<PAGE>
As filed with the Securities and Exchange Commission on October 31, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
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 of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
10735 Willows Road NE
Redmond, WA 98052
(425) 702-5600
(Address, including zip code and telephone number, including area code,
of Registrant's principal executive offices)
---------------
ROBERT H. HUNSBERGER
Chief Executive Officer and Chairman of the Board
10735 Willows Road NE
Redmond, WA 98052
(425) 702-5600
(Name, address including zip code and telephone number including area code, of
agent for service)
Copies to:
MARK J. HANDFELT
JOHN W. ROBERTSON
KIRK D. SCHUMACHER
Venture Law Group
A Professional Corporation
4750 Carillon Point
Kirkland, WA 98033-7355
(425) 739-8700
---------------
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. [X]
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. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================
Proposed
Maximum Proposed
Offering Maximum
Amount to Price Aggregate Amount Of
Title Of Each Class Of be per Offering Registration
Securities To Be Registered Registered share(1) Price(1) Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.0001...................... 5,361,803 $9.88 $52,974,613.64 $13,985.30
================================================================================
</TABLE>
(1) Pursuant to Rule 457(c) under the Securities Act, this per share amount is
based on the average high and low prices of our common stock on October
27, 2000 as reported on the Nasdaq National Market. Estimated solely for
the purpose of calculating the registration fee.
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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. The selling stockholders may not sell these securities until the +
+registration statement filed with the securities and exchange commission is +
+effective. This prospectus is not an offer to sell these securities and it is +
+not soliciting an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS
(Subject to completion, dated October 31, 2000.)
5,361,803 Shares
[LOGO OF METAWAVE COMMUNICATIONS CORPORATION]
Common Stock
-----------
The 5,361,803 shares of our common stock, $0.0001 par value, covered by this
prospectus are offered for the account of selling stockholders listed under
"Selling Stockholders" on page 63. These shares were issued to the selling
stockholders in connection with an Amended and Restated Agreement and Plan of
Merger dated as of September 20, 2000 among Metawave Communications
Corporation, Malibu Acquisition Corporation, a wholly owned subsidiary of
Metawave, and Adaptive Telecom, Inc., pursuant to which Adaptive Telecom, Inc.
became our wholly-owned subsidiary. We have agreed to maintain the
effectiveness of this registration statement until February 28, 2001, taking
into account any periods of delay permitted. The selling stockholder may only
make sales pursuant to this prospectus once it has been declared effective and
during the following periods: (i) October 27, 2000 through and including
November 30, 2000 and (ii) January 26, 2001 through and including February 28,
2001. No sales may be made pursuant to this prospectus after that time unless
we amend or supplement this prospectus to indicate that we have agreed to
extend the period of its effectiveness. The selling stockholders may sell the
shares from time to time on the over-the-counter market in regular brokerage
transactions or in transactions directly with market makers. The prices at
which such stockholders may sell the shares will be determined by the
prevailing market for the shares or in negotiated transactions. Each selling
stockholder has advised us that no sale or distribution other than as disclosed
in this prospectus will be effected until after this prospectus has been
appropriately amended or supplemented, if required, to set forth those terms.
We will not receive any proceeds from the sale of the shares by the selling
stockholders. All expenses of registration of the shares shall be borne by
Metawave. Selling commissions, brokerage fees and any applicable stock transfer
taxes are payable individually by the selling stockholders.
Each of the selling stockholders may be deemed an "underwriter," as such term
is defined in the Securities Act of 1933, as amended.
On October 27, 2000, the last sale price of our common stock on the Nasdaq
National Market was $9.88 per share. Our common stock is traded on the Nasdaq
National Market under the symbol "MTWV."
Investing in our common stock involves risks that are described in the "Risk
Factors" section beginning on page 9 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
-----------
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY....................................................... 4
RISK FACTORS............................................................. 9
FORWARD-LOOKING STATEMENTS............................................... 21
USE OF PROCEEDS.......................................................... 21
PRICE RANGE OF COMMON STOCK.............................................. 21
DIVIDEND POLICY.......................................................... 21
CAPITALIZATION........................................................... 22
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 23
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA AND OTHER DATA............ 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.................................................... 25
BUSINESS................................................................. 32
MANAGEMENT............................................................... 46
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..................... 57
PRINCIPAL STOCKHOLDERS................................................... 59
ISSUANCE OF COMMON STOCK TO THE SELLING STOCKHOLDERS..................... 62
PLAN OF DISTRIBUTION..................................................... 62
SELLING STOCKHOLDERS..................................................... 63
DESCRIPTION OF SECURITIES................................................ 66
SHARES ELIGIBLE FOR FUTURE SALE.......................................... 69
LEGAL MATTERS............................................................ 70
EXPERTS.................................................................. 70
ADDITIONAL INFORMATION................................................... 70
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
The summary highlights selected information contained elsewhere in the
prospectus. You should read the entire prospectus, including "Risk Factors" and
the financial data and related notes before making an investment decision.
