
Gross profit (loss)..... -- 194 (278) (124) 105
------- -------- -------- ------- --------
Operating expenses:
Research and
development............ 883 7,186 13,083 5,365 8,025
Sales and marketing..... 84 1,704 5,383 2,244 4,087
General and
administrative......... 168 2,434 3,762 1,367 2,429
------- -------- -------- ------- --------
Total operating
expenses............... 1,135 11,324 22,228 8,976 14,541
------- -------- -------- ------- --------
Loss from operations.... (1,135) (11,130) (22,506) (9,100) (14,436)
Other income (expense),
net.................... 135 335 402 173 (1,747)
------- -------- -------- ------- --------
Net loss................ $(1,000) $(10,795) $(22,104) $(8,927) $(16,183)
======= ======== ======== ======= ========
Pro forma net loss per
share(1)............... $ (1.54) $ (1.01)
======== ========
Weighted average common
shares and equivalents
pro forma(1)........... 14,383 16,061
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1998
--------------------------- ----------------------
1995 1996 1997 ACTUAL PRO FORMA(2)
------- -------- -------- -------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 1,422 $ 19,092 $ 13,334 $ 20,311 20,311
Working capital........... 4,280 17,722 15,677 3,787 3,787
Total assets.............. 6,135 21,747 22,575 46,557 46,557
13.75% Senior Secured
Bridge Notes............. -- -- -- 29,708 29,708
Other debt................ 128 2,319 4,147 5,392 5,392
Convertible and redeemable
preferred stock.......... 5,500 30,100 49,282 49,282 --
Convertible and redeemable
preferred stock
warrants................. -- -- 128 4,423 --
Accumulated deficit....... (1,000) (11,795) (33,899) (50,082) (50,082)
Stockholders' equity
(deficit)................ (990) (11,785) (33,136) (48,797) 4,908
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
method used to compute the number of shares used in computing pro forma
net loss per share.
(2) Adjusted to reflect the conversion of convertible and redeemable Preferred
Stock into Common Stock and the conversion of Preferred Stock warrants to
Common Stock warrants. See "Description of Securities."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
included elsewhere in this Prospectus. The discussion in this Prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors," as well as those
discussed elsewhere herein. See "Risk Factors."
OVERVIEW
Metawave designs, develops, manufactures and markets spectrum management
solutions for the wireless communications industry. Metawave believes that its
spectrum management solutions, consisting of smart antenna systems,
applications software and engineering services, enable cellular network
operators to increase overall network capacity, reduce network operation
costs, better manage network infrastructure and stimulate end user demand
through improved system quality. Using its proprietary technologies, the
Company has developed products that address the capacity, coverage, and call
quality problems faced by cellular network operators.
The Company was incorporated in January 1995. Net revenue since inception
has been attributable to an engineering consulting contract in 1996, services
rendered by the Company's Network Services division during 1997 and sales of
the SpotLight 2000 system during the six months ended June 30, 1998. The
Company's Network Services division was discontinued during the first quarter
of 1998. Since inception, the Company has incurred significant losses and as
of June 30, 1998, had an accumulated deficit of $50.1 million.
From inception through June 30, 1998, the Company's operating activities
related primarily to conducting research and development, building market
awareness, recruiting management and technical personnel and building an
operating infrastructure. In 1997, the Company hired a new Chief Executive
Officer and a new Chief Financial Officer and added managerial personnel in
the engineering, product management, sales and administrative areas. Shipment
for commercial sale of the SpotLight 2000 system began late in the fourth
quarter of 1997. Since launching its SpotLight 2000 system, the Company has
increased operating expenditures in an effort to increase sales and expand
manufacturing capacity. In light of the progression of the Company from a
development stage to an operating stage during the past two years, the Company
believes that period to period comparisons of its financial results should not
be relied upon as an indicator of future performance.
There are two components of net revenue attributable to the SpotLight 2000
system, product revenue and service revenue. Product revenue is comprised of
both the sale of hardware and the licensing of software. Service revenue is
derived from installation, consulting services and maintenance contracts. The
Company believes that substantially all of its revenues in the foreseeable
future will be derived from sales of its SpotLight 2000 system. Sales cycles
can be lengthy and the related contracts typically include performance
specifications and customer acceptance conditions in connection with the
initial sale of each system to each customer. The Company recognizes net
revenue when the product has been shipped and all customer acceptance
conditions have been satisfied. The Company recognizes service revenue when
the services have been performed. If the Company does not satisfy conditions
in such contracts or satisfaction of conditions is delayed, revenues in any
particular period could fall significantly below the Company's expectations.
Contract terms, including pricing and acceptance criteria, will typically vary
depending upon the order, and the nature and extent of installation and
consulting services. Consequently, net revenue may vary from quarter to
quarter depending on the length of the sales cycle
24
<PAGE>
and the applicable contract terms. If anticipated sales and shipments in any
quarter do not occur when expected, expenses and inventory levels could be
disproportionately high. To date, the Company's international sales have been
denominated in U.S. dollars; however, in the future a portion of the Company's
international sales may be denominated in foreign currencies. If a material
amount of future sales are denominated in foreign currencies, a decrease in
the value of foreign currencies relative to the U.S. dollar could result in
losses from such transactions.
Cost of sales typically consists of material components, manufacturing
assembly and test, and overhead expenses. The Company believes that for its
SpotLight 2000 system to achieve broad market acceptance and compete
effectively with alternative systems, the Company's average selling prices
must decline. In order to achieve lower average selling prices without
adversely affecting gross profits, the Company must successfully reduce the
manufacturing costs of its product through engineering improvements and
economies of scale in production and purchasing. There can be no assurance,
however, that the Company will be able to achieve cost savings at a rate
necessary to keep pace with competitive pricing pressures. The Company expects
that its gross profits will continue to be affected by a variety of other
factors, including increased investment in manufacturing facilities and
equipment, changes in labor costs, changes in product mix due to a shift from
analog-only to analog/CDMA dual-mode system sales, changes in warranty expense
or inventory obsolescence, increased sourcing and changes in prices of
components and subassemblies from third party manufacturers and increased
price competition.
The Company's manufacturing operations consist primarily of supplier and
commodity management and assembling finished goods from components and
subassemblies purchased from outside suppliers. In May 1998, the Company moved
to significantly larger facilities to accommodate the Company's current
research, development and manufacturing needs in the near term. The Company
plans to further expand its manufacturing capacity in the future if and to the
extent the Company's products achieve market acceptance and demand increases.
If such expansion occurs, substantial investments in additional capital
equipment and the recruiting and training of additional personnel will be
required, which may include increased sourcing of components from third
parties as well as increased system integration and full-configuration testing
or investment in additional manufacturing facilities. See "Risk Factors--
Limited Manufacturing Experience; No Assurance of Successful Expansion of
Operations."
The Company recently upgraded its financial and accounting software to an
enterprise resource planning software package that integrates manufacturing,
finance and sales order management. The Company anticipates that additional
upgrades to its management information systems will be required in the near
future to address the expected increased volume and complexity of the
Company's transactions. See "Risk Factors--Management of Growth; New
Management Team."
Research and development expense consists principally of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of the Company's SpotLight
2000 system. As of June 30, 1998, all research and development costs had been
expensed as incurred. The Company believes that continued investment in
research and development is critical to attaining its strategic product and
cost reduction objectives and, as a result, expects these expenses to increase
significantly in absolute dollars in the future. Sales and marketing expense
consists of salaries, sales commissions and related expenses for personnel
engaged in marketing, sales and field service support functions, as well as
promotional expenditures. The Company expects sales and marketing expense to
increase significantly in absolute dollars in the future. General and
administrative expense consists primarily of salaries and personnel related
expenses, recruiting expenses, professional fees and other general corporate
expenses. The Company expects general and administrative expense to increase
in absolute dollars as the Company adds personnel and incurs additional costs
related to the growth of its business and operation as a public company.
The revenue and profit potential of the Company's business is unproven and
the Company's limited operating history makes its future operating results
difficult to predict. The Company believes that its growth and future success
will be dependent upon the broad acceptance of the SpotLight 2000 system by
cellular network operators. Because the SpotLight 2000 system was only
recently introduced, the Company is unable to predict with any degree of
certainty whether it will achieve market acceptance.
25
<PAGE>
There can be no assurance that the Company will ever achieve profitability or
significant revenues on a quarterly or an annual basis. Because of the limited
size of the Company's customer base and the large size of customer orders,
revenues derived from a small number of customers will likely represent a
significant portion of revenue in any given period. Thus, a decrease in demand
for the Company's systems from any customer for any reason is likely to result
in significant periodic fluctuations in revenue. Due to the highly
concentrated nature of the cellular industry, the Company believes that the
number of potential customers for future products, if any, will be small.
Failure by the Company to capture a significant number of the cellular network
operators as customers could have a material adverse effect on the Company's
business and operating results. See "Risk Factors--Limited Operating History;
Accumulated Deficit; Anticipated Losses," "--Significant Fluctuations in
Operating Results," "--Significant Customer Concentration" and "--Uncertainty
of Market Acceptance; Lengthy Sales Cycle."
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net Revenue. Net revenue for the six months ended June 30, 1998 was $6.5
million, substantially all of which was derived from sales of the Motorola
HDII analog version of the Spotlight 2000 system to three customers. Net
revenue for the six months ended June 30, 1997 was $392,000 all of which was
service revenue. International sales were 51.4% of net revenue for the six
months ended June 30, 1998. Although the Company anticipates that
international sales will continue to account for a significant portion of its
net revenues, the Company expects international sales to decrease as a
percentage of net revenue in the near term as sales of the Company's Spotlight
2000 system for the CDMA protocol in North America are expected to increase.
Gross Profit (Loss). Cost of sales was $6.4 million and gross profit was
$105,000 for the six months ended June 30, 1998. Gross profit was adversely
affected by unabsorbed fixed manufacturing overhead costs due to the expansion
of manufacturing capacity in advance of unit sales volume increases.
Additionally, increases to the warranty and inventory obsolescence reserves
negatively impacted gross profit. Cost of sales was $516,000 and gross profit
(loss) was $(124,000) for the six months ended June 30, 1997. Cost of sales in
this period reflected the direct costs of the Network Services division
related supplies and expenses, and gross profit (loss) was adversely affected
by these relatively high fixed costs.
Research and Development. For the six months ended June 30, 1998, research
and development expense was $8.0 million, of which $5.0 million was payroll
and benefits. For the six months ended June 30, 1997, research and development
expense was $5.4 million, of which $3.4 million was payroll and benefits. The
increase in research and development expense was primarily attributable to
increased staffing, prototype material costs and other associated expenses
relating to enhancing the features and functionality of the SpotLight 2000
system.
Sales and Marketing. For the six months ended June 30, 1998, sales and
marketing expense was $4.1 million, of which $2.2 million was payroll and
benefits. For the six months ended June 30, 1997, sales and marketing expense
was $2.2 million, of which $1.4 million was payroll and benefits. The increase
in sales and marketing expense was primarily attributable to expansion of the
Company's direct sales force, as well as increased public relations and other
promotional expenditures.
General and Administrative. For the six months ended June 30, 1998, general
and administrative expense was $2.4 million, of which $1.8 million was
payroll, $360,000 was in connection with certain patent license agreements and
$255,000 was stock compensation charges. For the six months ended June 30,
1997, general and administrative expense was $1.4 million, of which
$1.2 million was payroll and related expenses. The increase in general and
administrative expense was primarily attributable to increased personnel and
facility expenses necessary to support the Company's growth. The stock
compensation charge for the six months ended June 30, 1998 also contributed to
the increase over the prior year.
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<PAGE>
Deferred Stock Compensation. In connection with the grant of certain stock
options during 1997, the Company recorded aggregate deferred stock
compensation of approximately $1.9 million, representing the difference
between the deemed value of the Common Stock for accounting purposes and the
option exercise price of such options at the date of grant. Such amount is
recorded as deferred stock compensation and amortized ratably over the vesting
period as stock compensation expense. For the six months ended June 30, 1998,
stock compensation expense was $328,000. For the six months ended June 30,
1997, the Company recorded deferred stock compensation of $224,000 and
amortized a stock compensation expense of $22,000. For the year ended December
31, 1997, the aggregate stock compensation expense was $676,000.
Interest Expense and Net Other Income. Interest expense increased to $2.2
million for the six months ended June 30, 1998, compared to $236,000 for the
six months ended June 30, 1997. The increase was primarily attributable to the
$2.0 million interest expense and associated fees to secure the $29.0 million
of 13.75% Senior Secured Bridge Notes. Net other income consists primarily of
earnings on the Company's cash and cash equivalents and short-term
investments. Net other income increased to $484,000 for the six months ended
June 30, 1998, from $409,000 for the six months ended June 30, 1997. The
increase was attributable to higher average cash and cash equivalent balances.
Income Taxes. The Company has had a net loss for each period since
inception. As of June 30, 1998, the Company had approximately $45.6 million of
net operating loss carryforwards and $1.0 million of research and development
credit carryforward for federal income tax purposes, which begin to expire in
2009. The Company has provided a full valuation allowance on the deferred tax
asset, consisting primarily of net operating loss carryforward, because of
uncertainty regarding its realizability. See Note 8 of Notes to Financial
Statements.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (INCEPTION PERIOD)
Net Revenue. Net revenue for 1997 and 1996 was $1.5 million and $1.3
million, respectively, and was attributable to services provided by the
Network Services division in 1997 and a one-time engineering consulting
contract in 1996. During 1995, the Company was primarily engaged in product
development and accordingly, recorded no revenue. The Network Services
division was discontinued in March 1998.
Gross Profit (Loss). Cost of sales was $1.7 million and gross profit (loss)
was $(278,000) for the year ended December 31, 1997. Gross profit (loss) in
1997 was adversely affected by the establishment of an inventory obsolescence
reserve of $870,000 and the high fixed cost of the Network Services division
during its initial year of operation. Cost of sales in this period consists
primarily of direct labor and materials related to services rendered in
generating the revenue for the period. Cost of sales was $1.1 million and
gross profit was $194,000 for the year ended December 31, 1996. Gross profit
in 1996 was attributable to a one-time engineering consulting contract.
Research and Development. Research and development expense was $13.1
million, $7.2 million and $883,000 in 1997, 1996 and 1995, respectively. The
increases in research and development expense were primarily attributable to
increased staffing and associated costs related to product development. During
1997, research and development expense also included the design and
development of manufacturing infrastructure that was initially used for
prototyping activities.
Sales and Marketing. Sales and marketing expense was $5.4 million, $1.7
million and $84,000 in 1997, 1996 and 1995, respectively. The increases in
sales and marketing expense were primarily attributable to expansion of the
Company's direct sales force and costs associated with initial field trials of
the SpotLight 2000 system.
General and Administrative. General and administrative expense was $3.8
million, $2.4 million and $168,000 in 1997, 1996 and 1995, respectively. The
increases in general and administrative expense were
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<PAGE>
primarily attributable to increased payroll and related expenses in hiring
additional personnel and increased occupancy expenses necessary to support the
Company's growth.
Interest Expense and Net Other Income. Interest expense was $449,000,
$150,000 and $22,000 in 1997, 1996 and 1995, respectively. The increases in
interest expense were primarily attributable to increased capital lease
obligations and notes payable. Net other income was $851,000, $485,000 and
$157,000 in 1997, 1996 and 1995, respectively. The increases in net other
income were primarily attributable to interest income resulting from higher
cash and cash equivalent balances and short-term investments.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the six quarters ended June 30, 1998. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited financial statements appearing elsewhere in this Prospectus,
and all necessary adjustments, (consisting only of normal recurring
adjustments) have been included in the amounts stated below to present fairly
the unaudited quarterly results. The quarterly data should be read in
conjunction with the audited financial statements of the Company and the notes
thereto appearing elsewhere in this Prospectus. Such quarterly operating
results are not necessarily indicative of the operating results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
JUNE SEPT. DEC. JUNE
MARCH 31, 30, 30, 31, MARCH 31, 30,
1997 1997 1997 1997 1998 1998
--------- ------- ------- ------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $ 129 $ 263 $ 547 $ 511 $ 2,538 $ 3,963
Cost of sales........... 114 402 557 655 2,910 3,486
------- ------- ------- ------- ------- -------
Gross profit (loss)..... 15 (139) (10) (144) (372) 477
------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development.......... 2,693 2,672 3,559 4,159 3,575 4,450
Sales and marketing... 922 1,322 1,753 1,385 1,996 2,091
General and
administrative....... 655 712 1,073 1,322 1,044 1,385
------- ------- ------- ------- ------- -------
Total operating
expenses........... 4,270 4,706 6,385 6,866 6,615 7,926
------- ------- ------- ------- ------- -------
Operating loss.......... (4,255) (4,845) (6,395) (7,010) (6,987) (7,449)
Other income, net....... 204 205 191 250 165 319
Interest expense........ (99) (136) (90) (124) (152) (2,079)
------- ------- ------- ------- ------- -------
Net loss................ $(4,150) $(4,776) $(6,294) $(6,884) $(6,974) $(9,209)
======= ======= ======= ======= ======= =======
Pro forma net loss per
share.................. $ (0.31) $ (0.36) $ (0.43) $ (0.43) $ (0.44) $ (0.57)
======= ======= ======= ======= ======= =======
</TABLE>
The Company's net revenue for the quarters in 1997 consisted primarily of
service revenue. Net revenue for the quarters ended March 31, 1998 and June
30, 1998 was primarily attributable to sales of the Company's SpotLight 2000
system.
The significant fluctuations in the Company's historical quarterly operating
results are principally a function of the fact that the Company was a
development stage company through the latter part of the fourth quarter of
1997. These fluctuations are largely explained by significant increases and
large variations in expenses incurred in connection with the transition from
development stage to operating stage. Operating expense increased in each
quarter, primarily reflecting the increased expenditures related to the
Company's product development and its expanding workforce.
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<PAGE>
The Company will likely experience significant fluctuations in its operating
results on a quarterly and an annual basis in the future. In connection with
its efforts to increase production of its recently introduced SpotLight 2000
system, the Company expects to continue to make substantial investments in
capital equipment, to recruit and train additional personnel and to invest in
facilities and management information systems. These expenditures may be made
in advance of, and in anticipation of, increased sales and, therefore, gross
profits may be adversely affected by short-term inefficiencies associated with
the addition of equipment, personnel or facilities and costs may increase as a
percentage of revenues from time to time on a periodic basis. As a result, the
Company's operating results will vary from period to period. Because of the
limited size of the Company's customer base and the large size of customer
orders, revenues derived from a small number of customers will likely
represent a significant portion of revenue in any given period. Accordingly, a
decrease in demand for the Company's systems from any customer for any reason
is likely to result in significant periodic fluctuations in revenue. In
addition, most of the Company's contracts contain conditional acceptance
provisions for certain product sales and the Company delays recognition of
revenues that are subject to such contingencies until all such conditions are
satisfied. If the Company could not satisfy conditions in such contracts or
satisfaction of conditions were delayed for any reason, revenues in any
particular period could fall significantly below the Company's expectations.
Many other factors may affect the Company's business and operating results in
future periods. See "Risk Factors--Limited Operating History; Accumulated
Deficit; Anticipated Losses" and "--Significant Fluctuations in Operating
Results."
YEAR 2000 COMPLIANCE
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems
and applications could fail or create erroneous results unless corrected so
that they can process data related to the year 2000. The Company relies on its
systems, applications and devices in operating and monitoring all major
aspects of its business, including financial and accounting systems, customer
services, networks and telecommunications equipment and end products. The
Company also relies, directly and indirectly, on external systems of business
enterprises such as customers, suppliers, creditors, financial organizations,
and of governmental entities, both domestic and international, for accurate
exchange of data. Although the Company believes that its internally developed
products, systems and applications are designed to be year 2000 compliant, the
Company utilizes third party equipment and software that may not be year 2000
compliant. The Company has not fully assessed the compliance of its third
party systems. Failure of such third party systems to properly process data
related to the year 2000 could cause interruptions in the Company's operations
and could require the Company to incur unanticipated expenses to remedy any
problems. In addition, if the Company's customers or suppliers experience
difficulties with year 2000 issues, it could adversely impact sales of the
Company's products to such customers or disrupt the supply of necessary
components to the Company by such suppliers. The Company is in the early
stages of assessing the risk and impact of its customers' and suppliers' year
2000 issues and significant uncertainty exists concerning the potential costs
and effects associated with any year 2000 compliance issues. Any year 2000
compliance problems of either the Company, its customers or its suppliers
could have a material adverse effect on the Company's business, results of
operations and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of Preferred Stock and Common Stock, the issuance of debt
instruments, capital leases arrangements and borrowings under various lines of
credit. Net proceeds from these transactions totaled $85.8 million as of June
30, 1998.
For the six months ended June 30, 1998, net cash used in operating
activities was $20.8 million resulting from a net loss of $16.2 million and
increases of $8.1 million in inventories offset by decreases
29
<PAGE>
of $4.9 million in accounts payable, accrued liabilities and other
liabilities. Net cash used in operating activities was $23.6 million, $10.2
million and $309,000 in 1997, 1996 and 1995, respectively. For 1997, cash used
in operating activities resulted from a net loss of $22.1 million and
increases of $4.1 million in inventories, $1.3 million in accounts receivable
and $34,000 in prepaid expenses and deposits partially offset by increases of
$926,000 in accounts payable, accrued liabilities and other liabilities and
$1.8 million in depreciation and amortization. For 1996, cash used in
operating activities resulted from a net loss of $10.8 million and increases
of $67,000 in accounts receivable and $222,000 in prepaid expenses partially
offset by increases of $906,000 in accounts payable, accrued liabilities and
other liabilities and $520,000 in depreciation and amortization. Cash used in
operating activities in 1995 was attributable to a net loss of $1.0 million
and an increase of $55,000 in prepaid expenses partially offset by an
increases of $206,000 in accounts payable, accrued liabilities and other
liabilities and $19,000 in depreciation and amortization.
Net cash provided by (used in) investing activities of $(504,000),
$(621,000), $3.1 million and $(3.8 million) for the six months ended June 30,
1998 and the years ended December 31, 1997, 1996 and 1995, respectively, was
primarily related to purchases of property and equipment and purchases of
short term investments offset by maturities of short term investments. The
large increases in working capital on a period-to-period basis are a direct
result of the rapid growth of the Company in support of the product
development and sales and marketing efforts as well as the development of an
operational infrastructure to support the sales of product in the recent
quarters. Such growth has required the Company to purchase additional
equipment and software and increase purchase of materials, which resulted in
corresponding increases in inventories and accounts payable.
Cash provided by (used in) financing activities of $28.2 million for the six
months ended June 30, 1998 consisted of $29.0 million in proceeds from
issuance of 13.75% Senior Secured Bridge Notes offset by $130,000 in payments
on debt securities and $717,000 in principal payments on capital lease
obligations. Cash provided by financing activities of $18.4 million in 1997
consisted primarily of $19.2 million in net proceeds from the issuance of
Series D Preferred Stock. Cash provided by financing activities of $24.8
million in 1996 was primarily from net proceeds of $24.6 million from the
issuance of Series B and C Preferred Stock and $500,000 of proceeds from the
issuance of a note payable. Cash provided by financing activities of $5.5
million in 1995 consisted primarily of $5.5 million in net proceeds from the
issuance of Series A Preferred Stock.
In April 1998, the Company issued $29.0 million in aggregate principal
13.75% Senior Secured Bridge Notes due April 28, 2000 to certain institutional
and corporate investors. The 13.75% Senior Secured Bridge Notes are secured by
the Company's personal property and intellectual property. The Company is
required to comply with certain covenants and certain reporting requirements
determined by the noteholders. On April 28, 1999 and each 180-day period
thereafter until the 13.75% Senior Secured Bridge Notes are repaid in full,
the interest rate will increase by 200 basis points up to a maximum of 18.0%.
In addition, the Company issued the Note Warrant to purchase an aggregate of
537,500 shares of Series D Preferred Stock at a purchase price of $0.01 per
share. The Note Warrants expire on April 28, 2000. Pursuant to the terms of
the 13.75% Senior Secured Bridge Notes, upon the closing of this offering, the
Company is obligated to repay one-half of the aggregate principal amount of
the 13.75% Senior Secured Bridge Notes outstanding, together with accrued but
unpaid interest thereon. The remaining outstanding 13.75% Senior Secured
Bridge Notes are redeemable at the Company's option at any time prior to the
maturity date. Upon the closing of this offering, the Company has the right to
redeem all of the 13.75% Senior Secured Bridge Notes, Note Warrants and to
repurchase any stock issued upon exercise of the Note Warrants for an
aggregate redemption price of $40.6 million.
The Company has a credit facility with a commercial bank, which provides for
a revolving credit line of $7.5 million to support working capital with a $3.0
million sublimit for issuance of trade-related commercial and standby letters
of credit, which matures on October 14, 1999. Outstanding balances on the
credit line bear interest at the bank's prime rate and are secured by the
Company's accounts receivable
30
<PAGE>
and inventory. As of the date hereof, no amounts were outstanding under this
revolving credit line secured by accounts receivable and $2.5 million is
outstanding related to issuance of a standby letter of credit. See Note 4 of
Notes to Financial Statements.
The Company has several capital leases with terms ranging from 36 to 48
months. At June 30, 1998, the Company's outstanding capital lease obligations
were $5.1 million, accruing interest at rates ranging from 7.25% to 14.50%. On
April 17, 1998, the Company entered into an additional $3,500,000 capital
lease line with a 36 month term. See Note 9 of Notes to Financial Statements.
As of June 30, 1998, the Company had $20.3 million of cash and cash
equivalents. As of June 30, 1998, the Company's principal commitments
consisted of accounts payable, current debt payable, convertible and
redeemable preferred stock and obligations outstanding under operating and
capital leases. Although the Company has no material commitments for capital
expenditures, management anticipates a substantial increase in its capital
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel. The Company may establish additional
field service and customer support locations, which would require it to commit
to additional lease obligations. In the future, the Company may support larger
inventories in order to provide shorter lead times to customers and achieve
purchasing efficiencies.
The Company will use approximately $16.2 million of the net proceeds
received from this offering to repay one-half of the outstanding principal and
estimated accrued interest on the 13.75% Senior Secured Bridge Notes and the
remaining proceeds of $31.8 million will be used for general corporate
purposes, including working capital to fund anticipated operating losses and
capital expenditures. See "Use of Proceeds." Following the expected
application of the estimated net proceeds of this offering together with
repayments of debt prior to this offering the Company will have $14.5 million
in outstanding principal 13.75% Senior Secured Bridge Notes.
The Company believes that the net proceeds from this offering, together with
its cash and cash equivalents, will be sufficient to meet its capital
requirements for at least twelve months. The Company's future capital
requirements will depend upon many factors, including the success or failure
of the Company's efforts to expand its production, sales and marketing
efforts, the status of competitive products and the requirements of the
Company's efforts to develop new products and product enhancements. To the
extent that the funds generated by this offering, together with existing
resources and future earnings, are insufficient to fund the Company's future
activities, the Company may need to raise additional funds through public or
private financing. There can be no assurance that additional financing will be
available to the Company on acceptable terms, or at all, or that such
financing would not result in further dilution to existing stockholders. See
"Risk Factors--Need for Additional Capital" and "Use of Proceeds."
31
<PAGE>
BUSINESS
OVERVIEW
Metawave designs, develops, manufactures and markets spectrum management
solutions for the wireless communications industry. Metawave believes that its
spectrum management solutions, consisting of smart antenna systems,
applications software and engineering services, enable cellular network
operators to increase overall network capacity, reduce network operation
costs, better manage network infrastructure and stimulate end user demand
through improved system quality. Using its proprietary technologies, the
Company has developed products that address the capacity, coverage and call
quality problems faced by cellular network operators.
The Company's smart antenna systems utilize fixed beam-switching hardware
and software algorithms to reduce system interference in order to enable more
efficient utilization of finite radio frequency spectrum or "wireless
bandwidth." The Company's products offer highly integrated system solutions
that can reduce the need for costly infrastructure upgrades and additional
cell site deployments, thereby enabling cellular network operators to reduce
otherwise capital intensive outlays and to keep pace with subscriber growth.
The Company's technology is designed to be leveraged across a variety of the
market segments in the wireless communications industry, including the AMPS,
CDMA, GSM, PCS, TDMA and WLL segments.
The Company's customers include ALLTEL, 360(degrees) Communications (which
was recently acquired by ALLTEL) and Millicom affiliates, Telefonica Celular
and St. Petersburg Telecom. The Company has completed a field trial with
AirTouch and is currently conducting a field trial with GTE.
INDUSTRY BACKGROUND
The worldwide demand for wireless communications services has grown
significantly in recent years, largely as a result of technological
advancements and economies of scale that have substantially reduced the cost
and improved the quality and reliability of wireless services for the business
and consumer mass market. In addition, worldwide deregulation of the wireless
communications industry and increased government allocation of spectrum have
resulted in wider availability of wireless radio frequency and increased
competition among existing and new wireless network operators, further
reducing cost to the end user and stimulating demand. According to Dataquest,
the number of cellular and PCS subscribers increased 45% in 1997, from 134
million to 194 million, and is projected to be approximately 550 million by
2001.
The demand for wireless communications services is expected to continue to
grow rapidly, as communications technology is driving the evolution of the
digital information age. The convergence of data communications, telephony and
wireless communications is straining public and private networks worldwide and
requiring the development of new technologies in order to enable the rate of
change to continue. Devices with wireless access such as mobile phones and
palm computers and the combination of wireless and internet protocol-based LAN
infrastructure may enable mobile customers to access services such as web
initiated telephony, unified messaging and advanced conferencing.
The need for mobile communications ubiquity places a significant strain on
wireless service providers given the fixed amount of radio frequency spectrum
or wireless bandwidth available to deliver wireless services. Unlike
traditional data and telephony communications bandwidth, which is a physical
medium, wireless spectrum is an invisible medium and is generally allocated in
fixed amounts by governments in U.S. and foreign markets. Traditional methods
used in data and telephony networks for increasing available bandwidth through
the adoption of new technologies, such as frame or cell based switching or
dense wave division multiplexing, generally do not apply in wireless networks.
Thus, the fundamental challenge for wireless network operators is to increase
capacity, coverage and call quality within a fixed amount of wireless
spectrum.
32
<PAGE>
To address capacity, coverage and call quality issues, wireless operators
have begun to deploy more spectrum-efficient digital technologies such as
CDMA, GSM and TDMA since the late 1980s. However, because analog and digital
cellular networks share the same fixed amount of spectrum, cellular network
operators must remove analog channels to implement digital technology. To
install one CDMA carrier into a network, an operator must clear 15 percent of
its existing analog spectrum. Removal of analog spectrum creates additional
capacity constraints within an existing analog network that is already nearing
capacity limits from the growing demand for analog minutes of use. As digital
traffic grows within analog systems, additional digital carriers must be
added, requiring more analog channels to be cleared. According to the Cahners
In-Stat Group, clearing analog spectrum to accommodate digital growth is
expected to continue for the next five to seven years as demand for digital
capacity increases.
The need to provide analog cellular service to increasing numbers of
subscribers while simultaneously clearing fixed spectrum for digital
deployment creates numerous challenges for cellular network operators.
Traditionally, operators of 800 MHz cellular networks addressed capacity,
coverage and call quality problems by building new cell sites. According to
the Cellular Telecommunication Industry Association ("CTIA"), wireless network
operators added approximately 21,000 new cell sites worldwide in 1997.
However, constructing a new site, including land, building and equipment, can
cost up to $1,000,000, and technical factors such as frequency reuse
limitations diminish the marginal benefits of adding cell sites to networks.
For example, building cell sites closer together increases interference and
noise in the network, which reduces capacity and call quality, exacerbating
the very problems the additional cell sites are intended to resolve. Cellular
network operators also face significant community resistance arising from
environmental concerns and aesthetic objections to the appearance of cell site
towers.
In addition to building more cell sites, cellular network operators have
adopted variations on antenna design. Traditionally, operators used omni-
directional (360(degrees)) antennas, which receive and transmit in all
directions around a cell site. This has the advantage of making all radio
channels available to any cellular caller, but has the disadvantage of being
susceptible to interference from all directions. In areas where interference
is a problem, cellular network operators have often installed sectorized
antennas, usually consisting of a suite of three antennas, each covering a
different 120(degrees) sector around a cell site. While sectorized antennas
reject signals from outside their sector, decreasing the overall level of
interference within a cell site, they can also reduce cell site capacity
because each radio channel is permanently allocated to a specific sector, and
therefore cannot be reused to cover other sectors.
The growing demand for wireless services and the difficulties encountered by
cellular network operators in building additional cell sites and implementing
digital technologies contribute to the need for a cost-effective solution to
capacity, coverage and call quality problems. Cellular network operators need
solutions that work within the framework of intense wireless service
competition and reduced capital budgets. As they seek to provide ubiquitous
wireless service and support increased subscriber demand, cellular network
operators must address the fundamental challenge of achieving maximum capacity
from finite spectrum resources. Metawave believes that the growing demand for
wireless services as well as the set of technological problems and economic
constraints imposed by finite spectrum resources presents an attractive market
opportunity for providers of spectrum management solutions.
THE METAWAVE SOLUTION
Metawave's spectrum management solutions, consisting of smart antenna
systems, applications software and engineering services, enable cellular
network operators to increase overall network capacity, reduce network
operation costs, better manage network infrastructure and stimulate end user
demand through improved system quality. The Company's initial spectrum
management platform, the SpotLight 2000 system, is a multibeam smart antenna
technology that is compatible with the Motorola HDII and Lucent Series II base
stations and AMPS and CDMA air interface protocols. The SpotLight 2000 system
divides the cell site coverage pattern into 12 fixed beams and incorporates
electronics and software to
33
<PAGE>
create the optimum signal for each radio in the cell site. The Company's
spectrum management solutions provide cellular network operators with the
following benefits:
Cost-Effective Capacity Expansion. The SpotLight 2000 system enables
cellular network operators to increase the capacity of their networks without
the increased network complexity and expenses associated with new cell site
development. The SpotLight 2000 system integrates narrow-beam antennas with RF
signal-processing hardware and beam-switching algorithms to provide stronger
signal reception and reduced interference. This enables cellular network
operators to more efficiently allocate radio frequencies and thereby increase
network capacity. The SpotLight 2000 system can be installed in a single cell
site or in multiple sites in a network. The system can be used to increase
analog capacity only or can be deployed in a dual-mode configuration to
simultaneously increase both analog and CDMA capacity. Based on field trials,
the Company estimates that the SpotLight 2000 system, when installed in a
network of cell sites, can improve analog capacity by as much as 100% and,
when used in a dual-mode system, can improve CDMA capacity by up to 40%.
Efficient Conversion to Digital Network Capability. The SpotLight 2000
system enables cellular network operators to use existing cell site
infrastructure to support current traffic levels with less of their allocated
spectrum and fewer channels. As a result, the SpotLight 2000 system
facilitates the transition from frequency-intensive analog service to more
spectrum-efficient digital service. Operators can use the SpotLight 2000
system to clear spectrum for the first and each subsequent CDMA carrier while
maintaining analog capacity and service quality.
Improved Network Performance. By providing a stronger signal and by reducing
interference, the SpotLight 2000 system can improve coverage in certain
portions of a cell site's geographic footprint, such as the interior of
buildings, where coverage is often insufficient. This stronger signal and
reduced interference can improve network quality. In addition, the SpotLight
2000 system provides RF engineers with the ability to measure and report
performance statistics in 30(degrees) increments around the cell site. Using
this data, engineers can better isolate specific network performance metrics
and determine optimum sector configurations.
STRATEGY
The Company's objective is to be a leading provider of spectrum management
solutions to the worldwide wireless communications market. The Company's
strategy to achieve this objective incorporates the following key elements:
Provide Solutions to High-Growth Wireless Communications Markets. The
Company seeks to identify rapidly growing wireless markets and to develop
highly integrated solutions to spectrum management problems in those markets.
The Company designed the SpotLight 2000 system initially for use in AMPS
cellular networks. In order to address the capacity and system quality
problems facing AMPS operators implementing CDMA digital technologies, the
Company has leveraged the SpotLight 2000 system technology to develop a dual-
mode solution that incorporates CDMA and AMPS protocols. In addition, the
Company has recently accelerated its engineering and market development
activities aimed at the GSM market. The Company intends to explore other high-
growth markets such as PCS, TDMA and WLL and, if appropriate, to develop
similar solutions for such markets. There can be no assurance, however, that
the Company will successfully develop and commercialize products for these
markets.
Build and Expand Strategic Customer Relationships. Metawave is dedicated to
serving those cellular network operators which the Company believes are most
likely to adopt and promote the Company's solution across their networks. The
Company uses a direct sales model and has established significant field
engineering expertise that enables the Company to install and optimize its
equipment within customers' cell sites. The Company's system engineers work
closely with the Company's direct sales personnel and customers to ensure that
the Company's product performance is optimized for each
34
<PAGE>
operator's network. In addition, the Company has developed expertise in
assisting cellular network operators in planning and improving overall network
performance.
Leverage Proprietary Core Technology. The Company seeks to continue to build
its core technology, which includes eight issued and 25 pending patents, and
to invest substantial resources in technology research and product
development. The Company has leveraged its core technology and expanded its
customer base by modifying its SpotLight 2000 system for use with the Lucent
Series II base station in addition to the Motorola HDII base station for which
it was initially developed. The Company is currently modifying the SpotLight
2000 system to interface with equipment made by other manufacturers, such as
the Ericsson 882 and Motorola SC2450 and SC9600 base stations, and intends to
expand into new technology markets by developing spectrum management solutions
for the GSM, PCS, TDMA and WLL markets, as appropriate. There can be no
assurance, however, that the Company will successfully develop and
commercialize products for these additional markets. To facilitate the
adoption and deployment of the Company's spectrum management solutions, the
Company intends to develop stand-alone products and applications that are
readily installed in existing or new cell sites. The Company may establish
strategic relationships both to develop new technologies and to expand into
new markets.
Focus on Highly Integrated System Solutions. The Company seeks to offer
system level products that enhance the performance of cellular network
operators' base station equipment. The Company will provide highly integrated
solutions that include pre-sales system planning, products configurable to
specific base station requirements and on-site installation and optimization
services to ensure a high level of system performance. The Company's highly
integrated system approach differentiates it from the component level product
offerings currently available in the market.
MARKETS
Today's wireless communications industry is characterized by several
protocols that divide the industry into broad markets. Currently, networks
based on the AMPS and GSM protocols have the greatest number of subscribers
and, correspondingly, the largest number of cell sites. The Company expects
digital technologies to grow rapidly and account for increased levels of
infrastructure spending. Many analog cellular network operators are migrating
their analog networks to digital to increase capacity and improve their
competitive position relative to emerging PCS providers. Regardless of the
protocol adopted or the frequency band used, the Company believes wireless
network operators worldwide will need to address capacity, coverage or call
quality issues.
Analog Cellular Market. The analog cellular market consists of operators
that provide cellular service within the 800 MHz and 900 MHz frequency bands
using analog technology. The predominant analog protocol is AMPS, which
according to the Strategis Group serves 71.0% of total analog subscribers
worldwide. In areas of the world where digital technology has not yet been
introduced, AMPS networks are growing to serve continued subscriber demand. In
areas where deployment of digital service is underway or planned, maintaining
analog capacity, coverage and call quality during this transition is
essential. In addition to currently serving the majority of subscribers and
minutes of use in North America, AMPS technology will also serve digital
customers in cases where they roam to other networks, in areas where digital
service is not yet in place and in circumstances where digital capacity is not
sufficient to carry the level of traffic. AMPS cellular phones also remain
significantly less expensive than digital and dual-mode phones. For these
reasons, the Company believes the migration to digital service will be an
extended process. Moreover, the Company believes that cellular network
operators may be reluctant to allow AMPS service quality to deteriorate during
this process due to the presence of significant competition from other
cellular and emerging PCS operators. The Company's SpotLight 2000 system
enables cellular network operators to provide enhanced capacity, coverage and
call quality to facilitate this transition to digital service.
35
<PAGE>
CDMA Digital Cellular Market. The CDMA digital cellular market consists of
operators overlaying CDMA technology onto existing AMPS technology in the 800
MHz frequency band. To deploy a single CDMA carrier, cellular network
operators must clear a portion of spectrum (approximately 15% in North and
South America) that was previously utilized for AMPS service. This involves
taking analog channels off the air, exacerbating capacity shortages and
deteriorating network quality. The Company believes that approximately half of
the cellular networks in North America are ultimately expected to migrate to
CDMA technology as are many cellular network operators in South America.
Cellular network operators must separately optimize the CDMA portion of their
network in order to achieve the necessary capacity and performance. The
Company's SpotLight 2000 system provides additional analog capacity
facilitating spectrum clearing without adversely affecting capacity or network
quality. The SpotLight 2000 system also provides additional CDMA capacity to
manage the transition from analog-only networks to dual-mode networks.
GSM Market. The GSM market consists of networks that operate at 900 MHz and
1800 MHz. GSM was the first widely implemented digital technology and is
deployed in 111 countries, predominantly in Europe and Asia. As the most
widely deployed digital technology, GSM served 48.5 million subscribers at the
end of 1997, according to the Strategis Group, and Allied Business
Intelligence estimates that GSM will account for over 50% of worldwide
wireless subscribers by 2000. GSM is not as spectrally efficient as other
digital technologies. Consequently, GSM networks are beginning to experience
capacity constraints, particularly in heavily subscribed areas. The Company
believes that these capacity shortfalls will become more common. The Company
is currently developing a GSM product that is intended to provide cost-
effective spectrum management solutions for GSM network operators. The product
is currently in the engineering prototype stage.
TDMA Market. The TDMA digital cellular market consists of operators
overlaying TDMA technology onto existing AMPS technology in the 800 MHz
frequency band. The TDMA market represented approximately 50% of the North
American digital cellular market, as well as a significant portion of the
South American market at the end of 1997, according to the Strategis Group.
TDMA operates on analog channels, and therefore can reduce analog capacity. As
subscriber growth continues on these networks, the capacity gains of TDMA may
not be sufficient to accommodate subscriber growth. Although the Company
currently has no TDMA solution under development, the Company believes that
its technology is applicable to the issues facing TDMA operators. The Company
continues to evaluate the economic viability of a TDMA solution and may in the
future undertake product development for TDMA.
PCS Market. In 1995 and 1996, the U.S. government auctioned new licenses at
frequencies of 1900 MHz, known as PCS. These licenses represent 120 MHz of new
spectrum compared to 50 MHz of spectrum held by the existing cellular network
operators. In doing so, the government opened up each wireless market to new
competitors. These new PCS operators represent a significant competitive
threat to cellular network operators. Since entering the market in 1997,
deployed PCS networks currently provide coverage to geographic regions
covering approximately 75% of the U.S. population and, according to The Yankee
Group, PCS accounted for 20% of all new wireless accounts in the United States
in 1997. PCS operators deploy digital networks, using CDMA, TDMA or GSM
technology, which offer enhanced services, better security and more capacity
than analog networks. In addition, customer churn has intensified as a result
of new consumer choices. As these networks grow, it is expected that they will
experience capacity and optimization issues similar to cellular networks. The
Company continues to evaluate potential spectrum management solutions for PCS.
36
<PAGE>
The following table presents a summary of the principal wireless protocols,
geographic markets and estimated subscribers as of December 31, 1997. The
Company's products currently are compatible only with AMPS and CDMA wireless
products.
<TABLE>
<CAPTION>
PREDOMINANT
GEOGRAPHIC ESTIMATED SUBSCRIBERS
MARKET PROTOCOL REGIONS WORLDWIDE, 1997(2)
<C> <S> <C> <C>
Analog Cellular AMPS (Advanced Mobile North America 68,421,482
Phone Services)(1) Latin America
Asia
-------------------------------------------------------------------
TACS/ETACS (Total Access Europe 21,366,610
Communications System) Asia
-------------------------------------------------------------------
NMT (Nordic Mobile Europe 4,933,956
Telephone) Asia
- ---------------------------------------------------------------------------------
Digital Cellular CDMA (Code Division North America 3,963,162
Multiple Access)(1) Latin America
Asia
-------------------------------------------------------------------
TDMA (Time Division North America 6,721,635
Multiple Access) Latin America
Asia
-------------------------------------------------------------------
GSM (Global System for Europe 48,495,238
Mobile Asia
Communications)(3)
-------------------------------------------------------------------
PDC (Pacific Digital Japan 21,959,350
Cellular)
- ---------------------------------------------------------------------------------
PCS/Other PCN/DCS-1800 (Digital Europe 5,065,119
Communications System) Asia
-------------------------------------------------------------------
PCS 1900 North America 1,319,138
-------------------------------------------------------------------
TDMA (1.9 GHz) North America 834,141
-------------------------------------------------------------------
CDMA (1.9 GHz) North America 2,197,355
Asia
-------------------------------------------------------------------
PHS (Personal Handyphone Asia 8,161,656
System)
- ---------------------------------------------------------------------------------
</TABLE>
(1) Indicates markets the Company's products currently address.
(2) As reported by the Strategis Group, 1997.
(3) The Company is currently developing a GSM engineering prototype. There can
be no assurance, however, that the Company will successfully develop a
product that addresses the needs of the GSM market or the other markets
that it does not currently address. See "Risk Factors--Rapid Technological
Change and Requirement for Frequent New Product Introductions."
METAWAVE PRODUCTS
The Company has developed spectrum management solutions, consisting of smart
antenna systems, applications software and engineering services, that enable
cellular network operators to increase overall network capacity, reduce
network operation costs, better manage network infrastructure and stimulate
end user demand through improved system quality. The Company's initial
spectrum management platform, the SpotLight 2000 system, is a multibeam smart
antenna technology that interfaces with Motorola HDII and Lucent Series II
base stations and is compatible with AMPS and CDMA air interface protocols.
Metawave's proprietary spectrum management solutions enable the transition
from traditional wireless network infrastructure designs to an architecture
which actively optimizes finite spectrum or
37
<PAGE>
wireless bandwidth, thereby enhancing the performance and increasing overall
network capacity of the cellular operator's network. The architecture, shown
in the figure below, adds smart antenna performance to the cellular operator's
network.
[GRAPHIC APPEARS HERE]
SpotLight Platform. The Company's SpotLight 2000 smart antenna system was
initially designed for use in AMPS networks and was first shipped for
commercial sale in November 1997. The second generation SpotLight 2000 system
was designed as a dual-mode system and is currently in field trials. The
SpotLight 2000 system divides cell site antennas into 12 beams and
incorporates electronics and software to optimize the signal for each radio in
the cell site, resulting in increased network capacity and improved call
quality. Designed for 800 MHz networks, the SpotLight 2000 system currently
provides solutions for AMPS networks or dual-mode AMPS and CDMA networks.
Based on field trials, the Company estimates that the SpotLight 2000 system,
when installed in a network of cell sites, can improve analog capacity by as
much as 100% and, when used in a dual-mode system, can improve CDMA capacity
by up to 40% without increasing the number of cell sites. Accordingly, the
SpotLight 2000 system is a cost-effective tool for clearing spectrum of analog
use to accommodate the transition of networks to digital service. Capacity is
increased by allowing for tighter re-use of frequency or by obtaining
increased trunking efficiency or a combination of both.
The Spotlight 2000 system interfaces with base stations by coupling directly
to the I/O ports of base station radios and by processing transmit and receive
signals through its smart antenna spectrum management system. The Company
provides all necessary hardware and software to process, transmit and receive
signals, including Spectrum Management Units ("SMUs"), linear power
amplifiers, filters and other equipment, including base station antennas.
38
<PAGE>
As the SpotLight 2000 system reduces interference in a network through
implementation of smart antennas, more channels can be added to each cell site
because frequencies can be reused more times over a given area, thereby
increasing network capacity. In areas where interference is a problem,
cellular network operators have often installed sectorized antennas, usually
consisting of a suite of three antennas, each covering a 120(degrees) sector
around a cell site. Sectorization reduces the amount of interference received
by a given cell site radio. The SpotLight 2000 system's 12 beam smart antenna
has four times the interference rejection potential of a three-sector antenna.
As shown in the figure below, the 12 beam antenna rejects potential signal
interference that is outside the caller's narrow 30(degrees) beam, reducing
network interference. This enables a cellular network operator to reuse the
same frequencies more often over a given service area, thereby adding more
channels to each cell site.
INTERFERENCE ISOLATION
[GRAPHIC APPEARS HERE]
Trunking efficiency represents a statistical measure of the call carrying
capacity of a set of channels. Trunking efficiency is increased whenever a
greater number of channels is made available for use by a group of subscribers
at a given location and time. Conventional three-sector antennas tend to
reduce capacity because they restrict the callers in any given sector to the
cell site radio channels assigned to that sector. In contrast, the SpotLight
2000 system's SMU's permit any caller in any beam to be assigned to any cell
site radio, thereby increasing the trunking efficiency and the cell site's
capacity. The primary interface between the SpotLight 2000 system and the cell
site is the set of RF connections between the transmit and receive terminals
on cell site radios and the SpotLight 2000 system's SMUs, which contain the
core of SpotLight's smart antenna capability. While any call is active, the
SMUs continuously measure call quality and make adjustments in beam assignment
to maintain the best possible call quality.
Through the SpotLight 2000 system, cellular network operators deploying
dual-mode smart antenna systems can use a single set of antennas for both
their analog and CDMA networks, and can optimize each network's performance
independently.
The SpotLight 2000 system also increases CDMA capacity because it allows
operators to manage and distribute traffic loading more effectively. The
geographic distribution of traffic loading across a CDMA network or within a
single cell varies considerably. In a typical three-sector cell, the traffic
density in the most heavily loaded sector is often significantly higher than
the least-loaded sector. As a result, some cells may have sectors that are
fully loaded with cellular traffic while other sectors of the same cell are
well below peak loading and have spare capacity. On a network scale, high
cellular traffic areas, such as highway interchanges, urban centers and
shopping centers, can become "hot spots" that strain network capacity even as
network resources go unused in low cellular traffic areas. This variability in
traffic density creates network inefficiencies and lower network capacity,
particularly in CDMA networks.
To address traffic loading, the SpotLight 2000 system controls the
transmission and reception of CDMA radio signals by base stations through a
process called sector synthesis. The SpotLight 2000 system
39
<PAGE>
adapts the sector coverage of the base stations' CDMA radios to the local
traffic patterns around cell sites. The system's phased-array antenna makes it
possible to create custom sector antenna patterns of varying degrees though an
embedded software-driven process. Optimization of the SpotLight 2000 system
for CDMA requires information about the CDMA signals on the network, which the
CDMA equipment within the system gathers through the antennas. Sector
synthesis occurs through software algorithms, which can be modified remotely
to respond to changing local traffic patterns in real time. Through sector
synthesis, cellular network operators also optimize their CDMA networks with
increased flexibility and precision, enhancing network capacity and
performance in response to changing traffic patterns as well as local terrain
and variable RF conditions, as illustrated in the following diagram.
SECTOR SYNTHESIS
[GRAPHIC APPEARS HERE]
Other Spectrum Management Products. The SpotLight 2000 system can be
administered and monitored locally or remotely through LampLighter, SpotLight
2000's system configuration product. LampLighter, a Windows-based software
tool, configures the SpotLight 2000 system for optimal cell site performance.
In addition, LampLighter allows real time monitoring of system performance
through graphical displays and log files.
In addition to the configuration capabilities of LampLighter, the Company
offers networked access to the SpotLight 2000 system configuration with its
SiteNet software product. SiteNet also provides a means for centralized
collection and analysis of RF performance statistics in analog and CDMA
networks. Cellular network operators can use the networked configuration
capability, as well as networked RF performance statistics, to attain remote
control of antenna operations across a network of SpotLight 2000 systems.
CORE TECHNOLOGY
The Company believes that one of its key competitive advantages is its
investment and expertise in the core technologies that enable efficient
spectrum management of wireless communications networks. Spectrum management
encompasses a number of technical components, including advanced antenna
concepts, radiowave propagation models, network performance monitoring tools,
common air interface knowledge and communications systems hardware
implementations. These core competencies, when applied in combination, allow
cellular network operators to optimize capacity, coverage and quality across
their networks. The Company has developed, and continues to expand upon, the
following four fundamental technical elements:
Phased-Array Antenna Systems. The Company has developed phased-array antenna
systems that provide compact beam-forming within a single structure. The
antenna systems make use of uniform linear or cylindrical arrays with a
combination of both ground-based and tower-based feed networks. The
40
<PAGE>
Company has designed antennas to synthesize multiple narrow fixed-beams, which
can be used to track individual users within a cell site. In addition, the
Company has developed beam-forming techniques to allow the coverage area of a
cell site to be customized. The phased-array antenna technology can be scaled
to a variety of gains and to span a broad range of frequencies. The basic
implementations are protocol independent, and as such can be applied to
analog, TDMA and CDMA and other wireless networks. The phased-array technology
is extendible to as many as 128 simultaneous narrow fixed-beams for high
density applications or high bit rate services. Phased-array antenna
technology has potential applications in ground-based mobile radio (cellular,
PCS, enhanced specialized mobile radio ("SMR")), two-way paging, local
multipoint distribution service ("LMDS") as well as in emerging satellite-
based wireless services.
Multibeam Hardware Architectures. The Company has developed cost-effective
hardware implementations of the complex circuitry necessary to support the
operation of multibeam systems on high-traffic cell sites. The hardware
architecture can be organized into several key subsystems: beam switching
matrices, ultra-linear amplification, beam-forming feed structures, array
calibration circuitry and performance measuring receivers. The Company has
designed compact high-density RF switch matrices for use in fast beam-
switching applications. The Company's beam-switching technology is modular,
reliable and readily adaptable to both TDMA and analog protocols, where rapid
beam switching is required. The Company holds proprietary technology for the
implementation of modular, scalable architectures that support beam-switching
and beam-forming. The Company has developed proprietary hardware techniques
for feeding and calibrating phased-arrays integrated into existing cell site
configurations. To monitor the radio environment, the Company has developed
high-speed, frequency-agile scanning receivers designed to accurately operate
over various channel bandwidths. The Company's controlled impedance circuit
board designs implement low-loss routing of hundreds of microwave signal paths
while maintaining low voltage standing wave ratio ("VSWR") and minimal
crosstalk. Additionally, the Company has patents related to architectures to
implement beam-switching for the CDMA protocol. The Company's spatial
technology allows the simultaneous operation of multiple protocols (for
example AMPS/CDMA or AMPS/TDMA) through the same physical antenna structure,
while maintaining independent optimization of the performance for each
protocol.
Real-Time Network Control Algorithms. The Company has developed algorithms
to control beam switching hardware based upon extensive drive testing, data
gathering, statistical analysis and propagation modeling in complex, real-
world radio environments. These algorithms make real-time decisions about
which beams best serve each user, how often to update beam selections and how
to mitigate interference from other users on the same or adjacent channels.
The Company has patents related to cellular beam spectrum management and
forward-looking interference cancellation technology. In addition, the Company
has developed expertise in the optimization of cellular network performance
for AMPS/NAMPS and CDMA protocols. Such expertise allows network control
algorithms to be customized based on the specific protocol and network
deployment scenario. The Company has also developed internal software tools
for performance modeling cellular networks. These proprietary tools allow
evaluation of new algorithms for spectrum management on mixed analog and
digital cellular networks.
Adaptive Beam-Forming Techniques. The Company designs and builds antenna
systems with a broad range of standard and custom beam types and shapes using
adaptive beam-forming technology. With respect to CDMA, the Company's system
makes use of the phased-array antenna to create custom sector antenna patterns
through an embedded software-driven process known as sector synthesis. Under
software control, independent selection of sector azimuth pointing angles,
beamwidths and per-beam gains can provide flexibility to fine-tune network
performance. With sector synthesis, cellular network operators can create
completely different sector mappings for AMPS and CDMA, thus allowing
independent network optimization while sharing the cell site's equipment,
including antennas. Adaptive beam-forming systems can monitor traffic loading
and interference levels and then respond by implementing changes designed to
equalize traffic loads and reduce interference.
41
<PAGE>
CUSTOMERS
Metawave works closely with its customers to establish long-term
relationships and to provide opportunities to expand the delivery of its
spectrum management solutions to these customers. Since 1996, the Company has
conducted field trials with a number of cellular network operators to test its
technology and to demonstrate the SpotLight 2000 system's capability to these
customers. These trials are an essential element in the Company's sales cycle.
Late in the fourth quarter of 1997, the Company began commercial shipment of
the Motorola HD-II analog-only version of its SpotLight 2000 system. In early
1998, the Company began a field trial to demonstrate the capability of its
SpotLight 2000 Lucent Series II system for both analog and CDMA, which was
completed in July 1998.
The following table sets forth a list of companies that have purchased or
are evaluating the purchase of the SpotLight 2000 system as of August 31,
1998.
<TABLE>
<CAPTION>
CUSTOMER OR PROSPECTIVE
CUSTOMER LOCATION SALES STATUS
<S> <C> <C>
ALLTEL(1) Augusta, Georgia Commercial Sale
Columbia, South Carolina Commercial Sale(2)
Savannah, Georgia Commercial Sale
Springfield, Missouri Commercial Sale
---------------------------------------------------
360(degrees)
Communications(1) Ft. Walton, Florida Commercial Sale(2)
---------------------------------------------------
Millicom--Telefonica Paraguay Commercial Sale
Celular
---------------------------------------------------
Millicom--St. Petersburg
Telecom St. Petersburg, Russia Commercial Sale
---------------------------------------------------
AirTouch San Diego, California Field Trial Completed 1997
---------------------------------------------------
GTE Fremont, California Field Trial Completed 1998
- -------------------------------------------------------------------------------
</TABLE>
(1) On July 1, 1998, ALLTEL completed the acquisition of 360(degrees)
Communications.
(2) These sales are conditional upon the achievement of certain performance
criteria set forth in the sales contracts. No revenue is recognized by the
Company until all customer acceptance conditions have been met.
There can be no assurance that successful completion of a given field trial
will result in a system sale. The sale of the Company's products is subject to
numerous risks and uncertainties. In order for its products to achieve market
acceptance, the Company must demonstrate to cellular network operators that
the products provide a spectrum management solution that addresses the
cellular network operators' challenges of capacity, coverage and call quality
in a cost-effective manner. The Company must demonstrate product performance
to a cellular network operator based on such operator's needs and
specifications and the difficulty in optimizing the Company's product in any
given cell site varies greatly depending on such operator's specifications and
the geographical terrain. Typically, performance of the Company's product must
be accepted in an initial cell site or cluster of cell sites prior to
completing any additional sales to such cellular network operator. If the
Company's products are not accepted by cellular network operators in a timely
manner, or at all, the Company's business and operating results will be
materially adversely affected. See "Risk Factors--Uncertainty of Market
Acceptance; Lengthy Sales Cycle," "--Dependence on Cellular Network Operator
Capital Spending" and "--Competition."
During the six months ended June 30, 1998, sales to St. Petersburg Telecom,
Telefonica Celular and ALLTEL accounted for 95.7% of net revenue. Sales to
these three customers are expected to continue to account for a substantial
majority of sales through the remainder of fiscal 1998. The loss of any of
these customers, or a significant loss, reduction or rescheduling of orders
from any of these customers, could have a material adverse effect on the
Company's business and operating results. See "Risk Factors--Significant
Customer Concentration" and "--Dependence on Growth of Cellular Communications
Market."
42
<PAGE>
SALES, MARKETING AND CUSTOMER SUPPORT
Metawave sells its products through a technical direct sales force supported
by systems engineers. Direct sales personnel are assigned on a customer
account basis and are responsible for generating product sales, providing
product and customer support and soliciting customer feedback for product
development. In addition, sales personnel receive support from the Company's
marketing organization.
The Company's marketing efforts are primarily focused on establishing and
developing long-term relationships with potential customers. As is customary
in the industry, sales are made through standard purchase orders which can be
subject to cancellation, postponement or other types of delays. While certain
customers provide the Company with forecasted needs, they are not bound by
such forecasts. Historically, the Company has conducted field trials and has
been required to satisfy performance conditions prior to the completion of a
sale. For these and other reasons, the sales process associated with the
purchase of the Company's systems is typically complex, lengthy (up to 18
months or more) and subject to a number of significant risks, including
changes in customers' budgets and approval at senior levels of customers'
organizations and approval by governmental agencies. See "Risk Factors--
Uncertainty of Market Acceptance; Lengthy Sales Cycle."
International sales of the Company's products accounted for 51.4% of net
revenue for the six-month period ended June 30, 1998. There were no
international sales for the years ended December 31, 1995, 1996 and 1997.
Foreign sales of the Company's products may be subject to national security
and export regulations and may require the Company to obtain a permit or
license. See "Risk Factors--Government Regulation." The Company has not
experienced any material difficulty in obtaining required permits or licenses.
Installation and operation of the Company's products may also require approval
from governmental agencies in these countries. Foreign sales are also subject
to risks related to political instability and economic downturns in foreign
nations. The Company's foreign customers typically pay for the Company's
products with U.S. dollars. As such, a strengthening of the U.S. dollar as
compared to a foreign customers' local currency would effectively increase the
price of the Company's products for that customer, thereby making the
Company's products less attractive to such customers. See "Risk Factors--Risks
Associated with International Markets."
The Company's customer support organization performs network design, product
installation, network optimization, training, consulting and repair and
maintenance services to support its SpotLight 2000 system. The Company offers
consulting services to optimize the network following the SpotLight 2000
system installation. Optimizing a network requires expertise in RF network
design, individual network peculiarities and knowledge of the SpotLight 2000
system capabilities. The Company offers repair and maintenance services. The
Company's warranties vary by customer and range from 12 to 18 months. Warranty
obligations and other maintenance services for the Company's products are
performed at the Company's headquarters in Redmond, Washington.