Metawave Communications Corporation
We provide smart antenna systems and embedded solutions to wireless network
operators facing capacity constraints in the wireless communications industry.
Our SpotLight smart antenna systems consist of antennas that improve the
reception and transmission of radio signals dynamically through the use of our
proprietary software. We believe that wireless operators can increase overall
network capacity, improve or maintain network quality, reduce network operating
costs and better manage network infrastructure by implementing our SpotLight
systems. Therefore, continued growth in wireless capacity demands will
necessitate that embedded smart antenna technology be made available to base
station manufacturers. To meet the growing demand for wireless services, we are
developing embedded solutions based on our proprietary technologies that
address the associated network capacity problems faced by wireless network
operators.
The recent increase in demand for wireless services has been driven by an
increased number of subscribers, lower prices and expanded availability of
existing services. In addition to these factors, the emergence of new mobile
Internet-oriented wireless services is expected to contribute to the continued
increase in subscriber usage. For example, wireless subscriber usage in the
United States is expected to grow at a compound annual growth rate of 20.9%
through 2003, according to The Strategis Group. The growth rate in wireless
subscriber usage, however, is not necessarily indicative of our growth rate.
This rapid growth in demand for wireless services and wireless usage has
strained the capacity of wireless networks given the fixed amount of radio
frequency spectrum allocated to wireless network operators. To address the
challenge of increasing capacity while maintaining signal quality, wireless
network operators generally have deployed more efficient digital technologies
or have built additional cell sites, which contain the transmitting and
receiving equipment used by wireless network operators to connect the wireless
network to subscribers' mobile phones. However, the high costs and technical
difficulties associated with building new cell sites, as well as the inherent
capacity limitations of digital technologies, have created the need for a cost-
effective solution to manage available spectrum.
As of June 30, 2000 we had sold a total of 185 SpotLight systems to a
variety of customers worldwide. In the second quarter of 2000, we completed the
testing of our GSM SpotLight systems in our Redmond, Washington facility, and
these systems are currently in field trials with potential customers in China,
Taiwan and Australia. The following customers accounted for more that ten
percent of our revenues in 1999: ALLTEL Communications Inc., which accounted
for 44.8% of our revenues; Grupo Iusacell Celular S.A. de C.V. of Mexico, which
accounted for 26.0% of our revenues; and Southwestco Wireless Inc., which
accounted for 20.9% of our revenues. For the six months ended June 30, 2000,
AirTouch Communications, Inc. and Grupo Iusacell Celular S.A. de C.V. of Mexico
accounted for 39.5% and 46.2% of our revenues, respectively.
We have had a history of significant losses and we expect to continue to
generate substantial losses in 2000 and beyond, even if our revenues increase.
Our net loss for the six months ended June 30, 2000 was $14.3 million compared
to our revenues of $20.7 million for the same period. For the year ended
December 31, 1999 our net loss was $42.4 million compared to our revenues of
$22.6 million for the same period. Our
4
<PAGE>
accumulated deficit was $134.9 million at June 30, 2000. In our limited
operating history, we have never achieved profitability.
On September 21, 2000, we completed the acquisition of privately held
Adaptive Telecom, Inc. located in Campbell, California. Adaptive Telecom is a
developer of 3G compatible, adaptive embedded smart antenna technology. We
believe this acquisition will enable us to accelerate the development and
deployment of adaptive array smart antenna systems for 3G wireless networks and
reinforces our position in the wireless infrastructure marketplace.
For the years ended 1998 and 1999, Adaptive Telecom had revenues of $2.7
million and $3.6 million, respectively. Net loss for 1998 was $55,000 and net
income was $43,000 for 1999. For the six months ended June 30, 1999 and 2000,
revenues were $1.6 million and $508,000, respectively. Net income for the six
months ended June 30, 1999 was $82,000 and net loss for the comparable period
in 2000 was $1.2 million. At the time of the acquisition, Adaptive Telecom had
a total of 18 employees, all primarily engaged in research and development.