As of June 30, 1998, the Company had approximately $5.0 million of
unrecognized revenue for customer sales that are subject to the satisfaction
of customer acceptance conditions set forth in the sales agreements related
thereto. In addition, the Company's backlog of orders was approximately
$802,000 on June 30, 1998, compared to no backlog of orders on June 30, 1997.
The Company includes in backlog only customer commitments for which it has
received signed purchase orders and scheduled shipment dates within the
following six months. The Company intends to increase its manufacturing
capacity and believes that backlog will decrease, as a percentage of sales, as
the Company becomes able to fill orders on a more timely basis. Moreover,
product orders in the Company's current backlog are subject to changes in
delivery schedules or to cancellation at the option of the purchaser without
significant penalty. Accordingly, although useful for scheduling production,
backlog as of any particular date may not be a reliable measure of sales for
any future period. See "Risk Factors--Significant Fluctuations in Operating
Results."
Because of the limited size of the Company's customer base and the
relatively large dollar amount of customer orders, revenues derived from a
small number of customers will likely represent a significant
43
<PAGE>
portion of revenue in any given period. A decrease in demand for the Company's
systems from any customer for any reason is likely to result in significant
periodic fluctuations in revenue. Due to the highly concentrated nature of the
cellular industry, the Company believes that the number of potential customers
for future products, if any, will be small. Failure by the Company to capture
a significant number of the cellular network operators as customers could have
a material adverse effect on the Company's business and operating results. See
"Risk Factors--Significant Fluctuations in Operating Results," "--Significant
Customer Concentration."
RESEARCH AND DEVELOPMENT
The Company's research and development efforts focus primarily on enhancing
the features and functionality, improving the quality and reducing the
manufacturing cost of the SpotLight 2000 system. The Company's efforts also
focus on using existing product architecture and technology to maintain
commonality and minimize time-to-market for new product enhancements and
technology platforms. The Company is investing resources in extending the
SpotLight 2000 system to other principal manufacturers' base station equipment
both in the United States and abroad. The Company is also investing resources
in the development of a spectrum management platform for GSM and in early-
stage research regarding CDMA for PCS and TDMA.
Research and development expenses were approximately $883,000, $7.2 million
and $13.1 million for the fiscal years ended December 31, 1995, 1996 and 1997,
respectively, and $8.0 million for the six months ended June 30, 1998. The
Company believes that continued investment in research and development is
critical to attaining its strategic objectives and, as a result, expects
research and development expenses to increase in absolute dollars for the
foreseeable future. As of June 30, 1998, 91 employees were engaged in the
Company's research, development and product management efforts.
The market for the Company's current product and planned future products is
subject to rapid technological change, frequent new product introductions and
enhancements, product obsolescence, changes in customer requirements and
evolving industry standards. To be competitive, the Company must successfully
develop, introduce and sell new products or product enhancements that respond
to changing customer requirements on a timely and cost-effective basis. The
Company's success in developing new and enhanced products will depend on a
variety of factors, many of which are beyond the Company's control. Such
factors include the timely and efficient completion of system design; the
timely and efficient implementation of assembly, calibration and test
processes; sourcing of components; the development and completion of related
software; the reliability, cost and quality of new products; the degree of
market acceptance; and the development and introduction of competitive
products by competitors. The inability of the Company to introduce in a timely
manner new products or product enhancements that contribute to sales could
have a material adverse effect on the Company's business and operating
results. See "Risk Factors--Rapid Technological Change and Requirement for
Frequent New Product Introductions."
MANUFACTURING
The Company relies to a substantial extent on outside suppliers to
manufacture many of the components and subassemblies used in the SpotLight
2000 system. The Company's manufacturing operations consist primarily of
supplier and commodity management and assembling finished goods from
components and subassemblies purchased from such outside suppliers. The
Company monitors quality at each stage of the production process, including
the selection of component suppliers, the assembly of finished goods and final
testing, packaging and shipping. The Company considers quality, cost and
timing of delivery in selecting its component suppliers. Final assembly,
system integration and full-configuration testing operations are performed at
the Company's headquarters in Redmond, Washington.
Certain parts and components used in the Company's products, including
linear power amplifiers supplied by Powerwave, are presently only available
from a sole source. Certain other parts and
44
<PAGE>
components used in the Company's products are available from a limited number
of sources. The Company's reliance on these sole source or limited source
suppliers involves certain risks and uncertainties, including the possibility
of a shortage or discontinuation of certain key components and reduced control
over delivery schedules, manufacturing capability, quality and cost. Any
reduced availability of such parts or components when required could
materially impair the Company's ability to manufacture and deliver its
products on a timely basis and result in the cancellation of orders which
could have a material adverse effect on the Company's business and operating
results. See "Risk Factors--Sole Source Suppliers; Dependence on Key
Suppliers."
The Company has had only limited experience manufacturing and arranging for
the manufacture of its products, and there can be no assurance that the
Company or any manufacturer of the Company's products will be successful in
increasing its manufacturing volume. The Company may need to procure
additional manufacturing facilities and equipment, adopt new inventory
controls and procedures, substantially increase its personnel and revise its
quality assurance and testing practices, and there can be no assurance that
any of these efforts will be successful. In August 1998, the Company was
recommended for registration pursuant to the ISO 9001 standard by an ISO
approved auditor. See "Risk Factors--Limited Manufacturing Experience; No
Assurance of Successful Expansion of Operations" and "--Risks Associated with
International Markets."
COMPETITION
The market for spectrum management solutions is relatively new but is
expected to become increasingly competitive. The Company's products compete
with other smart antenna systems and alternative wireless infrastructure
devices such as repeaters, cryogenic filters and tower-top amplifiers. The
Company believes that the principal competitive factors are the cost-effective
delivery of increased capacity, expanded coverage and improved system quality
to cellular network operators. There can be no assurance that the Company will
compete favorably with respect to the foregoing factors.
The Company believes that base station manufacturers, who provide cellular
network capacity through sales of additional base stations, represent a
significant competitive threat to the Company. These manufacturers, including
Ericsson, Lucent, Motorola, Nokia, Northern Telecom and Siemens, have
long-term, established relationships with the cellular network operators.
Deployment of the Company's SpotLight 2000 system by cellular network
operators can improve base station performance, and therefore may result in
fewer sales opportunities for base station manufacturers. Smart antenna
technology represents an area of opportunity for such manufacturers. The
Company believes that certain of these manufacturers are developing smart
antenna systems and are likely to offer smart antenna capabilities in the
future. In addition to having more established relationships with cellular
network operators, these manufacturers have significantly greater financial,
technical, manufacturing, sales, marketing and other resources than the
Company and significantly greater name recognition for their existing products
and technologies than the Company.
The Company's current primary direct competitors for spectrum management
solutions are ArrayComm, Inc. and GEC-Marconi Hazeltine Corporation. In
addition, Ericsson recently began a commercial trial of a GSM base station
which utilizes adaptive antenna technology. Other companies, such as Raytheon
E-Systems, Watkins-Johnson Company, Texas Instruments Incorporated and
ARGOSystems, Inc. (a subsidiary of the Boeing Company), offer systems that
utilize digital signaling processing and interference cancellation techniques
to extend cell site coverage and improve call quality. Several companies offer
alternative technologies such as cryogenic filters, tower-top low noise
amplifiers and repeaters that can be used to provide service in network
coverage holes and improve call quality. The Company may also face competition
in the future from new market entrants offering competing technologies.
The Company believes that its ability to compete in the future will depend
in part on a number of competitive factors outside its control, including the
development by others of products that are competitive with the Company's
products and the price at which others offer comparable products. To
45
<PAGE>
be competitive, the Company will need to continue to invest substantial
resources in research and development and sales and marketing. There can be no
assurance that the Company will have sufficient resources to make such
investments or that the Company will be able to make the technological
advances necessary to remain competitive. Accordingly, there can be no
assurance that the Company will be able to compete successfully in the future.
See "Risk Factors--Competition."
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, trade secret, copyright and
trademark protection, nondisclosure agreements and other measures to protect
its proprietary rights. The Company currently has eight issued U.S. patents
and 25 pending U.S. patent applications. The Company's future success will
depend in large part on its ability to obtain patent protection, in the U.S.
and other world markets to defend patents once obtained, to maintain trade
secrets and to operate without infringing upon the patents and proprietary
rights of others. The patent positions of companies in the worldwide wireless
communications industry, including the Company, are generally uncertain and
involve complex legal and factual questions. There can be no assurance that
any issued patents owned by or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will
provide competitive advantages to the Company. Further, there can be no
assurance that patents will issue from any patent applications or that, if
patents do issue, the claims allowed would be sufficiently broad to protect
the Company's technology. In addition, there can be no assurance that patents
issued in the U.S. will receive corresponding patent coverage in foreign
markets or that the Company will pursue similar patent coverage in all foreign
markets.
Patents and patent applications relating to products used in the worldwide
wireless communications industry are numerous and current and potential
competitors and other third parties may have filed or may in the future file
applications for, or may have been issued or in the future may be issued,
patents or may obtain additional proprietary rights relating to products used
or proposed to be used by the Company. The Company may not be aware of all
patents or patent applications that may materially affect the Company's
ability to make, use or sell any current or future products. From time to
time, third parties have asserted patent, copyright and other intellectual
property rights to technologies that are important to the Company. The Company
expects that it will increasingly be subject to infringement claims as the
number of products and competitors in the spectrum management market grows and
the functionality of products overlaps. Third parties may assert infringement
claims against the Company in the future, and such assertions could result in
costly litigation or require the Company to obtain a license to intellectual
property rights of such parties. There can be no assurance that any such
licenses would be available on terms acceptable to the Company, if at all. Any
failure to obtain a license from any third party asserting claims in the
future or defense of any third party lawsuit could have a material adverse
effect on the Company's business and operating results.
The Company also relies on unpatented trade secrets to protect its
proprietary technology, and there can be no assurance that others will not
independently develop or otherwise acquire the same or substantially
equivalent technologies or otherwise gain access to the Company's proprietary
technology or disclose such technology or that the Company can ultimately
protect its rights to such unpatented proprietary technology. Further, third
parties may obtain patent rights to such unpatented trade secrets, which
patent rights could be used to assert infringement claims against the Company.
The Company also relies on confidentiality agreements with its employees,
vendors, consultants and customers to protect its proprietary technology.
There can be no assurance that these agreements will not be breached, that the
Company would have adequate remedies for any breach or that the Company's
trade secrets will not otherwise become known to or be independently developed
by competitors. Failure to obtain or maintain patent and trade secret
protection, for any reason, could have a material adverse effect on the
Company's business and operating results. See "Risk Factors--Uncertainty
Regarding Protection of Intellectual Property."
46
<PAGE>
GOVERNMENT REGULATION
Wireless communications are subject to extensive regulation by foreign and
U.S. laws and international treaties. The Company's systems must conform to
certain international and domestic regulations established to, among other
things, avoid interference among users of frequencies. In order for the
Company's products to be used, regulatory approval must be obtained. In the
United States, the products must be certified by the Federal Communications
Commission before sales to customers may commence. Other countries have
similar regulations that must be complied with before product sales may
commence. This governmental approval process frequently involves substantial
delay which could result in the cancellation, postponement or rescheduling of
products by the Company's customers, which in turn may have a material adverse
effect on the sale of systems by the Company to such customers. The Company
believes that its SpotLight 2000 system currently complies with all applicable
U.S. and foreign regulations in countries in which its sales are material, but
changes in these regulations, the need to comply with regulations in
additional countries in the event of sales into those countries, or a failure
to obtain necessary approvals or permits in connection with sales to service
providers in a country could require the Company to change the features of its
SpotLight 2000 system and thereby incur substantial costs and experience
delays in system installation or operation. Regulatory bodies frequently
promulgate new standards and regulations for wireless communications systems
and products. To the extent that the Company's customers are delayed in
deploying these cellular systems as a result of such new standards or
regulations, the Company could experience delays in orders. These delays could
have a material adverse effect on the Company's business and operating
results.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly affect the Company's
operations by restricting network development efforts by the Company's
customers or end users, making current systems obsolete or increasing the
opportunity for additional competition. Any such regulatory changes could have
a material adverse effect on the Company's business and operating results. The
Company might deem it necessary or advisable to modify its systems to operate
in compliance with such regulations. Such modifications could be expensive and
time-consuming. See "Risk Factors--Government Regulation."
EMPLOYEES
As of June 30, 1998, the Company had 200 employees of which 91 were
primarily engaged in research, development and product management, 34 in
manufacturing, 43 in sales, marketing and customer support and 32 in general
and administration. The Company has no collective bargaining agreement with
its employees and the Company has never experienced a work stoppage. The
Company believes that its employee relations are good. See "Risk Factors--
Management of Growth; New Management Team" and "--Dependence on Attraction and
Retention of Key Personnel."
FACILITIES
The Company is headquartered in Redmond, Washington, where it leases an
aggregate of approximately 96,000 square feet, housing its principal
administrative, sales and marketing, customer support and manufacturing
facilities. The Company's lease for such facility expires on May 31, 2005 and
the Company has an option to renew such lease for two additional five year
terms. In addition, the Company has sales and service offices in Dallas,
Washington, D.C. and Sao Paulo, Brazil that are subject to short-term leases.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
August 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
President, Chief Executive Officer and
Robert H. Hunsberger..... 51 Director
Chief Technical Officer and Chairman of the
Douglas O. Reudink....... 59 Board
Senior Vice President, Chief Financial Officer
Vito E. Palermo.......... 34 and Secretary
Victor K. Liang.......... 46 Senior Vice President, GSM Products Group
Ray K. Butler............ 40 Vice President of Engineering
Martin J. Feuerstein..... 35 Vice President of Advanced Technology
Richard Henderson........ 37 Vice President of Sales and Marketing
Mark P. Johnson.......... 40 Vice President of Manufacturing
Robert N. Shuman......... 37 Vice President of Product Management
Bandel L. Carano(1)...... 37 Director
Bruce C. Edwards(2)...... 44 Director
David R. Hathaway(1)..... 54 Director
Scot B. Jarvis(1)........ 37 Director
Jennifer Gill Roberts(2). 35 Director
David A. Twyver.......... 51 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Robert H. Hunsberger has served as President and Chief Executive Officer of
Metawave since July 1997. From 1995 to July 1997, Mr. Hunsberger served as
Senior Vice President and General Manager of Siemens Business Communications
Systems, Inc., a telecommunications company and a wholly owned subsidiary of
Siemens. From 1981 to 1995, Mr. Hunsberger held various executive positions at
Northern Telecom Inc., a telecommunications company ("Nortel"), including Vice
President of Sales and Marketing of its wireless networks division from 1993
to 1995 and Vice President of Market Development of its wireless networks
division and Vice President of Cellular Systems from 1991 to 1993. Mr.
Hunsberger graduated from the University of Virginia with a B.S. in Commerce
and received an M.B.A. from Arizona State University.
Douglas O. Reudink co-founded Metawave in 1995 and has served as Chief
Technical Officer of Metawave since its inception and as Chairman of the Board
of Directors of Metawave since April 1997. From 1991 to 1995, Dr. Reudink
served as Director of Wireless Planning at US WEST NewVector Group, Inc., a
wireless telecommunications company ("US WEST"). From 1986 to 1991, he served
as Director of Laboratories of the High Technology Center at The Boeing
Company, an aerospace company. Prior to 1986, Dr. Reudink served 20 years at
the Bell Laboratories division of AT&T Corporation, a telecommunications
company ("AT&T"), in various research and management positions. Dr. Reudink
holds more than 30 patents and has published more than 50 technical papers. He
is currently a Fellow of the Institute of Electrical and Electronics
Engineers. Dr. Reudink graduated from Linfield College with a B.S. in Physics
and received a Ph.D. in Mathematics from Oregon State University.
Vito E. Palermo has served as Senior Vice President, Chief Financial Officer
and Secretary of Metawave since January 1997. From 1992 to 1996, Mr. Palermo
served in various positions at Bay Networks, Inc., a networking communications
company, most recently serving as Vice President and Corporate Controller and
previously serving as Director of Technology Finance, Corporate Financial and
Planning Manager, and Manufacturing and Customer Service Controller. From 1986
to 1992, Mr. Palermo held several financial management positions at the
Digital Equipment Corporation, a computer hardware and software company. Mr.
Palermo graduated from California State University at Chico with a B.S. in
Business Administration and received an M.B.A. from St. Mary's College.
48
<PAGE>
Victor K. Liang has served as Senior Vice President, GSM Products Group of
Metawave since July 1998. From 1989 until March 1998, Mr. Liang held various
senior executive positions with Siemens and its subsidiaries, most recently
serving as Managing Director of two Siemens' joint ventures in The People's
Republic of China, Siemens Shanghai Mobile Communications and Siemens Shanghai
Communication Terminals. From 1995 to 1996, Mr. Liang served as Vice President
of Wireless Products Group at Siemens Stromberg-Carlson. From 1994 to 1995, he
served as Senior Director at Siemens A.G., Munich, Germany and from 1989
through 1994 he served as Vice President Product Development of Siemens
Telecommunications Ltd. in Taiwan. Mr. Liang graduated from Chiao Tung
University in Taiwan with a B.S. in Electrical Engineering and from the
business school of Cheng Chih University with a degree in business
administration.
Ray K. Butler has served as Vice President of Engineering of Metawave since
December 1997 and Director of Systems Engineering and Architecture from
January 1997 to December 1997. From 1985 to January 1997, Mr. Butler held
various management positions at the Bell Laboratories division of AT&T (which
division became part of Lucent in 1996), most recently serving as Technical
Manager of the Cell Site HW Systems Engineering Group. Mr. Butler graduated
from Brigham Young University with a B.S. in Electrical Engineering and
received an M.S. in Electrical Engineering from Polytechnic University.
Martin J. Feuerstein has served as Vice President of Advanced Technology of
Metawave since August 1998 and Director of Research from March 1997 to July
1998. From 1995 to March 1997, Mr. Feuerstein served as Technical Manager at
Lucent. From 1992 to 1995, he served as a Senior Member Technical Staff at U S
WEST. Mr. Feuerstein graduated from Vanderbilt University with a B.E. in
Electrical Engineering and received an M.S. in Electrical Engineering from
Northwestern University and a Ph.D. in Electrical Engineering from Virginia
Polytechnic Institute.
Richard Henderson has served as Vice President of Sales and Marketing of
Metawave since December 1997. From 1984 to 1997, Mr. Henderson held various
sales and marketing positions at Nortel, most recently serving as Vice
President of Marketing Operations from 1996 to 1997 and Sales Account Director
from 1992 to 1995. Mr. Henderson graduated from Texas A&M University with a
B.S. in Industrial Engineering and received an M.B.A. from the University of
Dallas.
Mark P. Johnson has served as Vice President of Manufacturing of Metawave
since 1996 and as Director of Operations from 1995 to 1996. From 1994 to 1995,
Mr. Johnson was Director of Manufacturing at NeoPath, Inc., a medical products
company. From 1989 to 1994, he served in various management positions at
Motorola Inc., a telecommunications company, most recently serving as
Operations Manager. From 1980 to 1988, Mr. Johnson held various management
positions at Intermec Technologies Corporation, a computer hardware company,
most recently serving as Manufacturing Manager. Mr. Johnson graduated from the
University of Washington with a B.S. in Mechanical Engineering.
Robert N. Shuman has served as Vice President of Product Management of
Metawave since December 1997 and Director of Product Management from March
1997 to December 1997. From 1992 to March 1997, Mr. Shuman held various
positions at Lucent, most recently serving as Product Team Leader for CDMA.
Mr. Shuman graduated from Tufts University with a B.S. in Mechanical
Engineering and received an M.S. in Mechanical Engineering from Stanford
University.
Bandel L. Carano has served as a director of Metawave since 1995. Mr. Carano
has been a general partner of Oak Investment Partners, a venture capital firm
("Oak"), since 1987. Mr. Carano currently serves as a member of the Investment
Advisory Board of the Stanford University Engineering Venture Fund. Mr. Carano
also serves as a member of the Board of Directors of Netopia, Inc., Polycom,
Inc. and PulsePoint Communications, as well as several private companies. Mr.
Carano graduated from Stanford University with a B.S. in Electrical
Engineering and received an M.S. in Electrical Engineering from Stanford
University.
Bruce C. Edwards has served as a director of Metawave since May 1998. Mr.
Edwards has served as President, Chief Executive Officer and a member of the
Board of Directors of Powerwave since 1996.
49
<PAGE>
Mr. Edwards was Executive Vice President, Chief Financial Officer and a
director of AST Research, Inc., a personal computer company ("AST"), from 1994
to December 1995 and Senior Vice President of Finance and Chief Financial
Officer of AST from 1988 to 1994. Mr. Edwards also serves as a member of the
Board of Directors of Diamond Multimedia Systems, Inc. and HMT Technology
Corporation. Mr. Edwards graduated from Rider University with a B.S. in
Commerce and received an M.B.A. from the New York Institute of Technology.
David R. Hathaway has served as a director of Metawave since 1995. Mr.
Hathaway has been a general partner of the venture capital firms Venrock
Associates ("Venrock") and Venrock Associates II, L.P. since 1980 and 1995,
respectively. Mr. Hathaway serves as a member of the Board of Directors of
several private companies. Mr. Hathaway graduated from Yale University with a
B.A. in American Studies.
Scot B. Jarvis has served as a director of Metawave since February 1998. Mr.
Jarvis is a co-founder and managing member of Cedar Grove Partners, LLC, a
privately owned investment company. From 1994 to 1997, Mr. Jarvis was
Executive Vice President of Nextlink Communications, Inc., a wireless service
operator ("Nextlink"). From 1994 to 1996, Mr. Jarvis was Vice President-
Operations of Eagle River, Inc., an investment company. From 1985 to 1994, Mr.
Jarvis held several management positions at AT&T Wireless Services, Inc.,
formerly McCaw Cellular Communications Inc., a wireless communications company
("McCaw Cellular"), most recently serving as Vice President of McCaw
Development Corporation from 1993 to 1994 and Vice President of McCaw Cellular
from 1985 to 1994. Mr. Jarvis serves as a member of the Board of Directors of
Nextlink and PulsePoint Communications. Mr. Jarvis graduated from the
University of Washington with a B.A. in Business Administration.
Jennifer Gill Roberts has served as a director of Metawave since 1995. Ms.
Roberts has been a general partner of Sevin Rosen Funds, a venture capital
firm ("Sevin Rosen"), since 1994. From 1993 to 1994, she was a senior
associate at Technology Venture Investors, a venture capital firm. Ms. Roberts
serves as a member of the Board of Directors of several private companies. Ms.
Roberts graduated from Stanford University with a B.S. in Electrical
Engineering and received an M.S. in Electrical Engineering from the University
of Texas and an M.B.A. from Stanford University.
David A. Twyver has served as a director of Metawave since May 1998. From
1996 to 1997, Mr. Twyver served as Chief Executive Officer of Teledesic
Corporation, a satellite telecommunications company. From 1984 to 1996, Mr.
Twyver served in several management positions at Nortel, most recently serving
as President of the Wireless Networks division from 1993 to 1996. Mr. Twyver
serves as a member of the Board of Directors of Innova Corporation. Mr. Twyver
graduated from the University of Saskatchewan with a B.S. in Mathematics and
Physics.
BOARD COMPOSITION
The Company's Bylaws currently provide for a Board of Directors consisting
of nine members. All directors hold office until the next annual meeting of
stockholders of the Company and until their successors have been duly elected
and qualified. The officers of the Company are appointed annually and serve at
the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The members of the Audit Committee are Mr. Edwards and Ms. Roberts. The
Audit Committee reviews the results and scope of the audit and other services
provided by the Company's independent accountants.
The members of the Compensation Committee are Messrs. Carano, Hathaway and
Jarvis. The Compensation Committee reviews and approves the compensation and
benefits for the Company's executive officers, administers the Company's stock
purchase and stock option plans and makes recommendations to the Board of
Directors regarding such matters.
50
<PAGE>
BOARD COMPENSATION
Except for reimbursement for reasonable travel expenses relating to
attendance at Board meetings and the grant of stock options, directors are not
compensated for their services as directors, except for Messrs. Jarvis,
Edwards and Twyver who each receive $1,000 for each Board meeting attended and
$500 for each committee meeting attended. Directors who are employees of the
Company are eligible to participate in the 1995 Stock Option Plan, the 1998
Stock Option Plan and the Purchase Plan. Directors who are not employees of
the Company are eligible to participate in the Directors' Plan. See "Stock
Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of Messrs. Carano, Hathaway or Jarvis has at any time been an officer
or employee of the Company or any subsidiary of the Company. See "Certain
Relationships and Related Transactions" for a description of certain
transactions and relationships between the Company and Messrs. Carano,
Hathaway and Jarvis and entities affiliated with them.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by the Delaware General Corporation Law (the
"DGCL"). The DGCL provides that a director of a corporation will not be
personally liable for monetary damages for breach of such individual's
fiduciary duties as a director except for liability (i) for any breach of such
director's duty of loyalty to the Company or to its stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or
a knowing violation of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases or redemptions or (iv) for any transaction from
which a director derives an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its other employees and agents to the fullest
extent permitted by law. The Company believes that indemnification under its
Bylaws covers at least negligence and gross negligence on the part of an
indemnified party. The Company's Bylaws also permit the Company to advance
expenses incurred by an indemnified party in connection with the defense of
any action or proceeding arising out of such party's status or service as a
director, officer, employee or other agent of the Company upon an undertaking
by such party to repay such advances if it is ultimately determined that such
party is not entitled to indemnification, such advancement of expenses is
subject to authorization by the Board of Directors in the case of non-
executive officers, employees and agents.
The Company has entered into separate indemnification agreements with each
of its directors and officers. These agreements require the Company, among
other things, to indemnify such director or officer against expenses
(including attorney's fees), judgments, fines and settlements (collectively,
"Liabilities") paid by such individual in connection with any action, suit or
proceeding arising out of such individual's status or service as a director or
officer of the Company (other than Liabilities arising from willful misconduct
or conduct that is knowingly fraudulent or deliberately dishonest) and to
advance expenses incurred by such individual in connection with any proceeding
against such individual with respect to which such individual may be entitled
to indemnification by the Company. The Company believes that its Certificate
of Incorporation and Bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
The Company also maintains directors' and officers' liability insurance.
At present the Company is not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of the Company where
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
51
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded to, earned by,
or paid to the Company's Chief Executive Officer, the Company's four other
most highly compensated executive officers, the Company's former Chief
Executive Officer and two other former officers whose total cash compensation
exceeded $100,000 during the year ended December 31, 1997 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
---------------- -----------------------
SECURITIES
UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($)(1) ($)(2) (#) ($)(3)
--------------------------- -------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Robert H. Hunsberger, President and
Chief Executive Officer.............. $ 90,751 $54,167 900,000 $ 50,660
Douglas O. Reudink, Chairman and Chief
Technology Officer................... 161,545 14,100 -- 2,466
Vito E. Palermo, Senior Vice President
and Chief Financial Officer.......... 136,294 15,000 200,000 169,633
Ray K. Butler, Vice President of
Engineering.......................... 108,238 6,900 100,000 40,322
Robert N. Shuman, Vice President of
Product Management................... 67,649 5,600 100,000 60,129
Thomas Huseby, former Chief Executive
Officer(4)........................... 7,431 -- -- 121,807
James J. Daley, former Vice
President(4)......................... 107,953 -- -- 137,318
Harold Carey, former Vice
President(4)......................... 110,001 32,356 -- 63,026
</TABLE>
- --------
(1) Mr. Hunsberger's employment began on July 28, 1997 and his base salary on
an annualized basis was $220,000. Mr. Palermo's employment began on
January 20, 1997 and his base salary on an annualized basis, at year end,
was $160,000. Mr. Butler's employment began on January 27, 1997 and his
base salary on an annualized basis, at year-end, was $120,000. Mr.
Shuman's employment began on March 31, 1997 and his base salary on an
annualized basis, at year-end, was $120,000.
(2) Bonus represents the amount earned by the employee in 1997.
(3) Consists of relocation and temporary living expenses and life insurance
premiums paid by the Company, and with respect to Mr. Huseby and Mr.
Daley, includes severance payments of $121,281 and $97,268, respectively.
(4) Mr. Huseby resigned as Chief Executive Officer of the Company on January
7, 1997. Mr. Daley resigned from the Company on August 29, 1997. Mr. Carey
resigned from the Company on March 17, 1998.
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<PAGE>
The following table shows certain information regarding stock options
granted to the Named Executive Officers during the year ended December 31,
1997. No stock appreciation rights were granted to these individuals during
the year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SHARES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME(1) GRANTED(2) IN 1997(3) SHARE DATE 5% 10%
------- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Hunsberger.... 900,000 44.3% $0.62 7/28/07 $2,374,010 $4,110,736
Vito E. Palermo......... 135,000 6.6% $0.62 1/20/07 52,638 133,396
65,000 3.2% $0.62 5/22/07 171,456 296,887
Ray K. Butler........... 14,000 0.7% $0.62 1/27/07 5,459 13,834
18,000 0.9% $0.62 4/01/07 18,160 35,527
68,000 3.3% $3.36 12/16/07 143,690 364,138
Robert N. Shuman........ 15,000 0.7% $0.62 4/01/07 15,133 29,606
10,000 0.5% $1.20 10/21/07 20,578 39,875
75,000 3.7% $3.36 12/16/07 158,481 401,623
</TABLE>
- --------
(1) None of Dr. Reudink and Messrs. Huseby, Daley and Carey received any stock
option grants during the year ended December 31, 1997.
(2) These stock options, which were granted under the 1995 Stock Option Plan,
become vested at a rate of 25% of the total number of shares of Common
Stock subject to the option on the first anniversary of the date of grant,
and 1/48th of the total number of shares subject to the grant each month
thereafter, as long as the optionee remains an employee with, consultant
to, or director of the Company. The exercise price per share of each
option was equal to the fair market value on the date of grant as
determined by the Board of Directors at such time.
(3) Based on an aggregate of 2,031,268 options granted by the Company during
the year ended December 31, 1997 to employees of the Company, including
the Named Executive Officers.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
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<PAGE>
OPTION EXERCISES AND HOLDINGS
There were no option exercises by the Named Executive Officers during fiscal
year 1997 other than an exercise by Mr. Daley of options to purchase 49,327
shares with a value realized of $41,928. The following table provides certain
summary information concerning the shares of Common Stock represented by
outstanding stock options held by each of the Named Executive Officers as of
December 31, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
DECEMBER 31, DECEMBER 31,
1997(2) 1997 ($)(3)
------------ -------------------
NAME(1) VESTED UNVESTED VESTED UNVESTED
------- ------ -------- -------- ----------
<S> <C> <C> <C> <C>
Robert H. Hunsberger....................... -- 900,000 -- $8,892,000
Douglas O. Reudink......................... -- -- -- --
Vito E. Palermo............................ -- 200,000 -- $1,976,000
Ray K. Butler.............................. -- 100,000 -- $ 801,680
Robert N. Shuman........................... -- 100,000 -- $ 776,700
Harold Carey............................... 35,578 78,272 $351,511 $ 773,327
</TABLE>
- --------
(1) As a result of his separation from the Company, all unexercised options
held by Mr. Daley had expired as of December 31, 1997. Mr. Huseby did not
hold any options as of December 31, 1997.
(2) All options to be granted under the 1998 Stock Option Plan and all options
granted after July 15, 1997 under the 1995 Stock Option Plan may be
exercised immediately upon grant and prior to full vesting, subject to the
optionee's entering into a restricted stock purchase agreement with the
Company with respect to any unvested shares. Under such agreement, the
optionee grants the Company an option to repurchase any unvested shares at
their original purchase price in the event the optionee's employment or
consulting relationship with the Company is terminated. The Company's
right of repurchase lapses as the shares vest in a series of equal monthly
or annual installments in accordance with the vesting schedule of the
exercised options.
(3) Based on an assumed initial public offering price of $10.50 per share,
minus the exercise price, multiplied by the number of shares underlying
the option.
The Company has not granted options to purchase Common Stock to any of the
Named Executive Officers in 1998.
SEVERANCE ARRANGEMENTS
The Company has entered into severance arrangements with Douglas O. Reudink,
Chief Technical Officer, Robert H. Hunsberger, President and Chief Executive
Officer, Vito E. Palermo, Senior Vice President and Chief Financial Officer,
Richard Henderson, Vice President of Sales and Marketing and Victor K. Liang,
Senior Vice President, GSM Products Group.
On July 7, 1995, in connection with the Series A Preferred Stock financing,
the Company entered into an agreement with Dr. Reudink which provides that if
the Company were to terminate his employment without cause after July 7, 1996,
the Company would be obligated to make a lump-sum payment to Dr. Reudink equal
to six months' of his then-current base salary and to provide benefits for six
months following termination. In connection with this agreement, Dr. Reudink
entered into a one-year non-competition agreement effective upon the
termination of his employment with the Company.
On June 27, 1997, in connection with the employment of Mr. Hunsberger, the
Company entered into an arrangement with Mr. Hunsberger which provides that if
the Company were to terminate his employment without cause, the Company would
be obligated to make a lump-sum payment to Mr. Hunsberger equal to twelve
months' of his then-current base salary and provide benefits for twelve months
following termination.
On July 23, 1997, in connection with the employment of Mr. Palermo, the
Company entered into an agreement with Mr. Palermo which provides that if the
Company were to terminate his employment
54
<PAGE>
without cause after January 20, 1998, the Company would be obligated to make a
lump-sum payment to Mr. Palermo equal to six months' of his then-current base
salary and 50% of his target bonus, if any, for the year in which the
termination occurs and to provide benefits for six months following
termination. In addition, Mr. Palermo's stock options would continue to vest
in accordance with the Company's 1995 Stock Option Plan, as amended from time
to time, during the period that Mr. Palermo would receive continued benefits
from the Company. Mr. Palermo's voluntary resignation will not constitute
termination without cause unless Mr. Palermo were to resign for good reason,
in which case the Company would be obligated to make a lump-sum payment to Mr.
Palermo equal to nine months' of his then-current base salary and to pay for
the reasonable cost of relocating Mr. Palermo back to his primary residence.
If the Company were to terminate Mr. Palermo within six months following
certain changes in control of the Company, the Company would pay to Mr.
Palermo an amount equal to twelve months' of his then-current base salary and
100% of his target bonus for the year in which the change in control
transaction occurs. In addition, Mr. Palermo's outstanding unvested stock
options would vest during such period in accordance with the Company's stock
option plan as in effect at that time.
On October 29, 1997, in connection with the employment of Mr. Henderson, the
Company entered into an agreement with Mr. Henderson which provides that if
the Company were to terminate his employment without cause, the Company would
be obligated to make a lump-sum payment to Mr. Henderson equal to six months'
of his then-current base salary.
On July 23, 1998, in connection with the employment of Mr. Liang, the
Company entered into an agreement with Mr. Liang that provides that if the
Company were to terminate his employment without cause within the first two
years of his employment, the Company would be obligated to make a lump-sum
payment to Mr. Liang equal to six months' of his then-current base salary.
STOCK PLANS
1998 Stock Option Plan and 1995 Third Amended and Restated Stock Option
Plan. The 1998 Stock Option Plan (the "1998 Stock Option Plan") was adopted by
the Board of Directors in May 1998 and approved by the stockholders of the
Company in September 1998. A total of 850,000 shares of Common Stock has been
reserved for issuance under the 1998 Stock Option Plan, and, as of June 30,
1998, all such shares remained available for grant under the 1998 Stock Option
Plan. On the first trading day of each of the five calendar years beginning in
1999 and ending in 2003, the number of shares reserved for issuance under the
1998 Stock Option Plan shall automatically be increased by an amount equal to
three percent (3%) of the Company's outstanding Common Stock, up to a maximum
of 1,000,000 shares in any calendar year, or such lower amount as determined
by the Board of Directors.
The 1995 Third Amended and Restated Stock Option Plan (the "1995 Stock
Option Plan") was originally adopted by the Board of Directors in August 1995
and was approved by the stockholders of the Company in January 1996. The 1995
Stock Option Plan was amended by the Board of Directors in December 1995,
February 1997, July 1997 and May 1998 and such amendments were approved by the
stockholders in January 1996, February 1997 and July 1997. A total of
4,150,000 shares of Common Stock has been reserved for issuance under the 1995
Stock Option Plan, and, as of June 30, 1998, 435,639 options remained
available for grant under such plan.
Both the 1998 Stock Option Plan and the 1995 Stock Option Plan provide for
the grant to employees of the Company (including officers and employee
directors) of "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") and for the grant
of nonstatutory stock options to employees, officers, directors (including
non-employee directors) and consultants of the Company. To the extent an
optionee would have the right in any calendar year to exercise for the first
time one or more incentive stock options for shares having an aggregate fair
market value (under all plans of the Company and determined for each share as
of the date the option to purchase
55
<PAGE>
the share was granted) in excess of $100,000, any such excess options shall be
treated as nonstatutory options.
Both the 1998 Stock Option Plan and the 1995 Stock Option Plan are
administered by the Board of Directors or a committee of the Board of
Directors (the "Administrator"). The Administrator determines the terms of
options granted under the 1998 Stock Option Plan and 1995 Stock Option Plan,
including the number of shares subject to the option, exercise price, term and
exercisability. The exercise price of all incentive stock options granted
under either the 1998 Stock Option Plan or 1995 Stock Option Plan must be at
least equal to the fair market value of the Common Stock of the Company on the
date of grant. The exercise price of any incentive stock option granted to an
optionee who owns stock representing more than 10% of the voting power of the
Company's outstanding capital stock (a "10% Stockholder") must be at least
equal to 110% of the fair market value of the Common Stock on the date of
grant. The exercise price of all nonstatutory stock options cannot be less
than 85% of the fair market value of the Common Stock of the Company on the
date of grant, except in the case of 10% Stockholders, in which case the
exercise price cannot be less than 110% of the fair market value of the Common
Stock. Payment of the exercise price, subject to approval by the
Administrator, may be made in cash, check, promissory note, delivery of shares
of the Company's Common Stock, subject to certain conditions, net exercise of
the option, delivery of an irrevocable subscription agreement that obligates
the option holder to take and pay for the shares issuable upon exercise not
more than 12 months after the date of delivery of the subscription agreement,
any combination of the foregoing or other consideration approved by the
Administrator. The term of options granted under either the 1998 Stock Option
Plan or the 1995 Stock Option Plan may not exceed 10 years; provided, however,
that the term of an incentive stock option granted to a 10% stockholder may
not exceed five years. An option may not be transferred by the optionee other
than by will or the laws of descent or distribution. Each option may be
exercised during the lifetime of the optionee only by such optionee or by a
permitted transferee. Options granted to each employee under either the 1998
Stock Option Plan or the 1995 Stock Option Plan generally become exercisable
at the rate of 25% of the total number of shares subject to the options after
the first anniversary following the date of grant, with 1/48th vesting monthly
thereafter.
The Board of Directors has the authority to amend or terminate both the 1998
Stock Option Plan and the 1995 Stock Option Plan as long as such action does
not adversely affect any outstanding option and provided that, to the extent
necessary and desirable to comply with Rule 16b-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or Section 422 of the Code,
stockholder approval shall be obtained for any amendment to either the 1998
Stock Option Plan or the 1995 Stock Option Plan. If not terminated earlier,
the 1998 Stock Option Plan will terminate in 2008 and the 1995 Stock Option
Plan will terminate in 2007.
With respect to all options granted under the 1998 Stock Option Plan and
those options granted on or after February 12, 1997 under the 1995 Stock
Option Plan, in the event of certain changes in control of the Company (a
"Corporate Transaction"), an optionee is, provided such optionee is employed
at the time such Corporate Transaction occurs, entitled to accelerated vesting
of one year if such optionee has been employed by the Company less than two
years or accelerated vesting of two years if such optionee has been employed
by the Company for two years or more as of the date of the Corporate
Transaction; provided, however, this acceleration shall not occur if the
Administrator determines that the Board, the acquiring person or the surviving
corporation, as the case may be, has made equitable and appropriate provision
for the assumption of existing options or substitution of new options on terms
which are equivalent to the foregone option.
The Board has the discretion to authorize the issuance of unvested shares of
Common Stock pursuant to the exercise of all stock options granted under the
1998 Stock Option Plan and any stock options granted after July 15, 1997 under
the 1995 Stock Option Plan. If the optionee ceases to be employed by or
provide services to the Company, all shares of Common Stock issued on exercise
of a stock option which are unvested at the time of cessation shall be subject
to repurchase by the Company at the exercise
56
<PAGE>
price paid for such shares. The terms and conditions upon which the repurchase
rights are exercisable by the Company are determined by the Board and set
forth in the agreement evidencing such right. The Board has discretionary
authority to cancel the Company's outstanding repurchase rights with respect
to the shares purchased or purchasable under an option granted pursuant to
such plans. In the event of a Corporate Transaction, if vesting of the options
accelerates, the repurchase rights of the Company with respect to shares
previously acquired on exercise of options granted under such plans shall
terminate.
1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
May 1998 and approved by the stockholders in September 1998. A total of
500,000 shares of Common Stock has been reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section
423 of the Code, generally will be implemented in a series of offering periods
of 12 months duration with new offering periods (other than the first offering
period) commencing on or about February 1 and August 1 of each year. Each
offering period will consist of two consecutive purchase periods of six months
duration, with the last day of each period being designated a purchase date.
However, the first such offering period is expected to commence on the date of
this offering and continue through July 31, 1999, with the first purchase date
occurring on January 31, 1999, and subsequent purchase dates to occur every
six months thereafter. The Purchase Plan will be administered by the Board of
Directors or by a committee appointed by the Board of Directors. Employees
(including officers and employee directors) of the Company, or of any
subsidiary designated by the Board of Directors, are eligible to participate
if they are employed by the Company or any such subsidiary for at least 20
hours per week and more than five months per year. The Purchase Plan permits
eligible employees to purchase Common Stock through payroll deductions, which
may not exceed 15% of an employee's compensation, at a price equal to the
lower of 85% of the fair market value of the Company's Common Stock at the
beginning of the offering period or the purchase date; provided, however, an
employee shall not be permitted to purchase more than 2,500 shares of Common
Stock in any single purchase period. If the fair market value of the Common
Stock on a purchase date is less than the fair market value at the beginning
of the offering period, a new 12-month offering period will automatically
begin on the first business day following the purchase date with a new fair
market value. Employees may end their participation in the offering at any
time during the offering period, and an employee's participation ends
automatically on termination of employment with the Company. In addition,
participants may decrease their level of payroll deductions once during an
offering period.
The Purchase Plan provides that in the event of a merger of the Company with
or into another corporation or a sale of substantially all of the Company's
assets, each right to purchase Common Stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation unless
the Board of Directors shortens the offering period so that employees' rights
to purchase stock under the Purchase Plan are exercised prior to the merger or
sale of assets. On the first trading day of each of the five calendar years
beginning in 1999 and ending in 2003, the number of authorized shares shall
automatically increase by an amount equal to two percent (2%) of the Company's
outstanding Common Stock, up to a maximum of 375,000 shares in any calendar
year, or such lower amount as determined by the Board of Directors. The Board
of Directors has the power to amend or terminate the Purchase Plan as long as
such action does not adversely affect any outstanding rights to purchase stock
thereunder. If not terminated earlier, the Purchase Plan will have a term of
20 years.
1998 Directors' Stock Option Plan. The 1998 Directors' Stock Option Plan
(the "Directors' Plan") was adopted by the Board of Directors in February 1998
and approved by the stockholders on April 20, 1998. A total of 300,000 shares
of Common Stock has been reserved for issuance under the Directors' Plan and
as of June 30, 1998, 225,000 options remained available for grant under such
plan. The Directors' Plan provides for the automatic grant of nonstatutory
stock options to nonemployee directors of the Company. The Directors' Plan is
designed to work automatically without administration; however, to the extent
administration is necessary, it will be performed by the Board of Directors.
57
<PAGE>
The Directors' Plan provides that each person who becomes a nonemployee
director of the Company after the date of this offering shall be granted a
nonstatutory stock option to purchase 25,000 shares of Common Stock (the
"First Option") on the date on which the optionee first becomes a nonemployee
director of the Company. However, for individuals already serving as
nonemployee directors as of the date of this offering, the First Option shall
be an option to purchase 18,000 shares of Common Stock, except in the case of
Messrs. Jarvis, Edwards and Twyver who were granted options to purchase
25,000 shares of Common Stock on February 12, 1998, May 19, 1998 and May 19,
1998, respectively. Thereafter, on the date of each annual meeting of the
Company's stockholders following which a nonemployee director is serving on
the Board of Directors, each nonemployee director (including directors who
were not granted a First Option prior to the date of such annual meeting)
shall be granted an option to purchase 7,000 shares of Common Stock (a
"Subsequent Option") if, on such date, he or she has served on the Company's
Board of Directors for at least six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order, or to a family trust or
family limited partnership established by the optionee, a member of optionee's
immediate family or to a partnership or other entity of which optionee is a
general partner or plays a similar role. Each option is exercisable, during
the lifetime of the optionee, only by such optionee or by a permitted
transferee. Provided an individual remains a director, the Directors' Plan
provides that each First Option and Subsequent Option shall become exercisable
in installments cumulatively as to 25% of the total number of shares subject
to the Option on the first anniversary of the date of grant of the option and
1/48th of the total number of shares subject to the option each month
thereafter. The exercise price of all stock options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option. Options granted
under the Directors' Plan have a term of ten years.
In the event of a Corporate Transaction, an optionee is, provided such
optionee continues to serve as a director until such Corporate Transaction
occurs, entitled to accelerated vesting of one year if such optionee has been
a director of the Company less than two years or accelerated vesting of two
years if such optionee has been a director of the Company for more than two
years as of the date of the Corporate Transaction; provided, however, this
acceleration shall not occur if the Board of Directors determines that the
acquiring person or the surviving corporation, as the case may be, has made
equitable and appropriate provision for the assumption or substitution of new
options on terms which are equivalent to the foregone option. The Board of
Directors may amend or terminate the Directors' Plan; provided, however, that
no such action may adversely affect any outstanding option, and the provisions
regarding the grant of options under the plan may be amended only once in any
six-month period, other than to comport with changes in the Code. If not
terminated earlier, the Directors' Plan will have a term of ten years.
401(k) Plan. The Company maintains a 401(k) plan that covers all employees
who satisfy certain eligibility requirements relating to minimum age, length
of service and hours worked. Under the profit-sharing portion of the plan, the
Company may make an annual contribution for the benefit of eligible employees
in an amount determined by the Board of Directors. The Company has not made
any such contribution to date. Under the 401(k) plan, eligible employees may
make pretax elective contributions of up to 15% of their compensation, subject
to maximum limits on contributions prescribed by law.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SALES OF EQUITY SECURITIES
Certain stock option grants to directors and executive officers of the
Company are described herein under the caption "Management--Executive
Compensation."
Since July 1995, the Company has issued, in private placement transactions,
shares of Preferred Stock as follows: an aggregate of 5,500,000 shares of
Series A Preferred Stock at $1.00 per share beginning in July 1995, an
aggregate of 2,740,743 shares of Series B Preferred Stock at $3.375 per share
beginning in May 1996, an aggregate of 2,491,880 shares of Series C Preferred
Stock at $6.16 per share beginning in October 1996 and an aggregate of
2,397,727 shares of Series D Preferred Stock at $8.00 per share in August
1997. Upon completion of this offering, each outstanding share of Series A,
Series B, Series C and Series D Preferred Stock will convert into one share of
the Company's Common Stock.
Listed below are those directors, executive officers and five percent
stockholders who have made equity investments in the Company during the last
three fiscal years. The Company believes that the shares issued in these
transactions were sold at the then fair market value and that the terms of
these transactions were no less favorable than the Company could have obtained
from unaffiliated third parties.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
COMMON PREFERRED PREFERRED PREFERRED PREFERRED AGGREGATE
INVESTOR(1) STOCK STOCK STOCK STOCK STOCK CONSIDERATION
----------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Entities affiliated with
Venrock Associates(2).. -- 1,833,334 888,889 324,675 182,790 $ 8,295,652
Entities affiliated with
Oak Investment
Partners(3)............ -- 1,833,333 888,889 324,675 182,790 $ 8,295,651
Entities affiliated with
The Sevin Rosen
Funds(4)............... -- 1,833,333 888,889 324,675 182,790 $ 8,295,651
Entities affiliated with
Worldview Technology
Partners............... -- -- -- 811,688 46,825 $ 5,374,598
Entities affiliated with
Bowman Capital
Management............. -- -- -- -- 1,250,000 $10,000,000
Douglas O. Reudink...... 1,650,000 -- -- -- -- $ 16,500
Jennifer Gill
Roberts(4)............. -- 5,000 7,408 -- -- $ 30,002
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been aggregated. See
"Principal Stockholders."
(2) David R. Hathaway, a director, is a general partner of Venrock.
(3) Bandel L. Carano, a director, is a general partner of Oak.
(4) Jennifer Gill Roberts, a director, is a general partner of the Sevin
Rosen. In addition to the equity investment made by entities affiliated
with Sevin Rosen, (i) Ms. Roberts purchased 5,000 shares of Series A
Preferred Stock and 7,408 shares of Series B Preferred Stock for her own
account and (ii) Steven L. Domenik, a general partner of Sevin Rosen,
purchased 5,926 shares of Series B Preferred Stock for his own account.
Holders of Preferred Stock and certain holders of Common Stock are entitled
to certain registration rights with respect to the Common Stock issued or
issuable upon conversion of the Preferred Stock. See "Description of
Securities--Registration Rights."
On May 2, 1997, Thomas S. Huseby, the former Chief Executive Officer of the
Company, sold a total of 200,000 shares of Common Stock to entities affiliated
with Sevin Rosen, Venrock and Oak at a price per share of $2.00. Sevin Rosen
and Venrock each purchased 66,666 shares of Common Stock and Oak purchased
66,668 shares of Common Stock. On May 28, 1997, Douglas O. Reudink, Chairman
of the Board and Chief Technical Officer of the Company, sold 55,000 shares of
Common Stock to each of Sevin Rosen, Venrock and Oak at a price per share of
$2.00.
On October 22, 1997, the Company made an unsecured loan of $75,000 to Vito
E. Palermo, Senior Vice President and Chief Financial Officer of the Company
pursuant to a Promissory Note bearing interest at a rate of 5.50% per annum.
Fifty thousand dollars of the principal amount of the loan is to be forgiven
59
<PAGE>
over a three-year period provided that Mr. Palermo remains employed with the
Company with the remaining balance of $25,000 plus interest due on the earlier
of October 22, 2000 or the date his employment terminates. The outstanding
indebtedness under the Promissory Note as of August 31, 1998 was $64,330. On
October 28, 1997, the Company made a second loan of $162,500 to Mr. Palermo
pursuant to a Secured Promissory Note bearing interest at a rate of 5.50% per
annum, which is secured by a second deed of trust on his principal residence
and a pledge of up to 50,000 shares of Common Stock held by Mr. Palermo. The
secured loan is payable in full on October 28, 2002 or earlier based upon
certain events specified in the loan agreement. The outstanding indebtedness
under the Secured Promissory Note as of August 31, 1998 was $169,576.
On January 10, 1998, the Company repurchased 137,775 shares of Common Stock
from Mr. Huseby for nominal consideration pursuant to the Company's right of
repurchase set forth in a Stock Repurchase Agreement dated July 7, 1995 by and
between the Company and Mr. Huseby. The Stock Repurchase Agreement specified
that the price per share to be paid by the Company was to be equal to the
price per share paid by Mr. Huseby for the shares. The shares repurchased by
the Company were subsequently canceled. In addition, the Company caused Mr.
Huseby to surrender 100,000 shares of Common Stock in 1996 for no
consideration.
In December 1997, the Company determined that it would discontinue the
Company's Network Services division. In March 1998, the Company sold the
assets of this division for an aggregate purchase price of $78,000 to Advanced
Wireless Engineering ("AWE"), a company that was majority-owned by Mr. Harold
Carey, who at the time was the Company's Vice President, Network Services. Mr.
Carey resigned from the Company in March 1998 to run AWE on a full time basis.
On April 3, 1998, Dr. Reudink sold 30,770 shares of Common Stock at a price
of $6.50 per share to Cedar Grove Investment L.L.C., a limited liability
corporation which is managed by Mr. Scot Jarvis, a director of the Company. On
April 17, 1998, Dr. Reudink sold 20,000 shares of Common Stock at a price of
$6.50 per share to Spinnaker Offshore Founders Fund, an entity affiliated with
Bowman Capital Management and related entities which are holders of Series D
Preferred Stock.
On April 28, 1998, the Company issued an aggregate principal amount of $29.0
million 13.75% Senior Secured Bridge Notes due April 28, 2000 to certain
institutional investors, including Powerwave, whose chief executive officer is
a director of the Company. On April 28, 1999 and at the end of each 180-day
period thereafter until the 13.75% Senior Secured Bridge Notes are repaid in
full, the interest rate will increase by 200 basis points up to a maximum of
18.0%. In addition, the Company issued Note Warrants to purchase an aggregate
of 537,500 shares of Series D Preferred Stock at a purchase price of $0.01 per
share. The Note Warrants expire on April 28, 2000. Pursuant to the terms of
the 13.75% Senior Secured Bridge Notes, upon the closing of this offering, the
Company is obligated to repay one-half of the aggregate principal amount of
the 13.75% Senior Secured Bridge Notes outstanding, together with accrued but
unpaid interest thereon. The remaining outstanding 13.75% Senior Secured
Bridge Notes are redeemable at the Company's option at any time. On or before
the closing of this offering, the Company has the right to redeem all of the
13.75% Senior Secured Bridge Notes and Note Warrants and to repurchase any
Series D Preferred Stock issued upon exercise of the Note Warrants for an
aggregate redemption and repurchase price of $40,600,000. Powerwave purchased
$2,500,000 in aggregate principal amount of the 13.75% Senior Secured Bridge
Notes and was issued a Note Warrant to purchase up to an aggregate of 46,336
shares of Series D Preferred Stock at an exercise price of $0.01 per share.
Upon the closing of this offering, the Note Warrants will automatically
convert into warrants to purchase up to an aggregate of 537,500 shares of the
Company's Common Stock at an exercise price of $0.01 per share.
Powerwave is currently the Company's sole supplier of linear power
amplifiers, a component in the Company's products. From January 1, 1997 to
June 30, 1998, the Company purchased a total of $8,015,545 of linear power
amplifiers and related components from Powerwave. Pursuant to a supply
agreement with Powerwave, Powerwave will manufacture and sell to the Company
100% of the Company's requirements for linear power amplifiers that Powerwave
manufactures. The term of the agreement is 18 months.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of June 30, 1998, and as
adjusted to reflect the sale of Common Stock offered hereby, as to (i) each
person (or group of affiliated persons) known by the Company to own
beneficially more than 5% of the outstanding shares of the Company's Common
Stock (a "5% Stockholder"), (ii) each of the Company's directors, (iii) each
of the Named Executive Officers, and (iv) all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY
OWNED(1)
SHARES -----------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OWNED(1) OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
Oak Investment Partners(2).................... 3,351,355 20.7% 15.8%
525 University Avenue, Suite 1300
Palo Alto, CA 94301-1902
Venrock Associates(3)......................... 3,342,352 20.7% 15.8%
30 Rockefeller Plaza
New York, NY 10112-0184
The Sevin Rosen Funds(4)...................... 3,333,020 20.6% 15.7%
550 Lytton Avenue, Suite 200
Palo Alto, CA 94301-1542
Douglas O. Reudink(5)......................... 1,404,230 8.7% 6.6%
Bowman Capital Management(6).................. 1,270,000 7.9% 6.0%
1875 South Grant Street, Suite 600
San Mateo, CA 94402
Robert H. Hunsberger(7)....................... 900,000 5.3% 4.1%
Worldview Technology Partners(8).............. 858,513 5.3% 4.1%
435 Tasso Street, Suite 120
Palo Alto, CA 94301-1546
Thomas Huseby(9).............................. 662,225 4.1% 3.1%
Vito E. Palermo(10)........................... 200,000 1.2% *
Robert N. Shuman(11).......................... 100,000 * *
Ray K. Butler(12)............................. 100,000 * *
James J. Daley................................ 49,327 * *
Harold Carey.................................. 42,694 * *
Bandel L. Carano(2)........................... 3,351,355 20.7% 15.8%
Jennifer Gill Roberts(13)..................... 3,345,428 20.7% 15.8%
David R. Hathaway(3).......................... 3,342,352 20.7% 15.8%
Scot B. Jarvis(14)............................ 55,770 * *
Bruce C. Edwards(15).......................... 25,000 * *
David A. Twyver(16)........................... 25,000 * *
All directors and officers as a group (13
persons)(17)................................. 13,574,135 74.6% 58.5%
</TABLE>
- --------
* Less than 1%.
(1) Applicable beneficial ownership percentage is based on 16,166,277 shares
of Common Stock outstanding prior to this offering and 21,166,277 shares
outstanding after this offering, and assuming no exercise of the
Underwriters' over-allotment option, together with applicable options
and warrants, if any, for such stockholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission (the "SEC Rules"). The number of shares beneficially owned by
a person includes shares of Common Stock subject to options and
warrants, if any, held by that person that are currently exercisable or
exercisable within 60 days of June 30, 1998. Such shares issuable
pursuant to such options and warrants are deemed outstanding for
computing the percentage ownership of the person holding such options
but are not deemed outstanding for the purposes of computing the
percentage ownership of each other person. A portion of the shares
issued or issuable upon exercise of such stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time. To
the Company's knowledge, the persons named in
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<PAGE>
this table have sole voting and investment power with respect to all
shares of Common Stock shown as owned by them, subject to community
property laws where applicable and except as indicated in the other
footnotes to this table. Unless otherwise indicated, the address of each
5% Stockholder is: c/o Metawave Communications Corporation, 10735 Willows
Road NE, P.O. Box 97069, Redmond, WA 98073-9769.
(2) Includes 3,274,943 shares held by Oak Investment Partners VI, L.P. and
76,412 shares held by Oak VI Affiliates Fund, L.P. Bandel L. Carano, a
director, is a Managing Member of Oak Associates VI, L.L.C., a general
partner of Oak Investment Partners VI, L.P., a General Partner of Oak VI
Affiliates and a general partner of Oak VI Affiliates Fund, and as such
may be deemed to share voting and investment power with respect to such
shares. Mr. Carano disclaims beneficial ownership of such shares, except
to the extent of his pecuniary interest in such shares.
(3) Includes 2,123,970 shares held by Venrock Associates and 1,218,382
shares held by Venrock Associates II, L.P. David R. Hathaway, a
director, is a general partner of Venrock Associates and Venrock
Associates II, L.P., and as such, may be deemed to share voting and
investment power with respect to such shares. Mr. Hathaway disclaims
beneficial ownership of such shares, except to the extent of his
pecuniary interest in such shares.
(4) Includes 15,220 shares held by Sevin Rosen Bayless Management Co.,
2,573,428 shares held by Sevin Rosen Fund IV L.P., 713,853 shares held
by Sevin Rosen Fund V L.P. and 30,519 shares held by Sevin Rosen V
Affiliates Fund L.P. Jennifer Gill Roberts, a director, is a general
partner of Sevin Rosen Fund IV L.P., Sevin Rosen Fund V L.P. and Sevin
Rosen V Affiliates Fund L.P., and as such, may be deemed to share voting
and investment power with respect to such shares. Ms. Roberts disclaims
beneficial ownership of such shares, except to the extent of her
pecuniary interest in such shares.
(5) Includes 15,000 shares held in trust for Matthew Reudink, Dr. Reudink's
son.
(6) Includes 43,750 shares held by Spinnaker Clipper Fund, L.P., 400,000
shares held by Spinnaker Founders Fund, L.P., 431,250 shares held by
Spinnaker Technology Fund, L.P., 375,000 shares held by Spinnaker
Technology Offshore Fund Limited and 20,000 shares held by Spinnaker
Offshore Founders Fund Ltd.
(7) Includes 900,000 shares issuable upon the exercise of immediately
exercisable options held by Mr. Hunsberger, 243,750 of which are fully
vested within 60 days of June 30, 1998 and 656,250 shares of which
remain subject to the Company Repurchase Right.
(8) Includes 50,104 shares held by Worldview Strategic Partners I, L.P.,
226,718 shares held by Worldview Technology International I, L.P. and
581,691 shares held by Worldview Technology Partners I, L.P.
(9) Includes 7,900 shares held by Margaret D. Huseby, spouse of Mr. Huseby,
and 31,600 shares held in trust for Katheryn Huseby, Max Huseby, Conor
Huseby and Devin Huseby, Mr. Huseby's children.
(10) Includes 200,000 shares issuable upon the exercise of outstanding
options held by Mr. Palermo, of which 73,749 are exercisable and vested
within 60 days of June 30, 1998. In accordance with the SEC Rules, Mr.
Palermo is the beneficial owner of 73,749 shares.
(11) Includes 3,750 shares owned by Mr. Shuman, and 96,250 shares issuable
upon the exercise of outstanding options held by Mr. Shuman, 85,000 of
which are immediately exercisable and subject to the Company's right of
repurchase, and an additional 1,250 shares of which are vested and
exercisable within 60 days of June 30, 1998. In accordance with the SEC
Rules, Mr. Shuman is the beneficial owner of 90,000 shares.
(12) Includes 100,000 shares issuable upon the exercise of outstanding
options held by Mr. Butler, 68,000 of which are immediately exercisable
and subject to the Company's right of repurchase and an additional
11,541 of which are vested and exercisable within 60 days of June 30,
1998. In accordance with the SEC Rules, Mr. Butler is the beneficial
owner of 79,541 shares.