With our recent acquisition of Adaptive Telecom, Inc., we issued 5,361,803
shares of Metawave common stock and stock options for 138,166 shares of
Metawave common stock in exchange for all the outstanding capital stock and the
assumption of all outstanding options to acquire Adaptive Telecom common stock.
This acquisition, valued at $114.3 million, resulted in a charge for in-process
research and development of $10.4 million, goodwill and other intangible assets
of $86.0 million and deferred stock compensation of $17.4 million. The $10.4
million in-process research and development charge was expensed in the quarter
ended September 30, 2000. A total of $103.4 million was recorded on our balance
sheet for goodwill, other intangible assets and deferred stock compensation.
Goodwill and other intangible assets will be amortized over their respective
useful lives of between three to five years. Deferred stock compensation will
be amortized over the remaining related vesting periods. We expect to generate
significant losses through 2005 as we amortize these expenses.
We have developed cost-effective smart antenna systems for expanding network
capacity while improving or maintaining overall network performance. These
systems are our primary product and have accounted for substantially all of our
revenues to date. Our SpotLight systems are designed to be compatible with base
station equipment for Code Division Multiple Access, or CDMA, and Global System
for Mobile Communications, or GSM, technologies, as well as analog
technologies. We have not completed any commercial sales of our SpotLight GSM
system. Although we are in discussions with several equipment manufacturers, we
have not entered into any definitive agreements to sell or license our embedded
technology for use in their products. Our SpotLight systems provide solutions
to wireless network operators with the following benefits:
Cost-Effective Capacity Expansion. Our SpotLight systems enable wireless
network operators to increase the capacity of their existing networks and
therefore reduce the need to build and maintain expensive new cell sites. Our
SpotLight 2000 system has improved CDMA capacity in cell sites from 30% to 50%,
depending on network configuration. In addition, in a recent field trial, our
SpotLight GSM system demonstrated that GSM network capacity can be increased by
up to 100% without increasing the number of GSM cell sites. Adding SpotLight
systems in selected cell sites can increase overall network capacity.
Improved Network Performance. Our SpotLight systems allow wireless network
operators to increase capacity while maintaining or improving the level of
service and signal quality. Our SpotLight 2000 systems efficiently allocate
existing network resources to better match subscriber usage. We expect our
SpotLight GSM systems to provide better signal reception and reduced
interference.
Compatibility with Standards and Equipment. We design our SpotLight systems
to be compatible with most of the widely deployed wireless standards operating
at 800 MHz and 900 MHz and related installed base station equipment in order to
allow wireless network operators' to continue to use their existing equipment
and technology.
5
<PAGE>
Our objective is to provide stand alone smart antenna systems and embedded
solutions to the wireless communications market worldwide. To accomplish this
objective we intend to:
. Continue to focus on delivering solutions that address the capacity
constraints of wireless network operators;
. Expand our presence and penetration of our current CDMA customers by
leveraging the performance and service of our existing system
deployments;
. Target additional large multi-system 800 MHz CDMA and 900 MHz GSM
wireless network operators around the world that serve substantial
concentrations of customers and have the greatest market share in their
respective markets; and
. Use our technology leadership and intellectual property to develop and
provide new capacity solutions to the existing and emerging wireless
communications markets, including Personal Communications System, or PCS,
operating at 1800 MHz and 1900 MHz.
. Develop relationships with existing and emerging wireless equipment
manufacturers to integrate our proprietary technology into their base
station equipment.
Our principal executive offices are located at 10735 Willows Road NE,
Redmond, Washington 98052, and our telephone number is (425) 702-5600. We were
originally incorporated in the state of Washington in January 1995 and
reincorporated in the state of Delaware in July 1995. Our Web site is
www.metawave.com. The information on this Web site does not constitute part of
this prospectus.
6
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The Offering
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<C> <S>
Common stock offered by Selling
Stockholders.............................. 5,361,803 shares
Shares outstanding after the offering...... 43,201,368 shares
Use of proceeds............................ We will not receive any
proceeds from this offering.
All proceeds will be received
by the selling stockholders.
Nasdaq National Market symbol.............. MTWV
</TABLE>
The information in this prospectus is based on the number of shares
outstanding at June 30, 2000. However, the number of shares in the table above
includes the 5,361,803 shares issued in connection with our acquisition of
Adaptive Telecom on September 21, 2000 and 13,648 shares issued from options
exercised between June 30, 2000 and September 30, 2000 and excludes outstanding
or available options and outstanding warrants to purchase an aggregate of
5,527,467 shares. See "Capitalization. "
We have agreed to maintain the effectiveness of this registration statement
until February 28, 2001, taking into account any periods of delay permitted. No
sales may be made pursuant to this prospectus after that time unless we amend
or supplement this prospectus to indicate that we have agreed to extend the
period of effectiveness. The selling stockholder may only make sales pursuant
to this prospectus once it has been declared effective and during the following
periods: (i) October 27, 2000 through and including November 30, 2000 and (ii)
January 26, 2001 through and including February 28, 2001.
7
<PAGE>
Summary Consolidated Financial Data
The summary consolidated financial data below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
included elsewhere in this prospectus. The statement of operations data for the
years ended December 31, 1997, 1998, and 1999 are derived from audited
consolidated financial statements included elsewhere in this prospectus. The
statement of operations data for the six months ended June 30, 1999 and 2000
and the balance sheet as of June 30, 2000 are derived from our unaudited
consolidated financial statements included elsewhere in this prospectus.
The unaudited pro forma information reflects our recent acquisition of
Adaptive Telecom, Inc. and has been derived from our unaudited pro forma
combined consolidated financial statements included elsewhere in this
prospectus. The unaudited pro forma combined consolidated statement of
operations data is derived from our statement of operations data for the twelve
months ended December 31, 1999 and for the six months ended June 30, 2000
combined with the statement of operations data of Adaptive Telecom for the same
period, giving effect to the acquisition as if it occurred on January 1, 1999.
The unaudited pro forma combined consolidated balance sheet data presents our
balance sheet data as of June 30, 2000 combined with the balance sheet data of
Adaptive Telecom as of June 30, 2000, giving effect to the acquisition as if it
had occurred on June 30, 2000. The unaudited pro forma information is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred if the
transaction had been consummated at the dates indicated, nor is it necessarily
indicative of the future operating results or financial position of the
combined company. Pro forma basic and diluted net loss earnings per share
reflects the pro forma effect of convertible and redeemable preferred stock as
if such shares were converted to common stock at the time of issuance.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, Year Ended Six Months
---------------------------- ------------------ December 31, Ended June
1997 1998 1999 1999 2000 1999 30, 2000
-------- -------- -------- -------- -------- ------------ ----------
(unaudited) (Pro Forma)
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues................ $ 1,450 $ 15,991 $ 22,596 $ 8,387 $ 20,694 $ 26,146 $ 21,202
Gross profit (loss)..... (278) (2,037) 360 (532) 5,501 1,315 5,619
Total operating
expenses............... 22,228 35,728 39,599 19,393 20,508 73,161 32,307
Loss from operations.... (22,506) (37,765) (39,239) (19,925) (15,007) (71,846) (26,688)
Other income (expense),
net.................... 402 (6,563) (3,174) (3,722) 726 (3,066) 760
-------- -------- -------- -------- -------- -------- --------
Net loss................ $(22,104) $(44,328) $(42,413) $(23,647) $(14,281) $(74,912) $(25,928)
Basic and diluted net
loss per share......... $ (12.18) $ (21.88) $ (18.98) $ (10.88) $ (0.99) $ (10.61) $ (1.33)
Shares used in
computation of basic
and diluted net loss
per share.............. 1,815 2,026 2,235 2,173 14,378 7,060 19,537
Pro forma basic and
diluted net loss per
share.................. $ (1.77) $ (0.43) $ (2.61) $ (0.68)
Shares used in
computation of pro
forma net loss per
share.................. 23,931 33,129 28,756 38,288
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000
--------------------
Actual Pro Forma
--------- ---------
(unaudited)
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................. $ 61,356 $ 61,935
Working capital........................................... 68,993 66,704
Total assets.............................................. 89,088 176,080
Long-term obligations, net of current portion............. 2,690 2,690
Common stock.............................................. 209,541 321,349
Accumulated deficit....................................... (134,921) (145,321)
Stockholders' equity...................................... 72,380 156,438
</TABLE>
8
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RISK FACTORS
You should carefully consider the risks described below, as well as other
information contained in this prospectus, before making a decision to buy our
common stock.
Risks Related to Our Business
We have a limited operating history which makes it difficult for you to
evaluate our business and your investment.
We were incorporated in 1995 and were in the development stage until late
1997, when we commenced shipment for commercial sale of our first SpotLight
smart antenna system. We therefore have a limited operating history upon which
an investor may evaluate our operations and future prospects. The revenue and
profit potential of our business is unproven and our limited operating history
makes our future operating results difficult to predict because the market for
smart antenna systems is so new and wireless technologies change so rapidly.