(13) Includes the shares referenced in footnote (4) and 12,408 shares held by
Ms. Roberts. Ms. Roberts disclaims beneficial ownership of the shares
referenced in footnote (4), except to the extent of her pecuniary
interest in such shares.
(14) Includes 30,770 shares owned by Cedar Grove Investments, LLC ("Cedar
Grove") and 25,000 shares issuable upon the exercise of immediately
exercisable options held by Mr. Jarvis within 60 days of June 30, 1998,
all of which are subject to the Company's right of repurchase. Mr.
Jarvis, a managing member of Cedar Grove, disclaims beneficial ownership
of such shares, except to the extent of his pecuniary interest in such
shares.
(15) Includes 25,000 shares issuable upon the exercise of immediately
exercisable options held by Mr. Edwards within 60 days of June 30, 1998,
all of which are subject to the Company's right of repurchase.
(16) Includes 25,000 shares issuable upon the exercise of immediately
exercisable options held by Mr. Twyver within 60 days of June 30, 1998,
all of which are subject to the Company's right of repurchase.
(17) Includes (i) shares referred to in footnotes (2), (3), (5), (7) and (10)-
(16) and (ii) 68,000 shares owned by four other executive officers and
657,000 shares issuable upon the exercise of outstanding options held by
the same four executive officers, 528,000 of which are immediately
exercisable and subject to the Company's right of repurchase and an
additional 48,082 of which are vested and exercisable within 60 days of
June 30, 1998. In accordance with the SEC Rules, such other officers are
the beneficial owners of 644,082 shares.
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<PAGE>
DESCRIPTION OF SECURITIES
Following the closing of the sale of the shares of Common Stock offered
hereby, the authorized capital stock of the Company will consist of
150,000,000 shares of Common Stock, $0.001 par value, and 15,000,000 shares of
Preferred Stock, $0.001 par value.
COMMON STOCK
As of June 30, 1998, there were 16,166,277 shares of Common Stock
outstanding that were held of record by approximately 41 stockholders. There
will be 21,166,277 shares of Common Stock outstanding (assuming no exercise of
outstanding options after June 30, 1998) after giving effect to the sale of
the shares of Common Stock offered hereby.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions available to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized to issue up to 15,000,000 shares of
Preferred Stock in one or more series and to determine the powers, preferences
and rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated Preferred Stock,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
any further vote or action by the stockholders.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. In certain circumstances, such issuance could have
the effect of decreasing the market price of the Common Stock. As of the
closing of this offering, no shares of Preferred Stock will be outstanding and
the Company currently has no plans to issue any shares of Preferred Stock.
WARRANTS
As of June 30, 1998, the Company has warrants outstanding to purchase an
aggregate of 65,416 shares of Series A Preferred Stock, 19,999 shares of
Series B Preferred Stock, 34,090 shares of Series C Preferred Stock and
541,875 shares of Series D Preferred Stock. Concurrently with the automatic
conversion of the Company's outstanding Preferred Stock on a one-for-one basis
into Common Stock upon the closing of this offering, all warrants to purchase
Preferred Stock will automatically convert into warrants to purchase Common
Stock.
In connection with an equipment lease line entered into in December 1995,
the Company issued a warrant to purchase up to an aggregate of 48,750 shares
of Series A Preferred Stock to Comdisco, Inc. ("Comdisco") at an exercise
price of $2.1875 per share. The warrant expires on December 13, 2002. In
connection with a second equipment lease line entered into in April 1996, the
Company issued a warrant to purchase up to an aggregate of 16,666 shares of
Series A Preferred Stock to Comdisco at an exercise
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<PAGE>
price of $2.1875 per share. The warrant expires on April 9, 2003.
In connection with a third equipment lease line entered into in August 1996,
the Company issued a warrant to purchase up to an aggregate of 19,999 shares
of Series B Preferred Stock to Comdisco at an exercise price of $4.72 per
share. The warrant expires on August 20, 2003. In connection with a fourth
equipment lease line entered into in June 1997, the Company issued a warrant
to purchase up to an aggregate of 34,090 shares of Series C Preferred Stock to
Comdisco at an exercise price of $6.16 per share. The warrant expires on June
9, 2004.
In connection with the issuance of the 13.75% Senior Secured Bridge Notes in
April 1998, the Company issued the holders of the 13.75% Senior Secured Bridge
Notes warrants to purchase an aggregate of 537,500 shares of Series D
Preferred Stock at an exercise price of $0.01 per share (the "Note Warrants").
The Note Warrants expire on April 28, 2000.
In connection with an equipment lease line entered into with Insight
Investments Corporation in April 1998, the Company issued a warrant to
purchase up to an aggregate of 4,375 shares of Series D Preferred Stock at an
exercise price of $8.00 per share. The warrant expires on the closing of this
offering and is expected to be exercised on a net issuance basis
simultaneously therewith.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 15,338,305 shares of Common Stock (the "Registrable
Securities") or certain of their transferees are entitled to certain rights
with respect to the registration of such shares under the Securities Act.
These rights are provided under the terms of an agreement between the Company
and the holders of Registrable Securities. Subject to certain limitations in
the agreement, certain holders of the Registrable Securities may require, on
two occasions at any time after six months from the effective date of this
offering, that the Company use its best efforts to register the Registrable
Securities for public resale, provided that the proposed aggregate offering
price is at least $7,500,000. If the Company registers any of its Common Stock
either for its own account or for the account of other security holders, the
holders of Registrable Securities are entitled to include their shares of
Common Stock in the registration. The holders of the Note Warrants are also
entitled to include shares issuable upon exercise of the Note Warrants in the
registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in the underwritten public offering. Subject to certain
conditions, all fees, costs and expenses of such registrations must be borne
by the Company and all selling expenses (including underwriting discounts,
selling commissions and stock transfer taxes) relating to Registrable
Securities must be borne by the holders of the securities being registered.
ANTI-TAKEOVER PROVISIONS OF DELAWARE AND WASHINGTON LAW AND CHARTER DOCUMENTS
The Company is subject to the provisions of Section 203 of the DGCL. In
general, the statute 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 (with certain 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 stockholder, and an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior, did own)
15% or more of the corporation's outstanding voting stock. This provision may
have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholders.
The laws of the State of Washington, where the Company's principal executive
offices are located, impose restrictions on certain transactions between
certain foreign corporations and significant
64
<PAGE>
stockholders. Chapter 23B.19 of the Washington Business Corporation Act (the
"WBCA") prohibits a "target corporation," with certain exceptions, from
engaging in certain "significant business transactions" with a person or group
of persons who beneficially own 10% or more of the voting securities of the
target corporation (an "acquiring person") for a period of five years after
such acquisition, unless the transaction or acquisition of such shares is
approved by a majority of the members of the target corporation's board of
directors prior to the time of acquisition. Such prohibited transactions
include, among other things, a merger or consolidation with, disposition of
assets to, or issuance or redemption of stock to or from, the acquiring
person, termination of 5% or more of the employees of the target corporation
as a result of the acquiring person's acquisition of 10% or more of the shares
or allowing the acquiring person to receive disproportionate benefit as a
stockholder. After the five-year period, a significant business transaction
may take place as long as it complies with certain fair price provisions of
the statute. A target corporation includes a foreign corporation if (i) the
corporation has a class of voting stock registered pursuant to Section 12 or
15 of the Exchange Act, (ii) the corporation's principal executive office is
located in Washington, and (iii) any of (a) more than 10% of the corporation's
stockholders of record are Washington residents, (b) more than 10% of its
shares are owned of record by Washington residents, (c) 1,000 or more of its
stockholders of record are Washington residents, (d) a majority of the
corporation's employees are Washington residents or more than 1,000 Washington
residents are employees of the corporation, or (e) a majority of the
corporation's tangible assets are located in Washington or the corporation has
more than $50.0 million of tangible assets located in Washington. A
corporation may not "opt out" of this statute and, therefore, the Company
anticipates this statute will apply to it. Depending upon whether the Company
meets the definition of a target corporation, Chapter 23B.19 of the WBCA may
have the effect of delaying, deferring or preventing a change in control of
the Company.
In addition, upon completion of this offering, certain provisions of the
Company's charter documents, including a provision eliminating the ability of
stockholders to take actions by written consent, may have the effect of
delaying or preventing changes in control or management of the Company, which
could have an adverse effect on the market price of the Company's Common
Stock. The Company's stock option and purchase plans generally provide that
upon a change in control or similar event optionees are entitled to
accelerated vesting credit equal to either twelve months or twenty-four months
of additional vesting beyond that otherwise scheduled, based on whether he or
she has been employed by the Company less than two years, or two years or
more, respectively, as of the date of such event unless in connection with the
change in control or similar event, outstanding options are assumed or
substituted for equivalent options of a successor corporation. The Board of
Directors has authority to issue up to 15,000,000 shares of Preferred Stock
and to fix the rights, preferences, privileges and restrictions, including
voting rights, of these shares without any further vote or action by the
stockholders. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company, thereby delaying, deferring or preventing a
change in control of the Company. Furthermore, such Preferred Stock may have
other rights, including economic rights senior to the Common Stock, and, as a
result, the issuance of such Preferred Stock could have a material adverse
effect on the market value of the Common Stock. The Company has no present
plan to issue shares of Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services L.L.C.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol "MTWV."
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
21,166,277 shares of Common Stock, assuming no exercise of options after June
30, 1998. Of these shares, the 5,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 of the Securities Act.
The remaining 16,166,277 shares outstanding upon completion of this offering
will be "restricted securities" as that term is defined under Rule 144 (the
"Restricted Shares") and may not be sold publicly unless they are registered
under the Securities Act or are sold pursuant to Rule 144 or another exemption
from registration. All directors and executive officers and certain other
stockholders of the Company, holding in the aggregate 15,909,338 of the shares
of Common Stock outstanding prior to this offering, are contractually
obligated not to sell or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of this Prospectus (the "Lockup Period")
without the prior written consent of BT Alex. Brown Incorporated or the
Company (the "Lockup"). See "Underwriting." The number of shares of Common
Stock available for sale in the public market is further limited by
restrictions under the Securities Act.
Because of the restrictions noted above, on the date of this Prospectus and
until 180 days after the date of this Prospectus (assuming no release of the
Lockup Period by the Company or by BT Alex. Brown Incorporated), no shares
other than the 5,000,000 shares offered hereby will be eligible for sale in
the public market. Beginning 90 days after the effective date of this
offering, approximately 288,301 Restricted Shares will be eligible for sale in
the public market. Beginning 180 days after the effective date of this
offering, approximately 15,889,494 Restricted Shares (as well as an additional
123,880 shares of Common Stock issuable upon exercise of currently outstanding
warrants) will be eligible for sale in the public market, subject in some
cases to certain volume limitations. Upon the expiration of one-year minimum
holding periods, an additional 20,000 shares will be eligible for sale.
<TABLE>
<CAPTION>
SHARES
DAYS AFTER DATE ELIGIBLE
OF THIS PROSPECTUS FOR SALE COMMENT
------------------ ---------- -------
<C> <C> <S>
Upon Effectiveness............... 5,000,000 Shares sold in offering
Upon Effectiveness............... none Freely tradable shares salable under
Rule 144(k) that are not subject to
the Lockup
91 days.......................... 288,301 Shares salable under Rules 701 and 144
and not subject to the Lockup
181 days......................... 15,889,494 Lockup released; shares salable under
Rules 144 and 701
</TABLE>
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year, including persons who may be deemed "affiliates" of the
Company, 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
Common Stock then outstanding or the average weekly trading volume of the
Common Stock as reported through the Nasdaq National Market during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has
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<PAGE>
beneficially owned for at least two years the shares proposed to be sold,
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Exchange Act in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144. During the Lockup Period,
the Company intends to register on a registration statement on Form S-8, (i) a
total of 3,638,399 shares of Common Stock reserved for issuance under the 1995
Stock Option Plan (assuming no exercise of options after June 30, 1998), (ii)
a total of 850,000 shares of Common Stock reserved for issuance under the 1998
Stock Option Plan, (iii) a total of 300,000 shares of Common Stock reserved
for issuance under the Directors' Plan and (iv) a total of 500,000 shares of
Common Stock reserved for issuance under the Purchase Plan. Such registration
will permit the resale of shares so registered by non-affiliates in the public
market without restriction under the Securities Act.
Prior to this offering, there has been no public market for securities of
the Company. No prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of Common Stock of the Company in the public market after the lapse of the
restrictions described above could adversely affect the prevailing market
price and the ability of the Company to raise equity capital in the future at
a time and price which it deems appropriate. In addition, after this offering,
the holders of the Registrable Securities will be entitled to certain demand
and piggyback rights with respect to registration of such shares under the
Securities Act. Registration of such shares under the Securities Act would
result in such shares becoming freely tradable without restriction under the
Securities Act (except for shares purchased by affiliates of the Company)
immediately upon the effectiveness of such registration. See "Description of
Securities--Registration Rights of Certain Holders." If such holders, by
exercising their demand registration rights, cause a larger number of
securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Company's Common Stock. If
the Company were to include in a Company initiated registration any
Registrable Securities pursuant to the exercise of piggyback registration
rights, such sales may have an adverse effect on the Company's ability to
raise needed capital.
67
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, BT Alex. Brown
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
NationsBanc Montgomery Securities LLC (the "Representatives"), have severally
agreed to purchase from the Company the following respective numbers of shares
of Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BT Alex. Brown Incorporated........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
NationsBanc Montgomery Securities LLC..............................
---------
Total.............................................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any such shares are
purchased.
The Company has been advised by Representatives of the Underwriters that
they propose to offer the shares of Common Stock directly to the public at the
initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to an aggregate
of 750,000 additional shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriters name in the above table bears to the total number of shares of
Common Stock offered hereby, and the Company will be obligated, pursuant to
the option, to sell shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of shares of Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 5,000,000 shares are being offered.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
All officers and directors of the Company and certain stockholders have
agreed with the Underwriters that, until 180 days after the effective date of
this Prospectus, they will not directly or indirectly offer, sell, pledge,
contract to sell (including any short sale), grant any option to purchase or
otherwise dispose of any shares of Common Stock (including, without
limitation, shares of Common Stock of the Company which may be deemed to be
beneficially owned by the undersigned on the date hereof in accordance with
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<PAGE>
the rules and regulations of the Commission and shares of Common Stock which
may be issued upon exercise of a stock option or warrant) or enter into any
hedging transaction relating to the Common Stock. The Company has also agreed
not to sell, offer to sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or any rights to acquire
Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of BT Alex. Brown Incorporated, except that
the Company may issue shares upon the exercise of options granted prior to the
date hereof, and may grant additional options under its Plans, provided that,
without the prior written consent of BT Alex. Brown Incorporated, such
additional options shall be exercisable, but not transferable, during such
period. The lockup agreements may be released at any time as to all or any
portion of the shares subject to such agreements at the sole discretion of BT
Alex. Brown Incorporated.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors to be considered in
such negotiations will be prevailing market conditions, the results of
operations of the Company in recent periods, the market capitalizations and
stages of development of other companies that the Company and the
Representatives of the Underwriters believe to be comparable to the Company,
estimates of the business potential of the Company and its industry in general
and the present state of the Company's development and other factors deemed
relevant.
BT Alex. Brown Incorporated acted as the placement agent in the private
placement of the Company's 13.75% Senior Secured Bridge Notes and Note
Warrants issued on April 28, 1998, and in connection with that placement
received cash compensation. BT Holdings (NY), Inc., an affiliate of BT Alex.
Brown Incorporated, purchased a 13.75% Senior Secured Bridge Note in the
principal amount of $4,500,000 and a Note Warrant to purchase 83,405 shares of
Series D Preferred Stock. See "Certain Relationships and Related Transactions"
for a description of the terms of the 13.75% Senior Secured Bridge Notes and
the Note Warrants.
In view of this relationship, the offering is being made in accordance with
Section 2720 of the Conduct Rules of the National Association of Securities
Dealers, Inc., which provides, among other things, that the price of the
Common Stock can be no higher than that recommended by a "qualified
independent underwriter" meeting certain standards. In accordance with this
requirement, Merrill Lynch, Pierce, Fenner & Smith Incorporated is serving in
such role and will recommend the maximum public offering price of the Common
Stock. Merrill Lynch, Pierce, Fenner & Smith Incorporated has also
participated in the preparation of this Prospectus and has performed due
diligence with respect thereto.
The Company has been advised by the Representatives that during and after
this offering, the Underwriters may purchase and sell Common Stock in the open
market. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with this offering. Stabilizing transactions consist of certain
bids or purchases for the purpose of preventing or retarding a decline in the
market price of the Common Stock. Syndicate short positions involve the sale
by the Underwriters of a greater number of shares of Common Stock than they
are required to purchase from the Company in this offering. The Underwriters
also may impose penalty bids, whereby selling concessions allowed to the
syndicate members or other broker-dealers in respect of the Common Stock sold
in this offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or short-covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock, which may be higher than the price that
might otherwise prevail in the open market. These transactions may be effected
on the Nasdaq National Market or otherwise and these activities, if commenced,
may be discontinued at any time.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm orders to any account over which they
exercise discretionary authority.
69
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by its counsel, Venture Law Group, A Professional Corporation,
Kirkland, Washington. Certain legal matters will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
The financial statements and schedule of Metawave Communications Corporation
as of December 31, 1996 and 1997 and the related statements of operations,
shareholders' equity (deficit), and cash flows for the years then ended and
the period from January 19, 1995 (inception) to December 31, 1995 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports, given on the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement
and the exhibits and schedules thereto for further information with respect to
the Company and the Common Stock offered hereby. Statements contained herein
concerning the provisions of any documents are not necessarily complete, and
in each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. Copies of the Registration Statement, including
exhibits and schedules filed therewith, may be inspected without charge at the
Commission's principal office in Washington, D.C. or obtained at prescribed
rates from the Public Reference Room of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information regarding the
Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding companies that file electronically with the
Commission. The Company has filed the Registration Statement, including the
exhibits and schedules thereto, electronically with the Commission via the
Commission's EDGAR system. The Company intends to distribute to its
stockholders annual reports containing audited financial statements and will
make available copies of quarterly reports for the first three quarters of
each fiscal year containing unaudited interim financial information.
70
<PAGE>
GLOSSARY OF TECHNICAL TERMS
<TABLE>
<S> <C>
AMPLIFIER................... A device used to increase the signal strength of analog or
digital radio frequency (RF) signals.
AMPS (ADVANCED MOBILE PHONE
SERVICE)................... An analog wireless protocol adopted in North and South
America.
ANALOG...................... The traditional method of modulating radio signals to carry
information. The analog method employs a continuous signal
that varies the amplitude, frequency or phase of the radio
transmission.
ANTENNA..................... A device for transmitting and/or receiving radiowave
signals. Antennas can be designed to offer various radiation
patterns. Omni-directional antennas typically radiate
equally in all directions. Other antennas are more
directional, radiating largely in one area and not in
others.
ATTENUATION................. The weakening of a signal along some path, often due to
partial blocking or absorption.
BANDWIDTH................... The total frequency range of spectrum available.
BASE STATION................ A transmit and receive station that controls and relays
signals between a switch and the remote handset or
subscriber unit (fixed or mobile).
BSC (BASE STATION
CONTROLLER)................ Equipment that manages the radio transmission for a set of
base stations by handling radio channel management, message
transport and hand-offs.
BEAM........................ A directed RF signal radiating from an antenna in a narrow
pattern which carries cellular phone traffic.
CARRIER TO INTERFERENCE
RATIO (C/I)................ The ratio of strength in the carrier signal to the total
strength of interfering signals, expressed in dB.
CAPACITY.................... The maximum amount of call traffic that a cellular network
can handle.
CDMA (CODE DIVISION MULTIPLE
ACCESS).................... A digital wireless protocol adopted in North America and
Asia. In this protocol, each voice call is labeled with a
unique code and transmitted on the same frequency channel
with other calls.
CARRIER..................... A CDMA channel with 1.23 MHz bandwidth.
CELL........................ The term used to define a geographic area that is served by
a cell site.
CELL SITE................... The location of the base station equipment servicing the
cell.
CELL-SPLITTING.............. The splitting of one large cell into smaller ones. With
proper splitting and allocation of frequencies, channels can
be reused more frequently, making it possible to increase
capacity.
</TABLE>
71
<PAGE>
GLOSSARY OF TECHNICAL TERMS--(CONTINUED)
<TABLE>
<S> <C>
CELLULAR NETWORK............ A network of interconnected low-powered radio transceivers
that provides mobile telephone service.
CHANNEL..................... The communication path which transfers information between
elements in a wireless network. This radio channel requires
a unique RF frequency that is used for communication between
subscriber unit and cell site base station and is assigned
by the FCC.
COVERAGE AREA............... The geographic area in which the signal strength from a
cellular network is sufficient to provide service to users
of the wireless network.
DB.......................... Abbreviation for decibel, a unit for expressing the relative
strength of two signals.
DIGITAL..................... A method of storing, processing, and transmitting voice and
data that uses distinct electronic pulses to represent the
information.
DIGITAL CELLULAR............ A wireless protocol that breaks up cellular voice or data
transmission and sends them in a digital format. Common
digital cellular protocols include CDMA, GSM and TDMA.
DUAL-BAND................... A mobile or portable phone that is capable of operating in
more than one frequency band. An example of a dual-band
phone is a unit that operates on both a 900 MHz and 1.9 GHz
system.
DUAL-MODE................... A mobile or portable phone that is capable of operating
using more than one standard. An example of a dual-mode
phone is a unit that primarily operates on a digital system
and defaults to analog AMPS operation if the digital system
is unavailable.
FCC......................... The Federal Communications Commission; a U.S. government
agency which regulates wireless communications services and
equipment.
FOOTPRINT................... The coverage area of a cell site.
FREQUENCY................... The rate at which the electric and magnetic fields of a
radio wave oscillate, expressed as the number of cycles per
unit of time. Frequency is typically measured in Hertz (Hz),
or cycles per second.
GHZ (GIGAHERTZ)............. One gigahertz is equal to one billion cycles per second.
GSM (GLOBAL SYSTEM FOR
MOBILE COMMUNICATIONS)..... A digital wireless protocol which serves as the European
standard for digital cellular.
HZ (HERTZ).................. A measurement of frequency, equivalent to one "wave" or
cycle per second.
INFRASTRUCTURE.............. All parts of the wireless network, excluding the
subscriber's phone. Includes the Mobile Telephone Switching
Office, Base Stations, and all links between them.
</TABLE>
72
<PAGE>
GLOSSARY OF TECHNICAL TERMS--(CONTINUED)
<TABLE>
<S> <C>
INTERFERENCE................ Reception of unwanted signals which degrades call quality
and limits wireless capacity. Refers to undesired signals
from the standpoint of any particular listener.
KHZ (KILOHERTZ)............. One kilohertz is equal to one thousand cycles per second.
LAN (LOCAL AREA NETWORK).... A private data communications network linking a variety of
data services such as computers and printers within an
office or home environment.
LMDS (LOCAL MULTIPOINT
DISTRIBUTION SERVICE)...... A broadband wireless communications network that uses
millimeter wave frequencies around 28 to 38 GHz to transmit
video and data over a cellular-like network at distances
under a few miles.
LOCAL LOOP.................. A wired communications channel between the subscriber's
location and the subscriber's local central office, also
known as the subscriber loop.
MHZ (MEGAHERTZ)............. One megahertz is equal to one million cycles per second.
MSC (MOBILE SWITCHING
CENTER).................... A high-capacity, traffic handling device that routes
incoming and outgoing wireless calls by determining which
base station will handle each call and also provides inter-
system hand-offs.
MTSO (MOBILE TELEPHONE
SWITCHING OFFICE).......... The hub of a cellular network, which incorporates the mobile
switching center and the network operating software for the
switching, database, and maintenance functions.
NAMPS (NARROW-BAND AMPS).... An analog wireless protocol which operates in the 800-MHz
band in the United States. Developed by Motorola, NAMPS
divides traditional 30-MHz channels into three 10-MHz
channels to add capacity.
PCS (PERSONAL COMMUNICATIONS
SERVICES).................. A two-way, digital, wireless telecommunications system
operating in the 1.8 GHz to 2.4 GHz range in the United
States.
PHASED-ARRAY................ A type of antenna design in which the relative phases of the
respective signals feeding the group of antennas are varied
to vary the radiation pattern of the antenna.
PSTN (PUBLIC SWITCHED
TELEPHONE NETWORK)......... Refers to the collection of networks providing public
telephone switching service; the wired or landline network.
RECEIVER.................... A device that receives signals.
REUSE/FREQUENCY REUSE....... The utilization of frequency (channels) more than once in a
wireless network. To minimize interference, cells are
assigned only a portion of an operator's available
frequencies; adjacent cells do not use the identical
channels. The reuse pattern determines how many cells the
available frequencies are divided among before being reused
and therefore how much distance separates cells using the
same frequency.
</TABLE>
73
<PAGE>
GLOSSARY OF TECHNICAL TERMS--(CONTINUED)
<TABLE>
<S> <C>
RF (RADIO FREQUENCY)........ The range of electromagnetic frequencies above the audio
range and below visible light. All broadcast transmission,
from AM radio to microwaves, falls into this range, which is
between 30-KHz and 300-GHz.
RF SIGNAL................... Information transmitted over a communications network by a
modulated RF channel.
ROAMING..................... The ability to use a wireless phone to make and receive
calls in places outside a user's home coverage area.
SECTORIZING................. The process of dividing a cell site into sectors by using
directional antennas. Sectorizing is typically used as a
means of reducing interference in order to increase
frequency reuse and therefore network capacity.
SECTOR SYNTHESIS............ A proprietary method incorporated into Metawave's smart
antenna system to better control the transmission and
reception of CDMA radio signals by cell sites, thereby
reducing interference.
SMART ANTENNA............... A system that can respond to changes in the radio frequency
environment through the use of software algorithms that
control an integrated antenna array.
SMR (SPECIALIZED MOBILE
RADIO)..................... A two-way radio telephony service making use of macrocells
that cover an area up to 50 miles in diameter. Widely used
in dispatch operations by truck and taxi fleets. SMR systems
have much less radio spectrum than cellular systems, but
have a much greater range.
SPATIAL DIVERSITY........... An antenna configuration of two or more elements that are
physically spaced (spatially diverse) to combat signal
fading and improve signal quality. The desired spacing
depends on the frequency band and the RF environment.
SPECTRUM.................... A continuous range of frequencies, ranging from 30 Hz to
3000 GHz, available for radio transmission and reception.
The FCC has set aside fixed portions of the spectrum for
cellular service, PCS service, television, FM radio, and
satellite transmissions.
SPECTRUM ALLOCATION......... Federal government designation of a range of frequencies for
a category of use or uses.
SPECTRUM MANAGEMENT......... A way to improve a network's capacity, coverage, and call
quality by using hardware and software tools for network
configuration and RF enhancement.
SUBSCRIBER.................. A customer of a wireless service provider or other
communications company.
SWITCH...................... See MTSO.
</TABLE>
74
<PAGE>
GLOSSARY OF TECHNICAL TERMS--(CONTINUED)
<TABLE>
<S> <C>
TDMA (TIME DIVISION MULTIPLE
ACCESS).................... A method of digital wireless communications transmission by
which a large number of users can access, in sequence, a
single radio frequency channel without interference because
each user is allocated a unique time slot within each
frequency channel.
TRANSCEIVER................. Equipment that both receives and transmits radio waves.
TRANSMITTER................. A device that generates signals.
TRUNKING.................... Allowing a subscriber unit to be connected to any unused
channel in a group of channels for an incoming or outgoing
call. Trunking efficiency is increased whenever greater
numbers of channels can be made available to any group of
subscribers at a given location and time.
WIRELESS.................... Describing a type of technology using radio-based systems
that allows transmission of voice and data signals through
radio frequencies without a physical connection.
WLL (WIRELESS LOCAL LOOP)... A type of wireless technology which is used to provide
subscribers with standard telephone service. Eliminates the
need for a wire, or loop, connecting users to the PSTN by
transmitting voice communications over radio waves between
the end user and a base station that is connected to the
network equipment.
</TABLE>
75
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young, LLP, Independent Auditors.......................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Metawave Communications Corporation
We have audited the accompanying balance sheets of Metawave Communications
Corporation as of December 31, 1996 and 1997 and the related statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended and the period from January 19, 1995 (inception) to December 31, 1995.
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 generally accepted auditing
standards. 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 Metawave Communications
Corporation at December 31, 1996 and 1997, and the results of its operations
and its cash flows for the years then ended and the period from January 19,
1995 (inception) to December 31, 1995, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
March 13, 1998, except for Note 13,
as to which the date is April 28, 1998.
F-2
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
------------------ JUNE 30, EQUITY AT
1996 1997 1998 JUNE 30, 1998
-------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 19,092 $ 13,334 $ 20,311
Accounts and notes receivable,
net.......................... 120 1,444 3,792
Inventories................... -- 4,080 12,000
Debt issuance costs, net of
amortization of 1,275........ -- -- 4,545
Prepaid expenses and other
assets....................... 185 142 708
-------- -------- --------
Total current assets............ 19,397 19,000 41,356
Property and equipment--net
(Note 3)....................... 2,258 3,406 5,032
Other noncurrent assets......... 92 169 169
-------- -------- --------
Total assets.................... $ 21,747 $ 22,575 $ 46,557
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............. $ 484 $ 729 $ 3,581
Accrued liabilities........... 622 1,304 2,663
Current portion of notes
payable...................... 104 140 29,838
Current portion of capital
lease obligations............ 465 1,035 1,182
Deferred revenue.............. -- 115 305
-------- -------- --------
Total current liabilities....... 1,675 3,323 37,569
Notes payable, less current
portion........................ 321 263 143
Capital lease obligations, less
current portion................ 1,429 2,709 3,937
Other long-term liabilities..... 7 6 --
-------- -------- --------
Total liabilities............... 3,432 6,301 41,649
Commitments and contingencies
Convertible and redeemable
preferred stock, issued and
outstanding 10,732,623 shares
in 1996 and 13,130,350
in 1997 and June 30, 1998;
aggregate preference in
liquidation of $49,282 at
December 31, 1997 and June 30,
1998........................... 30,100 49,282 49,282 $ --
Convertible and redeemable
preferred stock warrants....... -- 128 4,423 --
Stockholders' equity (deficit):
Preferred stock, $.0001 par
value, authorized 20,000,000
shares, of which 13,130,350
have
been designated as
convertible and redeemable
at June 30, 1998 and December
31,1997...................... -- -- -- --
Common stock, $.0001 par
value, authorized 40,000,000
shares; issued and
outstanding
2,650,000 in 1996, 2,932,093
in 1997 and
3,035,927 at June 30, 1998
and 16,166,277
shares pro forma............. 10 1,968 2,162 55,867
Deferred stock compensation... -- (1,205) (877) (877)
Accumulated deficit........... (11,795) (33,899) (50,082) (50,082)
-------- -------- -------- -------
Total stockholders' equity
(deficit)...................... (11,785) (33,136) (48,797) $ 4,908
-------- -------- -------- =======
Total liabilities and
stockholders' equity (deficit). $ 21,747 $ 22,575 $ 46,557
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 19, 1995 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------ ----------------------
1995 1996 1997 1997 1998
---------------- -------- -------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............. $ -- $ 1,291 $ 1,450 $ 392 $ 6,501
Cost of sales........... -- 1,097 1,728 516 6,396
------- -------- -------- ------- --------
Gross profit (loss)..... -- 194 (278) (124) 105
Operating expenses:
Research and
development.......... 883 7,186 13,083 5,365 8,025
Sales and marketing... 84 1,704 5,383 2,244 4,087
General and
administrative....... 168 2,434 3,762 1,367 2,429
------- -------- -------- ------- --------
Total operating
expenses............... 1,135 11,324 22,228 8,976 14,541
------- -------- -------- ------- --------
Operating loss.......... (1,135) (11,130) (22,506) (9,100) (14,436)
Other income, net....... 157 485 851 409 484
Interest expense........ (22) (150) (449) (236) (2,231)
------- -------- -------- ------- --------
135 335 402 173 (1,747)
------- -------- -------- ------- --------
Net loss................ $(1,000) $(10,795) $(22,104) $(8,927) $(16,183)
======= ======== ======== ======= ========
Pro forma net loss per
share.................. $ (1.54) $ (1.01)
======== ========
Shares used in
computation of
pro forma net loss per
share.................. 14,383 16,061
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 19, 1995 (INCEPTION) THROUGH JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------
DEFERRED TOTAL
STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT COMPENSATION DEFICIT EQUITY (DEFICIT)
------ ------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Sale of common stock at
$.0036 per share for
cash................... 2,750 $ 10 $ -- $ -- $ 10
Net loss for the period
from January 19, 1995
to December 31, 1995... -- -- -- (1,000) (1,000)
----- ------ ------- -------- --------
Balance, December 31,
1995................... 2,750 10 -- (1,000) (990)
Shares surrendered to
Company for no
consideration......... (100) -- -- -- --
Net loss for the year
ended December 31,
1996.................. -- -- -- (10,795) (10,795)
----- ------ ------- -------- --------
Balance, December 31,
1996................... 2,650 10 -- (11,795) (11,785)
Exercise of stock
options............... 282 77 -- -- 77
Deferred stock
compensation.......... -- 1,881 (1,881) -- --
Stock compensation
expense............... -- -- 676 -- 676
Net loss for the year
ended December 31,
1997.................. -- -- -- (22,104) (22,104)
----- ------ ------- -------- --------
Balance, December 31,
1997................... 2,932 1,968 (1,205) (33,899) (33,136)
Repurchased restricted
stock *............... (138) -- -- -- --
Exercise of stock
options *............. 231 84 -- -- 84
Exercise of stock
warrants*............. 11 110 -- -- 110
Stock compensation
expense *............. -- -- 328 -- 328
Net loss for the period
ended June 30, 1998 *. -- -- -- (16,183) (16,183)
----- ------ ------- -------- --------
Balance, June 30, 1998
*...................... 3,036 $2,162 $ (877) $(50,082) $(48,797)
----- ------ ------- -------- --------
</TABLE>
- --------
* Unaudited
See accompanying notes.
F-5
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 19, 1995 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------ ----------------------
1995 1996 1997 1997 1998
---------------- -------- -------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(1,000) $(10,795) $(22,104) $ (8,927) $ (16,183)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization expense. 19 520 1,841 756 2,441
Loss on disposal of
assets .............. -- -- -- -- 24
Stock compensation.... -- -- 676 22 438
Reserve for loss on
assets............... -- -- 425 -- --
Changes in operating
assets and
liabilities:
Increase in accounts
receivable.......... (53) (67) (1,323) (267) (2,349)
Increase in
inventories......... -- -- (4,080) (2,209) (8,091)
Increase in other
assets.............. (55) (222) (34) (63) (2,091)
Increase in accounts
payable, accrued
liabilities and
other liabilities... 206 906 926 878 4,864
(Increase) decrease
in projects in
process............. (717) 717 -- --
Increase (decrease)
in deferred revenue. 1,291 (1,291) 114 -- 191
------- -------- -------- -------- ---------
Net cash used in
operating activities... (309) (10,232) (23,559) (9,810) (20,756)
INVESTING ACTIVITIES
Purchases of securities. (3,612) -- -- -- --
Proceeds on sale of
securities............. -- 3,612 -- -- --
Proceeds on sale of
assets................. -- -- -- -- 78
Purchases of equipment.. (151) (549) (621) (870) (582)
------- -------- -------- -------- ---------
Net cash provided by
(used in) investing
activities............. (3,763) 3,063 (621) (870) (504)
FINANCING ACTIVITIES
Proceeds from issuance
of preferred stock..... 5,500 24,600 19,182 -- --
Proceeds from issuance
of common stock........ 10 -- 77 1 84
Proceeds from notes
payable................ -- 500 -- -- 29,000
Payments on notes
payable................ -- (81) (115) (60) (130)
Principal payments on
capital lease
obligations............ (16) (180) (722) (290) (717)
------- -------- -------- -------- ---------
Net cash provided by
(used in) financing
activities............. 5,494 24,839 18,422 (349) 28,237
------- -------- -------- -------- ---------
Net increase (decrease)
in cash................ 1,422 17,670 (5,758) (11,029) 6,977
Cash and cash
equivalents at
beginning of period.... -- 1,422 19,092 19,092 13,334
------- -------- -------- -------- ---------
Cash and cash
equivalents at end of
period................. $ 1,422 $ 19,092 $ 13,334 $ 8,063 $20,311
======= ======== ======== ======== =========
NONCASH TRANSACTIONS AND
SUPPLEMENTAL
DISCLOSURES
Capital lease
obligations incurred to
purchase assets........ $ 144 $ 1,952 $ 2,665 $ 1,458 $ 2,099
Inventories reclassified
to property and
equipment.............. -- -- -- -- 171
Deferred compensation on
stock option grants.... -- -- 1,881 224 --
Interest paid........... 22 150 450 304 214
</TABLE>
See accompanying notes.
F-6
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Metawave designs, develops, manufactures and markets spectrum management
solutions for the wireless communications industry. The Company believes that
its spectrum management solutions, consisting of smart antenna systems,
applications software and engineering services, enable cellular network
operators to increase overall network capacity, reduce network operation
costs, better manage network infrastructure and stimulate end user demand
through improved system quality. Using its proprietary technologies, the
Company has developed products that address the capacity, coverage, and call
quality problems faced by cellular network operators.
The Company was incorporated in January 1995. Net revenue since inception
has been attributable to an engineering consulting contract in 1996, services
rendered by the Company's Network Services division during 1997 and sales of
the SpotLight 2000 system during the six months ended June 30, 1998. The
Company's Network Services division was discontinued during the first quarter
of 1998. Since inception, the Company has incurred significant losses and as
of June 30, 1998, had an accumulated deficit of $50.1 million.
Unaudited Interim Financial Information
The financial information as of June 30, 1998 and for the periods ended June
30, 1997 and 1998 is unaudited, but includes all adjustments (consisting only
of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such dates and the operations
and cash flows for the periods then ended. Operating results for the period
ended June 30, 1998 are not necessarily indicative of results that may be
expected for the entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
Significant estimates made in preparing the financial statements include the
allowance for doubtful accounts, inventory reserves and warranty accruals.
Revenue Recognition
Product revenues are recognized when the product has been shipped and all
customer acceptance conditions have been satisfied. Service revenues,
generally installation and consulting, are recognized when the services have
been performed. Revenue from maintenance contracts is deferred and recognized
ratably over the term of the agreement (which is typically one year). Any
billings in excess of revenue are classified as deferred revenue and projects
in process are recorded as inventory.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment and leasehold improvements are recorded at cost.
Depreciation is provided on the straight-line method for financial statement
purposes and on accelerated methods for federal
F-7
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income tax purposes over estimated useful lives of two to seven years.
Leasehold improvements are amortized over the lesser of the lease term or
estimated useful life.
Pro Forma Net Loss per Share
Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding and the weighted average convertible and
redeemable preferred stock outstanding as if such shares were converted to
common stock at the time of issuance. Common stock equivalents, including
stock options and warrants, are excluded from the computation as their effect
is antidilutive. For the periods presented, there is no difference between the
basic and diluted net loss per share. Historical basic and diluted earnings
per share are not presented on the accompanying statement of operations
because they are considered meaningless due to the significant change in
capital structure upon the mandatory conversion of convertible redeemable
preferred stock upon completion of the initial public offering.
Warranty
The Company provides a 12 to 18 month warranty which may vary depending upon
specific contractual terms, on all products and records a related provision
for estimated warranty costs at the date of sale.
Research and Development Costs
Research and development costs are expensed as incurred.
Advertising Costs
Advertising costs are charged to expense as incurred. The Company had no
material advertising expense for the period ended December 31, 1995 while
$355,000, $535,000 and $342,000 were recorded for the years ended December 31,
1996, 1997 and the six months ended June 30, 1998, respectively.
Cash Equivalents, Fair Values of Financial Instruments, and Concentration of
Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, and trade receivables.
The carrying value of financial instruments approximates market value.
Cash equivalents consist of investments with maturities of three months or
less when purchased. The Company invests with various high-quality
institutions and, by policy, limits the amount of credit exposure to any one
institution.
The Company sells its products and provides services to customers in the
wireless communications industry. The Company performs on-going credit
evaluations of its customers' financial condition and generally does not
require collateral. The Company maintains reserves, which to date have not
been material, for potential credit losses, and such losses have been within
management's expectations.
F-8
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Financial
Accounting Standards Board Statement No. 123 and applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. Accordingly, the Company's stock-based compensation expense is
recognized based on the intrinsic value of the option on the date of grant.
Recognition of stock-based compensation expense under Statement 123 requires
the use of a fair value method to value stock options using option valuation
models that were developed for purposes other than valuing employee stock
options. Pro forma disclosure of net loss under Statement 123 is provided in
Note 6.
Reclassifications
The Company adopted a manufacturing fiscal year in 1998. The fiscal year
1998 is the 52 week period that ends the Sunday following the calendar year
end. For convenience of presentation, all fiscal periods in these financial
statements are treated as ending on a calendar month end.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recently Issued Accounting Standards
In 1997, the following accounting standards were issued: SFAS No. 129,
Disclosure of Information About Capital Structure requiring supplemental
disclosure of capital structure, SFAS No. 131, Disclosures About Segments of
an Enterprise and Required Information, and SOP 97-2, Software Revenue
Recognition, SFAS No. 130, Reporting Comprehensive Income, establishing
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements.
Comprehensive loss is the same as net loss for all periods reported. Each of
these standards became effective for the Company on January 1, 1998. The
adoption of these standards did not impact the Company's financial statements
or disclosures.
In March 1998, the AICPA issued SOP 98-1, Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use. The SOP is
effective for the Company beginning on January 1, 1999 but earlier adoption is
encouraged. The SOP requires the capitalization of certain costs incurred
after the date of adoption in connection with developing or obtaining software
for internal-use. The Company elected to adopt the SOP in 1998. The SOP did
not have a material impact on the Company's operations or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in 2000. Because the Company does not currently use
derivatives, management does not anticipate that the adoption of SFAS No. 133
will have a significant effect on earnings or the financial condition of the
Company.
F-9
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Purchased parts........................................ $1,331 $ 6,766
Subassemblies.......................................... 274 472
Finished goods......................................... 2,475 4,762
------ -------
$4,080 $12,000
====== =======
</TABLE>
Purchased parts include purchased components and partially assembled units.
Subassemblies primarily represent components that are assembled and ready for
final configuration pending the detailed requirements for the specific
customer. Finished goods are units representing projects-in-process at
customer locations.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Equipment........................................ $ 2,131 $ 4,738 $ 6,932
Furniture and fixtures........................... 394 605 796
Leasehold improvements........................... 272 315 693
------- ------- -------
2,797 5,658 8,421
Accumulated depreciation and amortization........ (539) (2,252) (3,389)
------- ------- -------
$ 2,258 $ 3,406 $ 5,032
======= ======= =======
</TABLE>
4. NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER
31,
------------ JUNE 30,
1996 1997 1998
---- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Senior Secured Bridge Notes maturing in April 2000,
bearing interest at 13.75% accrued semi-annually..... $ -- $ -- $ 29,708
Note payable to U.S. Bank with monthly payments of
$217 maturing in July 2000, bearing interest at 11%.. 7 6 4
Note payable to Comdisco with monthly payments of
$12,126, maturing in February 2000, bearing interest
at 8%, with a residual payment of $50,000 due
February 28, 2000, secured by the underlying
equipment............................................ 418 308 252
Notes payable to GMAC with monthly payments
aggregating $2,190, maturing between December 2001
and April 2002, bearing interest at rates between
3.9% and 8.75%....................................... -- 89 17
----- ----- --------
425 403 29,981
Current portion....................................... (104) (140) (29,838)
----- ----- --------
$ 321 $ 263 $ 143
===== ===== ========
</TABLE>
F-10
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. NOTES PAYABLE (CONTINUED)
Notes payable are secured by equipment and vehicles.
Future principal payments on notes payable at December 31, 1997 are as
follows: 1998--$139,439; 1999--$159,926; 2000--$84,929; 2001--$16,202; and
2002--$2,071.
The Company has a credit facility with a commercial bank, which provides for
a revolving credit line of $7.5 million to support working capital with a $3.0
million sublimit for issuance of trade-related commercial and standby letters
of credit, which matures on October 14, 1999. Outstanding balances on the
credit line bear interest at the bank's prime rate (8.5%) as of December 31,
1997 and June 30, 1998, respectively, and are secured by the Company's
accounts receivable and inventory. At December 31, 1997 and June 30, 1998, no
amounts were outstanding under this revolving credit line secured by accounts
receivable and $2.5 million was outstanding related to issuance of a standby
letter of credit.
On April 28, 1998, the Company issued $29 million of Senior Secured Bridge
Notes (Notes), which mature on April 28, 2000. The Notes accrue interest at
13.75%, payable semi-annually at the option of the Company in either
additional Notes or cash. Until the Notes are repaid in full, the interest
rate will increase by 200 basis points up to a maximum of 18.0%. On April 28,
1999 and at the end of each subsequent six-month period; to a maximum rate of
18.00%. One-half of the outstanding Notes and any accrued and unpaid interest
is due upon the occurrence of an Initial Public Offering (IPO). The other one-
half of the Notes may be redeemed at any time, prior to the maturity date, by
the Company by payment in cash of the principal and accrued interest.
The Notes are secured by personal property and intellectual property of the
Company. The Company is required to comply with certain covenants and certain
reporting requirements determined by the noteholders.
In connection with the Senior Secured Bridge financing, the noteholders
received warrants to purchase 537,500 shares of series D Preferred Stock at
$.01 per share. The Company recorded debt issuance fees of approximately
$5,820,000 related to the issuance of these warrants. The fees are amortized
over the two-year contractual life of the Notes. The warrants have a two-year
term. On April 28, 1999 and at the end of each subsequent three-month period,
the Company will issue the noteholders 200,000 additional warrants. This
provision will terminate upon an IPO by the Company and redemption of at least
one-half of the issued and outstanding Notes.
The Company may redeem the balance of the Notes and warrants on or before
the completion of an IPO or on April 28, 1999 for and aggregate redemption and
repurchase price of $40.6 million.
5. CONVERTIBLE AND REDEEMABLE PREFERRED STOCK
In July 1995, the Company issued 5,500,000 shares of Series A Preferred
Stock (Series A) through a private offering. Proceeds from the financing
amounted to $5,500,000.
In May 1996, the Company issued 2,711,113 shares of Series B Preferred Stock
(Series B) through a private offering. Proceeds from the financing amounted to
$9,150,006. An additional 29,630 shares of Series B were issued in November
1996 with proceeds of $100,002.
F-11
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
5. CONVERTIBLE AND REDEEMABLE PREFERRED STOCK (CONTINUED)
In October and November 1996, the Company issued 2,491,880 shares of Series
C Preferred Stock (Series C) through a private offering. Proceeds from the
financing amounted to $15,349,980.
In August 1997, the Company issued 2,397,727 shares of Series D Preferred
Stock (Series D) through a private offering. Proceeds from the financing
amounted to $19,181,816.
Holders of Series A, B, C, and D have preferential rights to dividends
($.08, $.27, $.49, and $.64 per share per annum, respectively) when and if
declared by the Board of Directors. Dividends are not cumulative until July
1999. The holders are entitled to the number of votes equal to the number of
shares of common stock into which the preferred stock could be converted. Each
share of preferred stock is convertible into one share of common stock at the
option of the holder, or automatically upon the vote or written consent of the
holders of the majority of the shares of Series A, B, C, and D originally
issued or upon the closing of an initial public offering of the Company's
common stock from which the aggregate proceeds are not less than $15 million.
The conversion rate is subject to adjustment, as provided by the Company's
Amended and Restated Articles of Incorporation. In the event of liquidation,
the holders of Series A, B, C, and D have preferential rights to liquidation
payments of $1.00, $3.375, $6.16, and $8.00 per share, respectively, plus any
declared but unpaid dividends. The preferred stock has redemption rights for a
six-month period beginning on December 31, 2000 upon the election of at least
50% of the holders. The redemption price is equal to the original purchase
price plus any declared but unpaid dividends.
Convertible and Redeemable Preferred Stock Warrants
In connection with a Master Lease Agreement dated December 13, 1995, the
Company has issued two warrants providing for the purchase of 48,750 shares
and 16,666 shares of Series A Preferred Stock at an exercise price of $2.1875
per share, subject to adjustment as provided in the Warrant Agreements. The
Warrant Agreements expire after seven years or eighteen months to three years
from the effective date of an initial public offering, whichever comes later.
During 1996, the Company entered into an additional lease line to the Master
Lease Agreement. The new lease included the issuance of a warrant to purchase
19,999 shares of Series B Preferred Stock with an exercise price of $4.72.
During 1997, the Company entered into an additional lease line to the
aforementioned Master Lease Agreement. The new lease included the issuance of
a warrant to purchase 34,090 shares of Series C Preferred Stock with an
exercise price of $6.16. The value of the warrants, determined using the
Black-Scholes valuation model, was recorded as additional debt issuance cost
and is being amortized using the interest method over the term of the related
Master Lease Agreement.
Concurrently with the automatic conversion of the Company's outstanding
Preferred Stock on a one-for-one basis into Common Stock upon the closing of
this offering, all warrants to purchase Preferred Stock will automatically
convert into warrants to purchase Common Stock.
6. STOCKHOLDERS' EQUITY
Authorized Shares
In anticipation of the IPO of the Company's Common Stock, in May 1998, the
Board of Directors approved the amendment and restatement of the Certificate
of Incorporation to change the authorized
F-12
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
number of shares of preferred stock to 15,000,000 shares and increase the
number of authorized shares of Common Stock of the Company to 150,000,000
shares. These changes are to take effect upon completion of the IPO.
Stock Repurchases
Prior to June 30, 1998, the Company had common stock repurchase agreements
with two founders, whereby if the shareholder ceases to be an employee of the
Company, the Company has the right to repurchase shares of common stock at the
original issuance price paid by the founder. The stock held by the founders,
and subject to the terms of these agreements, vested during each full fiscal
quarter commencing after June 30, 1995 at a rate of 33% per year and became
fully vested on June 30, 1998. As of December 31, 1997, there were 344,437
shares subject to repurchase with an aggregate purchase price of $1,240. On
January 10, 1998, the Company repurchased 137,775 shares of common stock from
one of the founders for $501 pursuant to the terms of the stock repurchase
agreement. In addition, the Company caused Mr. Huseby to surrender 100,000
shares of Common Stock in 1996 for no consideration.
Proforma Stockholders' Equity (Unaudited)
The proforma stockholders' equity in the accompanying balance sheet reflects
the conversion of convertible and redeemable Preferred Stock and the
conversion of Preferred Stock warrants to Common Stock warrants coincident
with the IPO.
Stock Option Plan
The Company's 1995 Stock Option Plan (the Plan) provides for the granting of
incentive stock options and nonqualified stock options to employees, officers,
directors, and consultants. Options under the Plan have been granted at fair
market value on the date of grant and expire between five and ten years.
Options granted under this Plan generally become exercisable at the rate of
25% of the total number of shares subject to the option after the first
anniversary following the date of grant, with 2.083% vesting monthly
thereafter, with all shares becoming fully vested on the fourth anniversary
date of the date of grant. The Company has reserved 4,150,000 shares of common
stock for issuance under the Plan.
In anticipation of an IPO of the Company's common stock, in May 1998, the
Board of Directors approved the 1998 Stock Option Plan and the 1998 Employees
Stock Purchase Plan, subject to stockholder approval. Shares reserved for
issuance under these plans were 850,000 shares and 500,000 shares,
respectively.
The 1998 Directors' Stock Option Plan was adopted by the Board of Directors
in February 1998 and approved by the stockholders on April 20, 1998. A total
of 300,000 shares of Common Stock has been reserved for issuance under the
Directors' Plan. The Directors' Plan provides for the automatic grant of
nonstatutory stock options to nonemployee directors of the Company upon
joining the Board or upon the effectiveness of the Company's initial public
offering. Provided an individual remains a director, the Directors' Plan
provides that each option granted under the Plan shall become exercisable in
installments cumulatively as to 25% of the total number of shares subject to
the option on the first anniversary of the
F-13
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
date of grant of the option and 2.083% of the total number of shares subject
to the option each month thereafter. The exercise price of all stock options
granted under the Directors' Plan shall be equal to the fair market value of a
share of the Company's Common Stock on the date of grant of the option. The
fair market value of any option granted concurrently with the initial
effectiveness of the Purchase Plan shall be the Price to Public set forth in
the final prospectus relating to this Offering. Options granted under the
Directors' Plan have a term of ten years.
In 1997, deferred compensation of $1,881,382 was recorded for options
granted under the 1995 Plan. The deferred compensation was calculated as the
difference between the exercise price and the deemed value of the Company's
stock options granted under the 1995 Plan. The deferred compensation is
amortized over the vesting period of the related options. Amortized stock
compensation of $676,491 and $328,000 was recorded in the year ended December
31,1997 and the six months ended June 30, 1998, respectively.
Had the stock compensation expense for the Company's stock option plan been
determined based on the estimated fair value using the minimum value option
pricing model at the date of grant, the Company's net loss would have been
increased to these pro forma amounts (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported................................. $(1,000) $(10,795) $(22,104)
Pro forma................................... (1,002) (10,816) (22,109)
Pro forma net loss per share:
As reported................................. -- -- (1.54)
Pro forma................................... -- -- (1.54)
</TABLE>
The fair value for these options was estimated at the date of grant using
minimum value option pricing models that take into account: (1) the stock
price at the grant date, (2) the exercise prices, (3) a one-year expected life
beyond the vest date, (4) no dividends, and (5) a risk-free interest rate of
between 5.42% and 6.43% during 1995 through 1997 over the expected life of the
options. Compensation expense recognized in providing pro forma disclosures
may not be representative of the effects on pro forma net income for future
years because the amounts above include only the amortization for the fair
value of 1997, 1996, and 1995 grants.
F-14
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $.10 995,500 $.10 1,942,854 $ .24 3,148,794 $ .79
Granted at deemed
value................. 1,012,000 .10 1,189,454 .34 671,983 1.95 530,445 8.20
Granted at below deemed
value................. -- -- -- 1,359,285 .68 -- --
Canceled............... (16,500) .10 (242,100) .27 (543,236) .29 (171,970) 1.82
Exercised.............. -- -- -- (282,092) .27 (229,509) .36
--------- --------- --------- ---------
Outstanding at end of
period................. 995,500 .10 1,942,854 .24 3,148,794 .79 3,277,760 1.97
========= ========= ========= =========
Exercisable at end of
period................. -- -- 321,859 .10 2,140,002 .97 2,634,213 2.35
========= ========= ========= =========
Weighted average fair
value of options
granted during the
period.................
Granted at value....... $.10 $.34 $1.95 $8.20
Granted at below value. -- -- $1.89 --
</TABLE>
The following information is provided for options outstanding and exercisable
at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------ ------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
RANGE OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
-------- --------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
$ .10- .35................ 913,180 $ .14 7.98 500,104 $ .13
.62-1.20................ 1,800,314 .65 9.36 1,204,598 .67
2.00-3.36................ 435,300 2.73 9.91 435,300 2.73
--------- ---------
.10-3.36................ 3,148,794 .79 9.03 2,140,002 .96
========= =========
</TABLE>
In connection with the Plans, 660,639 shares of common stock are available
for future issuance at June 30, 1998.
F-15
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Common Shares Reserved for Future Issuance. The Company has reserved shares
of common stock as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
<S> <C> <C>
Series A Preferred Stock............................. 5,500,000 5,500,000
Series B Preferred Stock............................. 2,740,743 2,740,743
Series C Preferred Stock............................. 2,491,880 2,491,880
Series D Preferred Stock............................. 2,397,727 2,397,727
Convertible redeemable preferred stock warrants...... 119,505 930,130
Stock options........................................ 3,667,908 5,288,399
---------- ----------
16,917,763 19,348,879
========== ==========
</TABLE>
7. NET LOSS PER SHARE
Basic and diluted loss per share is calculated using the average number of
shares of common stock outstanding. The effect of stock options and warrants
have not been included as their effect is antidilutive. Pro forma basic and
diluted loss per share is computed on the basis of the average number of
shares of common stock outstanding plus the effect of convertible preferred
shares using the if-converted method as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -----------------
1995 1996 1997 1997 1998
-------- --------- --------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net loss (A)................ $(1,000) $(10,795) $(22,104) $(8,927) $(16,183)
======== ========= ========= ======= ========
Weighted average
outstanding:
Common stock (B).......... 1,311 2,720 2,723 2,655 2,931
Convertible preferred
stock.................... 2,577 7,480 11,660 10,732 13,130
-------- --------- --------- ------- --------
Total weighted average
outstanding (C)............ 3,888 10,200 14,383 13,387 16,061
======== ========= ========= ======= ========
Basic and diluted net loss
per share (A/B)............ $ (0.76) $ (3.97) $ (8.12) $ (3.36) $ (5.52)
======== ========= ========= ======= ========
Pro forma net loss per share
(A/C)...................... $ (0.26) $ (1.06) $ (1.54) $ (0.67) $ (1.01)
======== ========= ========= ======= ========
</TABLE>
8. INCOME TAXES
As of December 31, 1997, the Company had federal net operating loss
carryforwards (NOL) of approximately $28.5 million and research and
development tax credit carryforwards of approximately $677,500. The federal
net operating loss carryforwards will begin to expire in the year 2009 if not
utilized. As a result of changes in ownership coincident with the recent
financings, the utilization of a portion of the net operating loss
carryforward will be limited, pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended. Approximately $9,200,000 of the NOL is limited to
$920,000 per year. The remaining NOL is not subject to limitation as of
December 31, 1997, but is estimated to be subject to annual limitation of
$8,000,000 upon completion of the IPO.
F-16
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has
recognized a valuation allowance equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets. Significant components of
the Company's deferred tax liabilities and assets as of December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Deferred tax liabilities:
Prepaid assets.......................................... $ 18 $ 11
Deferred tax assets:
Net operating loss carryforwards........................ 3,865 9,674
Research and development tax credit carryforwards....... 210 678
Accrued compensation.................................... 82 167
Fixed assets............................................ 70 86
Accrued expenses and reserves........................... 1 431
Deferred revenue........................................ -- 906
Stock compensation...................................... -- 80
------- --------
Total deferred tax assets................................ 4,228 12,022
------- --------
4,210 12,011
Less valuation reserve................................... (4,210) (12,011)
------- --------
Net deferred taxes....................................... $ -- $ --
======= ========
</TABLE>
9. COMMITMENTS
The Company has entered into capital lease agreements to acquire certain
furniture and equipment, with lease terms ranging from 36 to 48 months. The
furniture and equipment, which serves as collateral for the leases, was
recorded at $4,635,553 and had accumulated amortization of $1,639,816 at
December 31, 1997. Amortization of the assets was included in depreciation
expense.
Operating leases are for office and manufacturing facilities.
In September 1997, the Company entered into a build-to-suit lease
arrangement for 95,838 square feet that will replace the current facilities.
The Company occupied the new building in June 1998, at which time the lease
commenced, and expires May 31, 2005. The Company, at its option, may extend
the term of this lease for two successive periods of five years each. The
option must be elected twelve months prior to the expiration of the initial
lease term. In connection with this arrangement, the Company has issued
letters of credit to the landlord aggregating $2.5 million.
F-17
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
9. COMMITMENTS (CONTINUED)
Following is a summary of future minimum payments under capital leases and
operating leases, including the new facility, that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1998................................................. $ 1,302 $1,256
1999................................................. 1,333 1,461
2000................................................. 1,162 1,390
2001................................................. 475 1,557
2002................................................. -- 1,557
------- ------
4,272 $7,221
======
Less interest........................................ (528)
-------
3,744
Current portion...................................... (1,035)
-------
$ 2,709
=======
</TABLE>
Rental expense for operating leases was $667,939, $304,619, and $21,167 for
the years ended December 31, 1997, 1996, and 1995, respectively.
The Company entered into agreements with certain leasing companies to
provide up to $2 million in 1996, $3 million in 1997 and $3.5 million at June
30, 1998 of financing to allow the Company to lease additional equipment.
Pursuant to these agreements, equipment leases would generally have a term of
three years and an implicit interest rate of 8.756% for 1996, 7.25% in 1997
and 14.5% at June 30, 1998 all are secured by the underlying equipment. The
Company issued warrants to purchase 4,375 shares of series D Preferred Stock
with an exercise price of $8 per share in conjunction with one of the lease
agreements.
10. RETIREMENT PLANS
The Company has a salary deferral 401(k) plan for its employees. The plan
allows employees to contribute a percentage of their pretax earnings annually,
subject to limitations imposed by the Internal Revenue Service. The plan also
allows the Company to make a matching contribution, subject to certain
limitations. To date, the Company has made no contributions.
11. RELATED-PARTY TRANSACTIONS
In October 1997, the Board authorized a secured loan of $162,500 and an
unsecured loan of $75,000 to the Company's Chief Financial Officer. Both loans
bear interest at 5.5%. The secured loan is payable in full on October 28, 2002
or earlier based upon certain events specified in the agreement. Fifty
thousand dollars of the principal amount of the loan is to be forgiven over a
three year period provided that the Company's Chief Financial Officer remains
employed with the Company, with the remaining balance of $25,000 plus interest
due on the earlier of October 22, 2000 or the date on which his employment
terminates. The portion of the loan being forgiven is expensed ratably as
compensation over the three-year period.
F-18
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
In December 1997, the Company determined that it would discontinue the
Company's Network Services division. In March 1998, the Company sold the
assets of this division for an aggregate purchase price of $78,000 to Advanced
Wireless Engineering ("AWE"), a company that was majority-owned by an
individual who at that time was the Company's Vice President, Network
Services. This individual resigned from the Company in March 1998 to run AWE
on a full time basis.
12. REVENUES AND OPERATIONS
The Company's customers are primarily cellular network operators in the
United States and certain international markets. As such, the Company's
primary market is made up of a limited number of customers operating within
the same industry, thereby subjecting the Company to business risks associated
with potential downturns of the industry. Export sales represented 51.4% of
net revenue in the six month period ended June 30, 1998 and none in 1997. To
date, four customers have accounted for all of the Company's product sales.
For the six months ended June 30, 1998, three customers, St. Petersburg
Telecom, Telfonica Celular and ALLTEL, accounted for approximately 27.4%,
24.0% and 44.2%, respectively, of the Company's net revenue. During 1997, two
customers of the Network Services division represented 63% and 27% of net
revenue.
In addition, the Company's current product design includes two key
components that are each currently supplied by a single supplier. Purchases
from these key suppliers aggregated $2,046,975 and $1,565,086 during 1997.
In December 1997, the Company determined that it would discontinue the
Network Services division. Accordingly, the carrying value of these fixed
assets has been adjusted to net realizable value, thereby resulting in an
impairment loss of $200,000, which is included in other expenses in the
accompanying 1997 Statement of Operations. These assets were sold in March
1998. Included in net revenue for the year ended December 31, 1997 and the six
months ended June 30, 1997 and 1998 were revenue of $1.5 million, $392,000 and
$252,000, respectively, relating to the Network Services division and the cost
of sales were $858,000, $516,000 and $242,000, respectively.
In June 1998, in connection with certain patent licenses, the Company issued
11,000 Common Stock warrants and recorded fees for an aggregate amount of
$360,000. The Common Stock warrants had an exercise price of $.01 per share
and were immediately exercised. The value of these warrants, using the Black-
Scholes valuation model, of $110,000 and cash of $250,000 was appropriately
recorded as an operating expense for the period ended June 30, 1998.
F-19
<PAGE>
[INSIDE BACK COVER ARTWORK:
MAP OF THE WORLD INDICATING THE LOCATION OF THE COMPANY'S
COMMERCIAL SALES AND FIELD TRIALS.]
(FIELD TRIALS MAY RESULT IN COMMERCIAL SALES.)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 20
Capitalization............................................................ 21
Dilution.................................................................. 22
Selected Financial Data................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 32
Management................................................................ 48
Certain Relationships and Related Transactions............................ 59
Principal Stockholders.................................................... 61
Description of Securities................................................. 63
Shares Eligible for Future Sale........................................... 66
Underwriting.............................................................. 68
Legal Matters............................................................. 70
Experts................................................................... 70
Additional Information.................................................... 70
Glossary of Technical Terms............................................... 71
Index to Financial Statements F-1
</TABLE>
------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 SHARES
[LOGO OF METAWAVE COMMUNICATIONS CORPORATION]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
BT ALEX. BROWN
MERRILL LYNCH & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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 the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market Listing Fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC Registration Fee.............................................. $19,507
NASD Filing Fee................................................... 7,113
Nasdaq National Market Listing Fee................................ 95,000
Printing Fees and Expenses........................................ 150,000
Legal Fees and Expenses........................................... 300,000
Accounting Fees and Expenses...................................... 200,000
Blue Sky Fees and Expenses........................................ 5,000
Transfer Agent and Registrar Fees................................. 10,000
Miscellaneous..................................................... 163,380
-------
Total........................................................... 950,000
=======
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Underwriting Agreement.(a)
3.1 Certificate of Incorporation of the Registrant.(a)
3.2 Bylaws of the Registrant.(a)
3.3 Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.(b)
5.1 Opinion of Venture Law Group, A Professional Corporation.(c)
10.1 Form of Indemnification Agreement.(a)
10.2 1995 Stock Option Plan, as amended, and form of stock option
agreement.(a)
10.3 1998 Stock Option Plan, as amended, and form of stock option
agreement.(a)
10.4 1998 Employee Stock Purchase Plan and form of subscription agreement.(b)
10.5 1998 Directors' Stock Option Plan and form of stock option agreement.(b)
10.6 Third Amended and Restated Investors Rights Agreement dated August 6,
1997 by and among the Registrant and certain holders of the
Registrant's capital stock.(a)
10.7 [Intentionally Omitted]
10.8+ Lease for Willow Creek Corporate Center dated September 29, 1997 by and
between the Registrant and Carr America Realty Corporation.(a)
10.9+ Purchase Agreement dated October 21, 1997 by and between the Registrant
and 360 Degree Communications Company.(a)
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.10+ Purchase Agreement dated December 12, 1997 by and between the
Registrant and Telefonica Celular de Paraguay S.A.(a)
10.11+ Purchase Agreement dated March 4, 1998 by and between the Registrant
and ALLTEL Supply Inc.(a)
10.12+ Purchase Agreement dated March 5, 1998 by and between the Registrant
and OJSC St. Petersburg Telecom.(a)
10.13 Loan Agreement dated October 14, 1997 by and between Registrant and
Imperial Bank.
10.14 Amendment No. 1 to the Loan Agreement dated October 14, 1997 by and
between Registrant and Imperial Bank.(a)
10.15 Metawave Communications Corporation Note Agreement dated as of April
27, 1998 Regarding $29,000,000 13.75% Senior Secured Bridge Notes due
April 28, 2000.(a)
10.16 Supply Agreement between the Registrant and Powerwave dated as of
September , 1998.(c)
10.17 Founders Stock Repurchase Agreement dated as of July 7, 1995 between
the Registrant and Thomas Huseby.(b)
10.18 Employment Agreement with Mr. Douglas O. Reudink dated July 7, 1995.(b)
10.19 Employment Agreement with Mr. Robert H. Hunsberger dated July 27,
1997.(b)
10.20 Employment Agreement with Mr. Vito E. Palermo dated July 23, 1997.(b)
10.21 Employment Agreement with Mr. Richard Henderson dated October 29,
1997.(b)
10.22 Employment Agreement with Mr. Victor K. Liang dated July 23, 1998.(b)
21.2 Subsidiaries of the Registrant.(b)
23.1 Consent of Ernst & Young LLP, Independent Auditors.(b)
23.2 Consent of Counsel (included in Exhibit 5.1).(c)
24.1 Power of Attorney (see page II-6).(c)
27.1 Financial Data Schedule.(a)
99.1 Report of Ernst & Young LLP, Independent Auditors on Financial
Statement Schedule.(b)
99.2 Financial Statement Schedule.(a)
</TABLE>
- --------
(a) Previously filed.
(b) Filed herewith.
(c) To be filed by amendment.
+ Certain information in these exhibits has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
(b) Financial Statement Schedules
The following financial statement schedule is filed herewith:
Schedule II--Valuation and Qualifying Accounts (see Exhibit 99.2).
Other financial statement sshedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Redmond, State of Washington, on September 10,
1998.
METAWAVE COMMUNICATIONS CORPORATION
/s/ Robert H. Hunsberger
By: _________________________________
Robert H. Hunsberger
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Robert H. Hunsberger President, Chief Executive September 10, 1998
____________________________________ Officer and Director
Robert H. Hunsberger (Principal Executive Officer)
/s/ Vito E. Palermo* Senior Vice President, Chief September 10, 1998
____________________________________ Financial Officer and
Vito E. Palermo Secretary (Principal Financial
and Accounting Officer)
/s/ Douglas O. Reudink* Chief Technical Officer and September 10, 1998
____________________________________ Chairman of the Board of
Douglas O. Reudink Directors
/s/ Bandel L. Carano* Director September 10, 1998
____________________________________
Bandel L. Carano
/s/ Bruce C. Edwards* Director September 10, 1998
____________________________________
Bruce C. Edwards
/s/ David R. Hathaway* Director September 10, 1998
____________________________________
David R. Hathaway
/s/ Scot B. Jarvis* Director September 10, 1998
____________________________________
Scot B. Jarvis
/s/ Jennifer Gill Roberts* Director September 10, 1998
____________________________________
Jennifer Gill Roberts
/s/ David A. Twyver* Director September 10, 1998
____________________________________
David A. Twyver
</TABLE>
/s/ Robert H. Hunsberger
*By:
----------------------------
Robert H. Hunsberger
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Underwriting Agreement.(a)
3.1 Certificate of Incorporation of the Registrant.(a)
3.2 Bylaws of the Registrant.(a)
3.3 Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
Offering.(b)
5.1 Opinion of Venture Law Group, A Professional Corporation.(c)
10.1 Form of Indemnification Agreement.(a)
10.2 1995 Stock Option Plan, as amended, and form of stock option
agreement.(a)
10.3 1998 Stock Option Plan, as amended, and form of stock option
agreement.(a)
10.4 1998 Employee Stock Purchase Plan and form of subscription
agreement.(a)
10.5 1998 Directors' Stock Option Plan and form of stock option
agreement.(a)
10.6 Third Amended and Restated Investors Rights Agreement dated August 6,
1997 by and among the Registrant and certain holders of the
Registrant's capital stock.(a)
10.7 [Intentionally Omitted]
10.8+ Lease for Willow Creek Corporate Center dated September 29, 1997 by
and between the Registrant and Carr America Realty Corporation.(a)
10.9+ Purchase Agreement dated October 21, 1997 by and between the
Registrant and 360 Degree Communications Company.(a)
10.10+ Purchase Agreement dated December 12, 1997 by and between the
Registrant and Telefonica Celular de Paraguay S.A.(a)
10.11+ Purchase Agreement dated March 4, 1998 by and between the Registrant
and ALLTEL Supply Inc.(a)
10.12+ Purchase Agreement dated March 5, 1998 by and between the Registrant
and OJSC St. Petersburg Telecom.(a)
10.13 Loan Agreement dated October 14, 1997 by and between Registrant and
Imperial Bank.
10.14 Amendment No. 1 to the Loan Agreement dated October 14, 1997 by and
between Registrant and Imperial Bank.(a)
10.15 Metawave Communications Corporation Note Agreement dated as of April
27, 1998 Regarding $29,000,000 13.75% Senior Secured Bridge Notes due
April 28, 2000.(a)
10.16 Supply Agreement between the Registrant and Powerwave dated as of
September , 1998.(c)
10.17 Founders Stock Repurchase Agreement dated as of July 7, 1995 between
the Registrant and Thomas Huseby.(b)
10.18 Employment Agreement with Mr. Douglas O. Reudink dated July 7,
1995.(b)
10.19 Employment Agreement with Mr. Robert H. Hunsberger dated July 27,
1997.(b)
10.20 Employment Agreement with Mr. Vito E. Palermo dated July 23, 1997.(b)
10.21 Employment Agreement with Mr. Richard Henderson dated October 29,
1997.(b)
10.22 Employment Agreement with Mr. Victor K. Liang dated July 23, 1998.(b)
21.2 Subsidiaries of the Registrant.(b)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Ernst & Young LLP, Independent Auditors.(b)
23.2 Consent of Counsel (included in Exhibit 5.1).(c)
24.1 Power of Attorney (see page II-6).(c)
27.1 Financial Data Schedule.(a)
99.1 Report of Ernst & Young LLP, Independent Auditors on Financial
Statement Schedule.(b)
99.2 Financial Statement Schedule.(a)
</TABLE>
- --------
(a) Previously filed.
(b) Filed herewith.
(c) To be filed by amendment.
+ Certain information in these exhibits has been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
METAWAVE COMMUNICATIONS CORPORATION
The undersigned, Robert H. Hunsberger and Vito E. Palermo, hereby certify
that:
1. They are the duly elected and acting President and Secretary,
respectively, of Metawave Communications Corporation, a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on July 7, 1995.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
"ARTICLE I
The name of this corporation is Metawave Communications Corporation (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, in the City of Wilmington, County of New Castle. The
name of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
(A) CLASSES OF STOCK. The Corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the Corporation is authorized to issue is One
Hundred Sixty Five Million (165,000,000)] shares, each with a par value of
$0.001 per share. One Hundred Fifty Million (150,000,000) shares shall be
Common Stock and Fifteen Million (15,000,000) shares shall be Preferred Stock.
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Certificate of Incorporation, to determine or alter
the rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock and the number of shares
constituting any such series and the designation thereof, or any of them; and to
<PAGE>
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status which
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to time
by a bylaw or amendment thereof duly adopted by at least 66 2/3% of the Board of
Directors.
ARTICLE VI
In the event of a vacancy in the Board of Directors, the remaining
directors, except as otherwise provided by law, may exercise the powers of the
full Board of Directors until the vacancy is filled. Vacancies in the Board of
Directors and newly created directorships resulting from any increase in the
authorized number of directors shall be filled by a vote of the majority of the
directors then in office, though less than a quorum, or by a sole remaining
director. Any director or the entire Board of Directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors.
ARTICLE VII
In the election of directors, each holder of shares of any class or series
of capital stock of the Corporation shall be entitled to one vote for each share
held. No stockholder will be permitted to cumulate votes at any election of
directors.
ARTICLE VIII
No action shall be taken by the stockholders of the Corporation other than
at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Corporation's bylaws.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
ARTICLE X
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal Bylaws of the Corporation. In addition to any requirements of
law and any other provisions hereof (and notwithstanding the fact that approval
by a lesser vote may be permitted by law or
-2-
<PAGE>
any other provision hereof), the affirmative vote of the holders of at least
66 2/3% of the voting power of the then outstanding shares of stock of all
classes and all series of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend, alter, repeal, or adopt any provision inconsistent with, this Article X
or Article V hereof.
ARTICLE XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XII
The Corporation shall have perpetual existence.
ARTICLE XIII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
If the General Corporation Law of Delaware is hereafter amended to authorize,
with the approval of a corporation's stockholders, further reductions in the
liability of the Corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this Article
XIII shall not adversely affect any right or protection of a director of the
Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XIV
(A) To the fullest extent permitted by applicable law, the Corporation is
also authorized to provide indemnification of (and advancement of expenses to)
such agents (and any other persons to which Delaware law permits the Corporation
to provide indemnification) though bylaw provisions, agreements with such agents
or other persons, vote of stockholders or disinterested directors or otherwise,
in excess of the indemnification and advancement otherwise permitted by Section
145 of the Delaware General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to actions
for breach of duty to a corporation, its stockholders, and others.
(B) Any repeal or modification of any of the foregoing provisions of this
Article XIV shall not adversely affect any right or protection of a director,
officer, agent or other person
-3-
<PAGE>
existing at the time of, or increase the liability of any director of the
Corporation with respect to any acts or omissions of such director, officer or
agent occurring prior to such repeal or modification."
* * *
-4-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Redmond, Washington, on ________ __, 1998.
_____________________________________
Robert H. Hunsberger, President
_____________________________________
Vito E. Palermo, Secretary
-5-
<PAGE>
EXHIBIT 10.17
FOUNDER'S STOCK REPURCHASE AGREEMENT
This Agreement is made as of the 7th day of July 1995, by and between
Metawave Communications, Inc., a Delaware corporation (the "Company") and Thomas
S. Huseby ("Founder").
WHEREAS, Founder is one of the principal stockholders of the Company, and
WHEREAS, the Company proposes to enter into a Series A Preferred Stock
Purchase Agreement (the "Series A Purchase Agreement") with certain investors
(the "Investors"), and
WHEREAS, Founder, as one of the principal stockholders of the Company,
expects to derive benefit from the Investors' investment in the Company, and
WHEREAS, execution of this Agreement by the Company and Founder is a
condition to the Investors' obligation to buy stock under the Series A Purchase
Agreement; and Founder is willing to enter into this Agreement;
NOW THEREFORE, in consideration of the mutual covenants and representations
herein set forth, and in consideration of the Investors' agreement to purchase
Series A Preferred Stock pursuant to the Series A Purchase Agreement, the
Company and Founder agree as follows:
1. Purchase Option.
(a) Founder is the holder of 1,100,000 shares of the Company's Common
Stock (the "Stock"). A maximum of 825,000 shares of the Stock shall be subject
to the right and option of the Company to repurchase such shares ("Purchase
Option") as set forth in this paragraph 1. In the event Founder shall cease to
be employed by the Company (including a parent or subsidiary of the Company) for
any reason, or no reason, with or without cause, including involuntary
termination, death or temporary or permanent disability (the "Termination"), the
Purchase Option shall come into effect. Except as set forth in subparagraphs (c)
and (d) below, following a Termination, the Company shall have the right, as
provided in subparagraph (b) hereof, to purchase from Founder or his personal
representative, as the case may be, at the purchase price per share determined
pursuant to subparagraph (f) hereof (the "Option Price") that number of shares
of the Stock which have not vested (the "Unvested Shares") as provided in
subparagraph (e) hereof.
<PAGE>
(b) Within 90 days following a Termination, the Company shall notify
Founder by written notice delivered or mailed as provided in subparagraph 6(c),
as to whether it wishes to purchase the Unvested Shares pursuant to exercise of
the Purchase Option. If the Company elects to purchase the Unvested Shares
hereunder, it shall set a date for the closing of the transaction at a place and
time specified by the Company or, at Company's option, such closing may be
consummated by mail as provided in Section 6(c) hereof. At such closing, the
Company shall tender payment for the Unvested Shares and the certificates
representing the Unvested Shares so purchased shall be canceled. The Option
Price shall be payable, at the option of the Company, in cash or by certified or
cashier's check.
(c) Notwithstanding subparagraph (a) above, if the Company (i) merges
with or into any other corporation (other than a merger in which the holders of
the outstanding voting equity securities of the Company immediately prior to the
merger hold securities representing more than 50% of the voting power of the
surviving entity immediately following such merger), (ii) sells, leases, or
conveys all or substantially all of its property or business, or (iii) issues
additional capital stock in one or more transactions, as a result of which
existing shareholders cease to own more than 50% of the voting power of the
Company, or any successor, (collectively, a "Change of Control") the Purchase
Option shall lapse and be of no further force or effect if, following such
Change of Control, the Company or its successor terminates Founder's employment
without cause as defined in Section 6(c) of the employment agreement entered
into between the Founder and the Company as of the date hereof (the "Employment
Agreement").
(d) Notwithstanding anything in this Agreement to the contrary, the
Company shall not be entitled to purchase more than 50% of the Stock if such
Termination occurs prior to the first anniversary of the execution of this
Agreement, unless such Termination is for cause, as defined in Section 6(c) of
the Employment Agreement.
(e) The Stock held by the Founder, and subject to the terms of this
Agreement, shall vest and no longer be subject to the Purchase Option as set
forth in subparagraph (a) hereof, at the rate of 8.33% of the shares of Stock
subject to the Purchase Option as of the date hereof on the last day of
September, December, March and June of each year, with all such shares of Stock
to be fully vested, and no longer subject to the Company's Purchase Option, on
June 30, 1998. In addition, the Shares shall vest during each full fiscal
quarter commencing after June 30, 1996, if any, during which Founder is entitled
to severance payments or is subject to the non-competition provisions under the
terms of the Employment Agreement, whichever is longer.
(f) The Option Price to be paid by the Company upon exercise of the
Purchase Option shall be equal to the price per share paid by Founder for such
Stock.
<PAGE>
2. Stock Splits, Etc. If, from time to time during the term of this
Agreement:
(a) There is any stock dividend or liquidating dividend of cash
and/or property, stock split or other change in the character or amount of any
of the outstanding securities of the Company; or
(b) There is any consolidation, merger or sale of all, or
substantially all, of the assets of the Company;
then, in such event, a proportionate amount of such new, substituted or
additional securities or other property to which Founder is entitled by reason
of his ownership of Stock shall be immediately subject to this Agreement and be
included in the words "Stock" and "Unvested Shares," as the case may be, for all
purposes with the same force and effect as the shares of Stock presently subject
to the Purchase Option, right of first refusal and other terms of this
Agreement. While the aggregate Option Price shall remain the same after each
such event, the Option Price per share of Stock payable upon execution of the
Purchase Option shall be appropriately adjusted.
3. Restriction on Transfer; Right of First Refusal. Founder shall not
sell, transfer, pledge, hypothecate or otherwise dispose of any Unvested Shares
and the Company shall not be required (i) to transfer on its books any unvested
Shares or (ii) to treat any such transferee as owner of such shares or to accord
the right to vote to such transferee or to pay dividends to any transferee to
whom such shares shall have been so transferred.
4. Legends. All certificates representing any of the shares of Stock
subject to the provisions of this Agreement shall have endorsed thereon the
following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS UPON TRANSFER, INCLUDING A STANDOFF AGREEMENT, AND RIGHTS
OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
CORPORATION. SUCH TRANSFER RESTRICTIONS, INCLUDING THE STANDOFF AGREEMENT, ARE
BINDING ON TRANSFEREES OF THESE SHARES."
(b) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT
COVERING THE
<PAGE>
PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO
COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
CORPORATION."
(c) Any legend required to be placed thereon by applicable blue sky
laws of any state.
5. Escrow. As security for the faithful performance of the terms of this
Agreement and to insure the availability for delivery of the Unvested Shares
upon exercise of the Purchase Option herein provided for, Founder agrees to
deliver to and deposit with the Assistant Secretary of the Company, or such
other person designated by the Company, as escrow agent in this transaction
("Escrow Agent"), two Stock Assignments duly endorsed (with date and number of
shares blank) in substantially the form attached hereto as Exhibit A, together
with the certificate or certificates evidencing the Stock; said documents are to
be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the
Joint Escrow Instructions of the Company and Founder set forth in Exhibit B
attached hereto and incorporated by this reference, which instructions shall
also be delivered to the Escrow Agent at the closing hereunder.
6. Miscellaneous.
(a) Subject to the provisions and limitations hereof, Founder may,
during the term of this Agreement, exercise all rights and privileges of a
stockholder of the Company with respect to the Stock deposited in said escrow.
(b) The parties agree to execute such further instruments and to take
such further action as may reasonably be necessary to carry out the intent of
this Agreement.
(c) Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery, or
delivery by facsimile transmission or overnight courier, or upon deposit in the
United States Post Office, by registered or certified mail with postage and fees
prepaid, addressed to Founder at his address shown in the Company's employment
records and to the Company at the address of its principal corporate offices
(attention: President) or at such other address as such party may designate by
ten days' advance written notice to the other party hereto.
(d) Subject to the terms and conditions of this Agreement, the
Company may assign its rights and delegate its duties under this Agreement,
including paragraphs 1 and 3 hereof. This Agreement shall inure to the benefit
of the successors and assigns of the Company and, subject to
<PAGE>
the restrictions on transfer herein set forth, be binding upon Founder, his
heirs, executors, administrators, successors and assigns.
(e) Nothing in this Agreement shall affect in any manner whatsoever
the right or power of the Company, or a parent or subsidiary of the Company, to
terminate Founder's employment, for any reason, with or without cause.
7. Standoff Agreement. Founder agrees, in connection with the Company's
initial public offering of its equity securities, and upon request of the
Company or the underwriters managing such offering, not to sell, make any short
sale of, loan, grant any option for the purchase of or otherwise dispose of any
securities of the Company (other than those included in the registration, if
any) without the prior written consent of the Company or such underwriters, as
the case may be, for such period of time (not to exceed 180 days) from the
effective date of such registration as may be requested by the Company or such
underwriters.
8. Governing Law. This Agreement shall be governed by, and shall be
construed and enforced in accordance with the laws of the State of Washington
without giving effect to the conflicts of laws principles thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMPANY:
METAWAVE COMMUNICATIONS
CORPORATION, a Delaware corporation
By /s/ Douglas O. Reudink
________________________________
Title President/C.E.O.
FOUNDER:
By /s/ Thomas S. Huseby
________________________________
Thomas S. Huseby
Address: c/o Riddell Williams
1001 Fourth Avenue Plaza
Suite 4400
Seattle, Washington 98154
<PAGE>
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Founder's Stock Repurchase
Agreement dated as of _______________, _____ (the"Agreement")
___________________("Founder") hereby sells, assigns and transfers unto
________________________________________ (__________) shares of the Common Stock
of Metawave Communications Corporation, a Delaware corporation, standing in the
undersigned's name on the books of said corporation represented by certificate
no. _________ herewith, and does hereby irrevocably constitute and appoint
______________________ attorney to transfer the said stock on the books of the
said corporation with full power of substitution in the premises. THIS
ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS
THERETO.
Dated: /s/ Thomas Huseby
_______________________________
Signature
_____________________________________
Instruction: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Corporation to exercise its
"Purchase Option" as set forth in the Agreement without requiring additional
signatures on the part of Founder.
<PAGE>
EXHIBIT B
JOINT ESCROW INSTRUCTIONS
July 7, 1995
Secretary
Metawave Communications Corporation
c/o Riddell, Williams, Bullitt & Walkinshaw
1001 Fourth Avenue Plaza, Suite 4400
Seattle, WA 98154
Dear Sir or Madam:
As Escrow Agent for both Metawave Communications Corporation, a Delaware
corporation ("Company"), and Thomas Huseby ("Founder"), you are hereby
authorized and directed to hold the documents delivered to you pursuant to the
terms of that certain Founder's Stock Repurchase Agreement ("Agreement") between
the Company and the undersigned, to which a copy of these Joint Escrow
Instructions is attached as Exhibit B, in accordance with the following
instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Purchase
Option set forth in the Agreement, the Company shall give to Founder and you a
written notice specifying the number of shares of stock to be purchased, the
purchase price, and the time for a closing hereunder at the principal office of
the Company. Founder and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, in accordance with the Agreement, against the simultaneous delivery to
you of the purchase price (by check) for the number of shares of stock being
purchased pursuant to the exercise of the Purchase Option.
3. Founder irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement. Founder
does hereby irrevocably constitute and appoint you as his attorney-in-fact and
agent for the term of this escrow to execute with respect to such securities all
documents necessary or appropriate to make such securities negotiable and to
<PAGE>
complete any transaction herein contemplated. Subject to the provisions of this
paragraph 3, Founder shall exercise all rights and privileges of a shareholder
of the Company while the stock is held by you.
4. Upon written request of the Founder, but no more than once per
calendar year, unless the Purchase Option has been exercised, you will deliver
to Founder a certificate or certificates representing so many shares of stock as
are not then subject to the Purchase Option. Within 100 days after cessation of
Founder's continuous employment by the Company, or any parent or subsidiary of
the Company, you will deliver to Founder a certificate or certificates
representing the aggregate number of shares sold and issued pursuant to the
Agreement and not purchased by the Company or its assignees pursuant to exercise
of the Purchase Option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Founder,
you shall deliver all of same to Founder and shall be discharged of all further
obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Founder while acting in good faith, and
any act done or omitted by you pursuant to the advice of your own or the
Company's attorneys shall be conclusive evidence of such good faith.
8. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
9. You shall not be liable for the expiration of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
10. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor. The Company will reimburse you
for your reasonable legal fees and expenses.
<PAGE>
11. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer of the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company shall
appoint a successor Escrow Agent.
12. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
13. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
14. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Metawave Communications Corporation
c/o Riddell, Williams, Bullitt & Walkinshaw
1001 Fourth Avenue Plaza, Suite 4400
Seattle, WA 98154
FOUNDER: __________________________________
__________________________________
__________________________________
ESCROW AGENT: Secretary
Metawave Communications Corporation
c/o Riddell, Williams, Bullitt & Walkinshaw
1001 Fourth Avenue Plaza, Suite 4400
Seattle, WA 98154
15. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow instructions; you do not become a
party to the Agreement.
<PAGE>
16. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
Very truly yours,
COMPANY
METAWAVE COMMUNICATIONS CORPORATION
a Delaware corporation
By: /s/ Douglas O. Reudink
-------------------------------
FOUNDER:
/s/ Thomas S. Huseby
-----------------------------------
Thomas S. Huseby
ESCROW AGENT:
________________________________,
Secretary
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of the 7th
day of July, 1995, by and between Douglas O. Reudink ("Employee") and METAWAVE
COMMUNICATIONS, INC., a Delaware corporation (the "Company"). In consideration
of the mutual covenants and conditions set forth herein, the parties hereby
agree as follows:
1. Employment. Company hereby employs Employee to serve as its Chief
Technical officer and Employee hereby accepts such employment. In such capacity,
Employee shall perform such duties during the term hereof as the Board of
Directors of the Company shall, from time to time, reasonably direct. Employee
agrees to utilize his skills and to render services to the best of his ability
on a full-time basis during the term of this Agreement.
2. Term. Employee's employment hereunder shall continue until terminated
pursuant to the provisions of paragraph 6 below.
3. Compensation. For all services rendered by Employee under this
Agreement, Employee shall receive a monthly salary at an annual rate of
$144,000, or such annual rate as the Board of Directors of the Company may from
time to time establish in its sole discretion, provided, that the Investors and
the Founders (as defined in the Founders Stock Repurchase Agreement dated as of
the date hereof,) hereby agree to work in good faith within the six (6) months
after the date of this Agreement to develop an executive compensation plan to
consist of salary and a bonus based on performance. In addition, Employee shall
receive such bonuses as may be declared from time to time by the Board of
Directors in its sole discretion and shall be eligible for consideration for
participation in stock option or stock purchase plans adopted by the Company, in
the sole discretion of the Board of Directors consistent with the terms of such
plans and applicable law.
4. Benefits. During the term of employment hereunder, Employee shall be
entitled to participate fully in any benefits and policies,. including, but not
limited to, vacation and sick leave and group medical and life insurance which
may be made available to the employees of the Company generally. The Company
shall pay or reimburse Employee for all reasonable travel and other expenses
incurred or paid by Employee in connection with the performance of services
under this Agreement upon presentation of expense vouchers and such other
supporting information as the company may from time to time reasonably request.
5. Warranties and Indemnification. Employee represents to the Company
that Employee is free to enter into this Agreement and that Employee has no
commitment, arrangement or understanding to or with any third party which
restrains or is in conflict with this
<PAGE>
Agreement or which would operate to prevent Employee from performing the
services to the Company which employee hereby has agreed to provide. Employee
agrees to indemnify and hold the Company harmless from and against any and all
liabilities or claims, including costs, expenses and reasonable attorney's fees
arising out of any acts by Employee which, the foregoing representation or
warranty to the contrary notwithstanding, shall be in violation of or shall
constitute a breach of any such commitment, arrangement or understanding. The
provisions of this Paragraph 5 shall survive any termination of this Agreement
for any reason. Employee agrees to execute the Company's Proprietary Information
Agreement upon his acceptance of employment with the Company. Employee further
agrees that at all times both during his employment by the Company and after its
termination, he will keep in confidence and trust, and will not use or disclose,
any confidential or proprietary information of the Company.
6. Termination.
(a) Employee's employment hereunder may be terminated by Employee or
Company at any time for any reason, with or without Cause by delivering to the
other party written notice of such termination; provided however:
(b) All other compensation and benefits will terminate upon the
effective date of termination of Employee's employment. Notwithstanding the
foregoing, Company's obligations to continue Employee's salary will immediately
terminate upon Employee's breach of his obligations pursuant to paragraph 7 of
this Agreement. Notwithstanding anything herein to the contrary, (other than the
immediately preceding sentence) if the Company terminates Employee's employment
without cause prior to the first anniversary of the execution of this agreement,
Employee shall be entitled to receive the salary and benefits referred to in
paragraphs 3 and 4 for a period of one year following such termination. If the
Company terminates Employee's employment without cause after the first
anniversary of the date of this Agreement, Employee shall be entitled to
benefits provided in paragraphs 3 and 4 for a period of 6 months following such
determination.
(c) Company's obligation to pay salary, benefits, and any and all
other forms of compensation to Employee shall immediately terminate on the
effective date of Employee's voluntary termination of employment or any
termination of Employee's employment for Cause. For purposes of this Agreement,
"Cause" shall mean (i) the Employee's engaging in misconduct which is
demonstrably injurious to Company; (ii) the Employee's being convicted of a
felony; (iii) any act of Employee, which in the reasonable judgment of a
majority of the Board of Directors of the Company, constitutes dishonesty,
larceny, fraud, deceit or gross negligence by Employee in the performance of his
duties to the Company, or willful misrepresentation to shareholders, directors
or officers of the Company; or (iv) the Employee's breach of this-
<PAGE>
Employment Agreement or any confidentiality or proprietary information agreement
between the Employee and Company.
(d) In the event of Employee's death during the Employment Period,
Company shall pay to Employee's estate within ten (10) days of Employee's death
any unpaid salary earned by Employee through the date of Employee's death. All
other payments shall cease.
(e) Termination by Employee. Employee may terminate his employment at
any time upon at least fifteen (15) days written notice. Einployee's right to
the benefits described in paragraphs 3 and 4 above shall terminate upon the
effective date of such termination.
7. (a) Covenant Not to Compete. For a period beginning on the date of
this Agreement and ending one year following the date of termination of
Employee's employment hereunder for any reason, Employee hereby agrees that he
will not, directly or indirectly, enter into the employment of, render services
to or acquire any interest whatsoever in (whether for his own account as an
individual proprietor, or as a partner, associate, shareholder, officer,
director, consultant, trustee or otherwise), any person or entity engaged in any
operations in competition in North America, Asia, Europe or Latin America, with
any aspect of the business of the Company as presently conducted and as said
businesses may evolve in the ordinary course of business between the date of
this Agreement and the termination of Employee's employment hereunder (including
products under active development at such time); provided, however, that nothing
herein shall prevent the purchase or ownership by Employee, by way of
investment, shares of any class stock with a value of $100,000 or less at the
time of investment, in any publicly-held corporation, or prevent the employment
of or the rendering of services by Employee where he does not contribute to the
development or sale of products which compete with products of the Company. The
parties agree that the areas within which these business activities are carried
on and where the goodwill of the Company has been established reasonably
includes North America, Asia, Europe and Latin America.
(b) Non-solicitation. Without limiting the foregoing, Employee
agrees that he will not call on or otherwise solicit business from any of the
customers or potential customers of the Company which, at the time of
termination of his employment, were listed (or ought to have been listed) in the
Company's records, as to any product that competes with any product provided or
marketed by or actually under development by the Company at the time of
Employee's termination. Employee further agrees that he will not solicit the
employment of or hire any employee of the Company throughout the term of this
covenant.
8. Remedies. Employee agrees that damages for breach of his covenants
under paragraph 7 above will be difficult to determine and inadequate to remedy
the harm which may
<PAGE>
be caused thereby, and therefore consents that these covenants may be enforced
by temporary or permanent injunction without the necessity of bond. such
injunctive relief shall be in addition to and not in place of any other remedies
available at law or in equity. Employee believes that the provisions of this
Agreement are reasonable and that Employee is capable of gainful employment
without breaching this Agreement. However, should any court or tribunal decline
to enforce any provision of paragraph 7 of this Agreement as written, the
parties hereby agree that this Agreement shall, to the extent applicable to that
circumstance before such court, be deemed to be modified to restrict Employee's
competition with the Company to the maximum extent of time, scope and geography
which the court shall find enforceable, and such provisions shall be so
enforced. The prevailing party in any enforcement proceedings hereunder shall be
awarded its costs and reasonable attorneys' fees at all levels of such
proceedings.
9. Agreement Relating to Sale and Repurchase of Shares. As a condition
of the employment of Employee by the Company, Employee agrees to execute and
deliver an agreement in substantially the form of Exhibit B attached hereto.
10. Entire Agreement: Modification. The provisions and documents
contained and referenced herein constitute the entire Agreement between the
parties with respect to the subject matter hereof and any waiver, alteration or
modification of any provisions of this Agreement, or the replacement of this
Agreement, shall not be valid unless in writing and signed by all the parties
signing hereunder.
11. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Washington.
12. No Waiver. No waiver or modification of any of the terms or
provisions hereof shall be valid unless in writing signed by the party against
which the enforcement of such waiver or modification is sought, nor shall any
waiver or failure to enforce any right hereunder be deemed to be a waiver of the
same or any other right in any other instance.
13. Arbitration. Employee agrees that any and all disputes that Employee
has with the Company or any of its employees, which arise out of Employee's
employment, the termination of employment or otherwise under the terms of this
Agreement shall be resolved through final and binding arbitration. This shall
include, without limitation, disputes relating to this Agreement, any disputes
regarding Employee's employment by the Company or the termination thereof,
claims for breach of contract or breach of the covenant of good faith and fair
dealing, and any claims of discrimination or other claims under any federal,
state or local law or regulation now in existence or hereinafter enacted and as
amended from time to time concerning in any way the subject of Employee's
employment with the Company or its termination. The only claims not covered by
this paragraph 13 are claims for benefits under the workers'
<PAGE>
compensation laws or unemployment insurance laws. Binding arbitration will be
conducted in Seattle, Washington, in accordance with the rules and regulations
of the American Arbitration Association then in effect. Each party will bear
one-half of the cost of the arbitration filing and hearing fees, and the cost of
the arbitrator; each side will bear its own attorneys' fees, unless otherwise
decided by the arbitrator. Employee understands and agrees that the arbitration
shall be instead of any civil litigation and that the arbitrator's decision
shall be final and binding to the fullest extent permitted by law and
enforceable by any court having jurisdiction thereof.
Signed by the parties as of the date first written above.
METAWAVE COMMUNICATIONS CORPORATION
By /s/ Thomas Huseby
----------------------------------
Its Chairman/Secretary
EMPLOYEE:
/s/ Douglas O. Reudink
--------------------------------------
Douglas O. Reudink
Address: c/o Riddell Williams et al.
1001 Fourth Avenue Plaza
Suite 4400 ,
Seattle, Washington 98154
Signature:____________________________
<PAGE>
EXHIBIT 10.19
METAWAVE
COMMUNICATIONS CORPORATION
June 27, 1997
Mr. Robert H. Hunsberger
3408 Mount Vernon Way
Plano, Texas 75025
Dear Bob:
On behalf of Metawave Communications Corporation, it is my pleasure to offer you
the position of President and Chief Executive Officer, as detailed in this
letter, with a start date of July 28, 1997.
Base compensation for your duties will be $220,000.00 per year for the first two
years of employment, subject to federal income tax and other normal withholding,
to be paid on Metawave's regularly scheduled pay days. After your second year
of employment, your base salary will be set by the Board of Directors.
You have also been granted a guaranteed bonus (i) for the first year of your
employment in the amount of $130,000.00 which will be paid (net of taxes and
other normal withholding) on a prorated monthly basis, (ii) for the second year
of your employment in the amount of $65,000.00 to be paid (net of taxes and
other normal withholding) again monthly. After your second year of employment,
any bonus to be awarded will be determined by the Board of Directors.
A recommendation will be made to the Board of Directors that you be granted an
option to purchase 900,000 shares of Metawave common stock at the exercise price
of $0.62 per share. Under our current plan, one quarter of the shares vest
after one year of employment with the remaining three quarters progressively
vesting on a monthly basis over the next three (3) subsequent years.
Metawave has also granted to you $50,000.00 in relocation assistance. This
figure represents the relocation assistance after it has been grossed up for tax
purposes (tax equalized). It will be paid to you in four equal installments of
$12,500.00 each with your first four regular pay checks. Should you leave the
company prior to completing 12 months of employment, you will be required to
repay Metawave this relocation amount on a prorated basis.
In the event that the Company terminates your employment without cause, you will
receive a lump sum severance payment within 30 days of such termination equal to
12 months' base salary ($220,000.00) and continuation of benefits for twelve
months.
You are eligible for our Medical, Dental and Life insurance starting on the
first day of the month following your hire date. You are also eligible to
participate in our 401(K) program. Details about these benefits may be obtained
from the Human Resources Department.
<PAGE>
Mr. Robert H. Hunsberger
Page 2
June 27, 1997
It is the policy of Metawave that employees not disclose nor use any
confidential information from prior employment while employed by Metawave. If
you have entered into specific NonDisclosure agreements, non-competitive
agreements, or any other agreements with any previous employer that might affect
or restrict your employment with us, please provide us with a copy so that we
can ensure that both you and Metawave abide by the terms thereof.
Employment with Metawave is at the mutual consent of each employee and the
company. Accordingly, while Metawave has every expectation that employment
relationships will be mutually beneficial and rewarding, both you and Metawave
retain the right to terminate the employment relationship at will, at any time,
with or without cause.
This offer represents the entire offer of Metawave and supersedes any prior
verbal or written agreements. This offer will remain open until June 29, 1997.
As a condition of your employment, you are required to sign a copy of the
enclosed Confidentiality and Inventions Agreement and provide proof of your
right to work in the United States to Human Resources on your first day of work.
Bob, we are excited about you leading our team and we hope you will be able to
achieve both your personal and professional objectives here at Metawave. If I
can answer any questions, please feel free to call me.
Please sign below and fax this letter to me and also return the original to me
by mail. The copy is for your records.
Welcome aboard!
Sincerely,
METAWAVE COMMUNICATIONS CORPORATION
/s/ Douglas O. Reudink
________________________________________
By: Douglas 0. Reudink, Chairman of the Board
This will acknowledge my acceptance of this offer of employment.
/s/ Robert H. Hunsberger
________________________________________
Robert H. Hunsberger
June 27, 1997
Date
<PAGE>
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
This Agreement is made by and between Metawave Communications Corporation (the
"Company") and Vito Palermo (the "Executive").
1. DUTIES AND SCOPE OF EMPLOYMENT.
a) Position: Employment Commencement Date. The Company shall employ the
Executive as the Senior Vice President of Finance and Chief Financial
Officer of the Company reporting to the Chief Executive Officer of the
Company. The Executive's employment with the Company pursuant to this
Agreement shall commence on January 20, 1997 ("Effective Date").
b) Obligations. The Executive shall devote his full business efforts and
time to the Company. The Executive agrees not to actively engage in
any other employment, occupation, or consulting activity for any
direct or indirect remuneration without the prior approval of the
Board; provided, however, that the Executive may serve in any capacity
with any civic, educational or charitable organization without the
prior approval of the Board, so long as such activities do not
interfere with his duties and obligations under this Agreement.
2. COMPENSATION AND STOCK OPTIONS.
a) Base Salary. While employed by the Company pursuant to this
Agreement, the Company shall pay the Executive as compensation for his
services a base salary in fiscal year 1997, which shall, beginning
June 1, 1997, be at the annualized rate of $160,000.00 (the "Base
Salary"). Such Base Salary shall be paid periodically in accordance
with normal Company payroll practices and subject to the usual
required withholding. The Executive's salary shall be reviewed
annually for possible raises in light of the Executive's performance
of his duties, as determined by the Chief Executive Officer.
b) Bonus. The Executive shall receive a bonus determined by the Board of
Directors in accordance with the Company's standard bonus practices in
effect from time to time.
c) Stock Options. The Executive has been granted a stock option, which
shall be, to the extent possible, an "incentive stock option" as
defined in Section 422 of the Internal Revenue Code of 1986, to
purchase 200,000 shares of Common Stock of the Company with a per
share exercise price equal to $0.62 per share (a grant of 135,000
shares was made as of January 20, 1997, and a grant of 65,000 was made
as of May 22, 1997). This option shall be for a term of ten (10)
years, and shall vest at the rate of 25% of the shares originally
subject to the option one year from the Effective Date and one-forty-
eighth of the shares originally subject to the
<PAGE>
option each month thereafter, so as to be 100% vested four years after
the Effective Date, conditioned upon the Executive's continued
employment with the Company as of each vesting date. The terms and
conditions of the option shall be in accordance with the Company's
Second Amended and Restated 1995 Stock Option Plan, as amended from
time to time (the "Company Stock Option Plan")
3. EMPLOYEE BENEFITS; RELOCATION EXPENSES.
A. Employee Benefits. During his employment hereunder, the Executive
shall be eligible to participate in the employee benefit plans and
programs maintained by the Company for its senior executives at a
level comparable to that of other senior executives of the Company.
B. Relocation Expenses. The Executive shall receive the following
payments on the following dates to cover the costs of his relocation
("Relocation Payments") subject to the usual required withholding:
(1) February 28, 1997: $25,000.00
(2) March 14, 1997: $25,000.00
(3) March 31, 1997: $25,000.00
(4) April 15, 1997: $24,396.00
C. Should the Executive cease to be employed with the Company within 12
months of the Effective Date pursuant to section 5 (c) or 6 hereof,
other than as the result of Good Reason, as that term is defined
herein, the Executive shall reimburse the Company for the Relocation
Payments he has received on a pro rata basis.
4. EXPENSES. The Company will pay or reimburse the Executive for reasonable
travel, entertainment or other expenses incurred by the Executive in the
furtherance of or in connection with the performance of the Executive's
duties hereunder in accordance with the Company's established policies.
5. TERMINATION BY THE COMPANY.
a) The Executive's employment hereunder may be terminated by the Company
at any time for any reason, with or without Cause, by delivering to
the other party written notice of such termination.
b) If the Company terminates the Executive's employment without Cause
prior to the first anniversary of the Effective Date, the Executive
shall be entitled to receive (i)a lump sum severance payment from the
Company within 30 days of such termination, equal to twelve months' of
the Executive's Base Salary as in effect on the date of termination,
(ii) the benefits set forth in section 3 (a) hereof for a
<PAGE>
period of one year following such termination, and (iii) any payments
not yet received under section 3(b). If the Company terminates the
Executive's employment without Cause after the first anniversary of
the Effective Date, the Executive shall be entitled to receive -(i)a
lump sum severance payment from the Company, within 30 days of such
termination, equal to six months' of the Executive's Base Salary as in
effect on the date of termination, (ii) 50% of the Executive's target
bonus, if any, for the year in which the termination occurs, and (iii)
the benefits set forth in section 3(a) hereof for a period of six
months following such termination. In addition, the Executive's
outstanding stock options shall continue to vest in accordance with
the schedule in section 2(c) hereof and the provisions of the Company
Stock Option Plan during the period that the Executive is receiving
payments from the Company pursuant to this section 5(b).
c) The Company's obligation to pay salary, benefits, and any and all
forms of compensation to the Executive shall immediately terminate on
the effective date of the termination of the Executive's employment by
the Company for Cause. For purposes of this Agreement, "Cause" shall
mean (i) the Executive's engaging in misconduct which is demonstrably
injurious to the Company; (ii) the Executive's being convicted of a
felony; (iii) any act of the Executive, which in the reasonable
opinion of a majority of the Board of Directors of the Company,
constitutes dishonesty, larceny, fraud, deceit or gross negligence by
the Executive in the performance of his duties to the Company or
willful misrepresentation to shareholders, directors, or officers of
the Company; and (iv) the Executive's breach of this Employment
Agreement or the Confidentiality and Inventions Agreement between the
Company and the Executive, dated January 20, 1997 (the
"Confidentiality Agreement").
d) In the event of the Executive's death during his employment with the
Company, the Company shall pay to the Executive's estate within ten
((10)) days of the Executive's death any unpaid salary earned by the
Executive through the date of the Executive's death and such estate,
or other designee of Executive, shall be entitled to exercise any
vested options at the time Executive's death in accordance with the
stock option agreement governing such exercise. All other payments
shall cease.
6. TERMINATION BY THE EMPLOYEE.
a) The Executive may terminate his employment at any time upon at least
fifteen (15) days written notice. The Executive's right to the
benefits described above in sections 2(a), 2(b), 3(a) and 3(b) shall
terminate upon the effective date of such resignation, provided,
however, that if the Executive terminates his employment with the
Company voluntarily for Good Reason (as defined herein) the Executive
shall be entitled to receive a lump-sum severance payment from the
Company, within 30 days of such termination, equal to nine months' of
the Executive's Base
<PAGE>
Salary as in effect on the date of termination, and the Company shall
pay for the reasonable cost of relocating the Executive and his
dependents back to San Jose, California.
b) For this purpose, "Good Reason" is defined as (i) the significant
reduction of the Executive's title, duties, authority or
responsibilities, relative to the Executive's title, duties, authority
or responsibilities as in effect immediately prior to such reduction
(except any such reduction which occurs within six (6) months of the
appointment of a new Chief Executive Officer of the Company, and which
relates to title, duties, authority and responsibilities assigned to
Executive on an interim basis by the Board subsequent to January 20,
1997), (ii) a reduction by the Company in the Base Salary of the
Executive as in effect immediately prior to such reduction unless part
of a plan applicable to a significant proportion of the Company's
executives at that time; (iii) any material breach of this Agreement
by the Company that the Company fails to cure within 30 days of
recovering notice thereof; and (iv) any act or set of facts which
would, under Washington case law or statute, constitute a constructive
termination of the Executive.
7. TERMINATION FOLLOWING A CONTROL TRANSACTION.
a) In the event that the Company terminates the Executive within six (6)
months following a Control Transaction, as that term is defined
herein, the provisions of section 5(b) hereof shall not apply and the
following shall apply:
(1) Executive's outstanding stock options shall have their
vesting accelerated in accordance with the provisions of the
Stock Option Plan as in effect as of the date immediately
prior to such Control Transaction; and
(2) the Company shall pay to the Executive an amount equal to
twelve months' of Executive's Base Salary as in effect as of
the date immediately prior to such Control Transaction, and
100% of the Executive's target bonus for the year in which
the Control Transaction occurs.
(b) For this purpose, "Control Transaction" is defined as
(1) any merger, consolidation, or statutory or contractual share
exchange in which there is no group of persons who held a
majority of the outstanding Common Stock immediately prior
to the transaction who continue to hold immediately
following the transaction at least a majority of the
combined voting power of the outstanding shares of that
class of capital stock (herein, "Voting Stock") which
ordinarily (and apart from rights accruing under special
<PAGE>
circumstances) has the right to vote in the election of
directors of the Company (or of any other corporation or
entity whose securities are issued in such transaction
wholly or partially in exchange for Common Stock);
(2) any liquidation or dissolution of the Company;
(3) any transaction (or series of related transactions)
involving the sale, lease, exchange or other transfer not in
the ordinary course of business of all, or substantially
all, of the assets of the Company; or
(4) any transaction (or series of related transactions) in which
any person (including, without limitation, any natural
person, any corporation or other legal entity, and any
person as defined in Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended from time to
time (the "Exchange Act"), other than the Company or any
employee benefit plan sponsored by the Company) (a)
purchases any Common Stock (or securities convertible into
Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer
subject to the requirements of the Exchange Act, or (b)
directly or indirectly becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of securities
of the Company which, when aggregated with such person's
beneficial ownership prior to such transaction, either (x)
represent 30% or more (50% or more if the Company is not
then subject to the requirements of the Exchange Act) (the
"Control Percentage") of the combined voting power of the
then outstanding Voting Stock of the Company, or (y) if such
person's beneficial ownership prior to such transaction
already exceeded the applicable Control Percentage, result
in an increase in such holder's beneficial ownership
percentage (all such percentages being calculated as
provided in Rule 13 d-3 (d) under the Exchange Act with
respect to tights to acquire the Company's securities).
(5) All references in this definition to specific sections of or
rules promulgated under the exchange Act shall apply whether
or not the Company is then subject to the requirements of
the Exchange Act.
<PAGE>
8. DEATH AND DISABILITY.
This Agreement shall terminate upon the death or disability of
Executive. In such event, the Company shall pay to the Executive's
executors, legal representatives or administrators, such salary as he
is entitled to receive for services rendered prior to the date of
termination, and such executors, representatives or administrators
shall have the right to exercise all stock options that have vested
prior to such termination in accordance with the Company Stock Option
Plan relating to such options.
9. INDEMNIFICATION AND INSURANCE.
Upon the commencement of his employment with the Company, Executive
shall be offered an indemnification agreement comparable in form and
substance to indemnification agreements entered into by and between
the Company and its executive officers and members of the Board (if
any). During the period of the Executive's employment with the
Company, the Company agrees to maintain director and officer liability
insurance in scope and amounts reasonably satisfactory to the
Executive, to the extent available. Following the termination of
Executive's employment for any reason, the Company agrees to honor the
indemnification agreement previously entered into by Executive.
10. ASSIGNMENT.
This Agreement shall be binding and inure to the benefit of (a) the
heirs, executors and legal representatives of the Executive upon the
Executive's death and (b) any successor of the Company. Any such
successor of the Company shall be deemed substituted for the Company
under the terms of this Agreement. As used herein, "successor" shall
include any person, firm, corporation or other business entity which
at any time, whether by purchase, merger or otherwise, directly or
indirectly acquires all or substantially all of the assets or business
of the Company.
11. NOTICES
All notices, requests, demands and other communications called for
hereunder shall be in writing and shall be deemed given if delivered
personally or three (3) days after being mailed by registered or
certified mail, or sent by a private delivery company, return receipt
requested, prepaid and addressed to the parties or their successors in
interest, at the following addresses, or at such other addresses as
the parties may designate by written notice in the manner aforesaid:
If to the Company:
Metawave Communications Corporation
148th Avenue NE
<PAGE>
Redmond, WA 98052
Attention: General Counsel
If to the Executive:
Vito Palermo
5608K Lakeview Drive
Kirkland WA
12. SEVERABILITY.
In the event that any provision hereof becomes or is declared by a
court of competent jurisdiction to be illegal, unenforceable, or void,
this Agreement shall continue in full force and effect without said
provision.
13. ENTIRE AGREEMENT.
This Agreement represents the entire agreement and understanding
between the Company and the Executive concerning the Executive's
employment relationship with the Company, other than the
Confidentiality Agreement, and supersedes and replaces any and all
prior agreements and understanding concerning Executive's employment
relationship with the Company, provided, however, that the
Confidentiality Agreement shall remain in full force and effect.
14. NO ORAL MODIFICATION.
This Agreement may only be amended, canceled, or discharged in writing
signed by the Executive and the Company.
15. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of
Washington.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
respective dates set forth below.
METAWAVE COMMUNICATIONS CORPORATION
By: /s/ Douglas O. Reudink
------------------------
Title: President
Date: 7/22/97
----------------------
VITO PALERMO
/s/ Vito Palermo
- ----------------------------
Date: 7/23/97
----------------------
(SIGNATURE PAGE FOR PALERMO EMPLOYMENT AGREEMENT dated July 22, 1997)
<PAGE>
EXHIBIT 10.21
October 27, 1997
Richard Henderson
3704 Roxbury
Plano, TX 75025
Dear Richard:
This letter supercedes the previous letter dated September 24, 1997. On behalf
of Metawave Communications Corporation, it is my pleasure to offer you the
position of Vice President of Sales and Marketing, as detailed in this letter.
You will report directly to me, with a mutually agreed upon start date.
Base compensation for your duties will be $150,000 per year, subject to federal
income tax and other normal withholding, to be paid on Metawave's regularly
scheduled pay dates twice monthly.
In addition to the base compensation, you will receive a bonus in the amount of
$25,000 (net of taxes and other normal withholding), payable with your first pay
check. For fiscal/calendar year 1998, you will be covered by a sales commission
plan with a target income of $75,000.
A recommendation will be made to the Board of Directors that you be granted an
option to purchase 150,000 shares of Metawave common stock at a price of $1.20
per share. Under our current plan, one quarter of the shares will vest after
one year of employment with the remaining three quarters progressively vesting
on a monthly basis over the next three (3) subsequent years.
Metawave is prepared to assist you in your relocation to the Seattle area by
reimbursing actual expenses incurred according to the following guidelines. Our
relocation assistance will include paying the closing costs on the sale of your
current home, the moving of your household goods and the closing costs of your
new home in the Seattle-area (not to include expenses related to points or
origination fees). You will also be reimbursed for temporary living costs for
up to three months at a maximum rate of $3000 per month. In addition, we will
pay for two house-hunting trips, storage of household goods for 90 days and
reasonable travel expenses associated with the relocation. For any relocation
expenses subject to tax withholding, Metawave will gross up the relocation
amount at a 35% rate intended to cover the tax liability. Should you leave the
company prior to completing 12 months of employment, you will be required to
repay Metawave on a prorated basis for actual expenses incurred.
You are eligible for our Medical, Dental and Life insurance starting on the
first day of the month following or equivalent to your hire date. You are also
eligible to participate in our 401(K) program. These programs are, of course,
subject to change.
Your performance and salary will be reviewed once per year. Your first review
will occur in June, 1998 and any salary adjustment will be effective July 1,
1998. Since you will have been employed less than one year, any salary increase
will be prorated based on the length of time from your date of hire.
It is the policy of Metawave that employees not disclose nor use any
confidential information from prior employment while employed by Metawave. If
you have entered into specific Non-Disclosure agreements, non-competitive
agreements, or any other agreements with any previous employer that might affect
or restrict your employment with us, please provide us with a copy so that we
can ensure that both you and Metawave abide by the terms thereof. As a
condition of your employment, you are required to sign a copy of the enclosed
Confidentiality Agreement and return it to Human Resources.
<PAGE>
Richard Henderson
Page 2
October 27, 1997
Employment with Metawave is at the mutual consent of each employee and the
company. Accordingly, while Metawave has every expectation that employment
relationships will be mutually beneficial and rewarding, both you and Metawave
retain the right to terminate the employment relationship at will, at any time,
with or without cause.
In the event that the Company terminates your employment without cause, you will
receive a lump sum severance payment within 30 days of such termination equal to
six months' base salary ($75,000), in exchange for executing the normal
severance release agreement.
This offer represents the entire offer of Metawave and supersedes any prior
verbal or written agreements. This offer will remain open for one month or until
otherwise withdrawn by Metawave. You will be required to provide your proof of
identification and your proof of your right to work in the United States to
Human Resources by your third day of employment.
Richard, we are excited about you joining our team and we hope you will be able
to achieve both your personal and professional objectives here at Metawave. If
we can answer any questions, please feel free to call me at (425) 702-5623.
Please sign below and return the original to Human Resources. The copy is for
your records.
Welcome aboard!
Sincerely,
METAWAVE COMMUNICATIONS CORPORATION
/s/ Shannon Dillingham for
Robert H. Hunsberger
_____________________________________
Robert H. Hunsberger
President and CEO
This will acknowledge my acceptance of this offer of employment.
/s/ Richard Henderson
_____________________________________
Richard Henderson
10/29/97
____________________________________
Date
<PAGE>
EXHIBIT 10.22
July 23, 1998
Mr. Victor Liang
6233 NE 191st Street
Seattle, WA 98155
Dear Victor:
On behalf of Metawave Communications Corporation, it is my pleasure to offer you
the position of Senior Vice President of Metawave Communications as detailed in
this letter. You will also be the President of the entity we will establish to
develop the Company's GSM products. You will report directly to me with a start
date of July 20, 1998.
Base compensation for your duties will be $190,000 per year, equivalent to
$7,307.69 per pay period, subject to federal income tax and other normal
withholding. Metawave has a bi-weekly payroll schedule with pay days on every
other Thursday. Your target bonus will be equal to 30% of your base annual
salary and will be pro-rated for 1998.
Metawave is prepared to assist you in your move from Seattle to Taiwan by paying
reasonable costs of relocation for you and your family.
You are eligible for our Medical, Dental and Life insurance starting on the
first day of the month following or equivalent to your hire date. The scheduled
effective date for your insurance plans is August 1, 1998. You are also
eligible to participate in our 401(K) program, with an enrollment date of
October 1, 1998. These programs are, of course, subject to change. A summary
outlining the Metawave benefit package is enclosed.
Your performance and salary will be reviewed once per year. Your first review
will occur in January, 1999 and any salary adjustment will be effective January
1, 1999. Since you will have been employed less than one year, any salary
increase will be prorated based on the length of time from your date of hire.
A recommendation will be made to the Board of Directors that you be granted an
option to purchase 300,000 shares of Metawave common stock at the price
determined by the Board of Directors at the next Board Meeting following your
first date of employment. Of these 300,000 shares, 150,000 will vest in
accordance with the Company's normal vesting schedule which is one quarter of
the shares vesting on the first anniversary of your first date of employment,
and the remaining three quarters will vest on a monthly basis over the next
three (3) subsequent years. The remaining 150,000 options will vest 100% on the
seventh anniversary date of your first date of employment. However, accelerated
vesting may occur with respect to 50% of these options in the year 2000, and 50%
in the year 2001, upon the achievement of certain mutually agreed objectives for
the years 2000 and 2001.
It is the policy of Metawave that employees not disclose nor use any
confidential information from prior employment while employed by Metawave. If
you have entered into specific Non-Disclosure agreements, non-competitive
agreements, or any other agreements with any previous employer that might affect
or restrict your employment with us, please provide us with a copy so that we
can ensure that both you and Metawave abide by the terms thereof.
<PAGE>
Page 2
Mr. Victor Liang
July 23, 1998
Employment with Metawave is at the mutual consent of each employee and the
company. Accordingly, while Metawave has every expectation that employment
relationships will be mutually beneficial and rewarding, both you and Metawave
retain the right to terminate the employment relationship at will, at any time,
with or without cause.
In the event that the Company terminates your employment without cause within
the first two years, you will receive a lump sum severance payment within 30
days of such termination equal to six months' base salary [***], in exchange
for executing the normal severance release agreement.
This offer represents the entire offer of Metawave and supersedes any prior
verbal or written agreements. As a condition of your employment, you are
required to sign a copy of the enclosed Confidentiality Agreement (which should
be returned to Human Resources). You will be required to provide your proof of
identification and your proof of your right to work in the United States to
Human Resources by your third day of employment.
Victor, we are excited about you joining our team and we hope you will be able
to achieve both your personal and professional objectives here at Metawave. If
I can answer any questions, please feel free to call me at (425)702-5623.
Please sign below and return the original to Human Resources. The copy is for
your records.
Welcome aboard!
Sincerely,
METAWAVE COMMUNICATIONS CORPORATION
/s/ Bob Hunsberger
_____________________________________
Bob Hunsberger
Chief Executive Officer
This will acknowledge my acceptance of this offer of employment.
/s/ Victor Liang
_____________________________________
Victor Liang
July 23, l998
____________________________________
Date
<PAGE>
EXHIBIT 21.2
Metawave Communications Corporation International
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our reports dated March 13,
1998, except for Note 13, as to which the date is April 28, 1998, in the
Amendment No. 1 to Registration Statement (Form S-1 No. 333-59621) and related
Prospectus of Metawave Communications Corporation.
Ernst & Young LLP
Seattle, Washington
September 9, 1998