Because our smart antenna systems were introduced relatively recently, we are
unable to predict with any degree of certainty whether our smart antenna
systems will achieve widespread market acceptance. In view of our limited
operating history, an investment in our common stock must be considered in
light of the risks and uncertainties that may be encountered by early stage
companies in the wireless communications equipment market. In addition, period-
to-period comparisons of operating results may not be meaningful and operating
results from prior periods may not be indicative of future performance.
We have incurred net losses and negative cash flow for our entire history, we
expect to incur future net losses and we may never achieve profitability.
We have never achieved profitability and as of June 30, 2000, we had an
accumulated net deficit of $134.9 million. We intend to continue to make
significant investments in our operations, particularly to support product
development, to increase manufacturing capacity and to market new smart antenna
systems. Accordingly, we expect to continue to generate substantial losses in
2000 and beyond, even if revenues increase. To achieve profitability, we must,
among other things:
. successfully scale our current operations;
. introduce new smart antenna systems;
. implement and execute our business and marketing strategies;
. develop and enhance our brand;
. adapt to changes in the marketplace;
. respond to competitive developments in the wireless communications
industry;
. continue to attract, integrate, retain and motivate qualified personnel;
and
. successfully integrate Adaptive Telecom's operations into our own.
We might not be successful in achieving any or all of these objectives. Failure
to achieve any or all of these objectives could materially and adversely affect
our business, operating results and financial position causing our stock price
to decline. We cannot be certain that we can achieve sufficient revenues to
achieve profitability, or if we do, that we could remain profitable.
We expect our quarterly revenues and operating results to fluctuate and these
fluctuations may cause the price of our stock to decline.
We base our operating expenses on anticipated revenue trends and a high
percentage of our expenses are fixed in the short term. As a result, any delay
in generating or recognizing revenues could cause our operating
9
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results to fall below the expectations of securities analysts and investors,
which would likely cause our stock price to decline. Factors that may cause our
quarterly results to fluctuate include:
. gain or loss by us of significant customers;
. our ability to increase sales to our existing customers;
. delays in customer orders;
. delays in installing our smart antenna systems;
. our ability to reduce manufacturing costs of our smart antenna systems;
. our ability to introduce new smart antenna systems;
. market acceptance of any new smart antenna systems;
. introduction and enhancement of competitive or substitute products by our
competitors;
. limitations in our manufacturing capacity; and
. delays or changes in regulatory environments.
We depend on a limited number of wireless network operators for substantially
all of our revenues, so the loss of a customer or a delay in an order from a
customer could impair our operating results.
We depend on a limited number of wireless network operators for
substantially all of our revenues, so the loss of a customer or a delay in an
order from a customer could impair our operating results. Due to the highly
concentrated nature of the wireless industry and industry consolidation, we
believe that the number of potential customers for future systems will be
limited. Six customers have accounted for substantially all of our system sales
to date. The U.S. wireless operations of three of our customers, Vodaphone-
AirTouch, Bell Atlantic and GTE combined their wireless business operations
into an entity named Verizon Wireless in the second quarter of 2000. Bell
Atlantic owns 47.2% of Grupo Iusacell Celular S.A. de C.V. of Mexico. Effective
April 1, 2000, ALLTEL acquired Southwestco Wireless, d.b.a. CellularOne,
properties located in Arizona and New Mexico. Failure by us to capture a
significant percentage of the wireless network operators as customers could
cause our operating results to be significantly less than anticipated and lead
to a decline in our stock price. Moreover, due to this customer concentration,
any loss or reduced demand from a particular customer could cause our sales to
fall significantly.
Because our contracts with new customers are subject to satisfying performance
criteria, the timing of purchases is difficult to predict and as a result our
revenue is unpredictable.
We believe that the purchase of our SpotLight systems 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. Our contracts with new
customers typically contain conditional acceptance provisions for the initial
system sales and we delay recognition of revenue until all conditions are
satisfied, which causes our sales cycle to last up to 18 months and to vary
substantially from customer to customer. This variability makes predicting our
revenues difficult. Typically, performance of our systems must be accepted in
an initial cell site or cluster of cell sites in a field trial prior to
completing any additional sales to a particular wireless network operator. This
makes the sales process associated with the purchase of our systems complex,
lengthy and subject to a number of significant risks. We may incur substantial
expenses and expend significant management and personnel resources in the
process of a field trial. If we do not satisfy conditions in these contracts or
if satisfaction of these conditions were delayed for any reason, revenues in
any particular period could fall significantly below our expectations.
10
<PAGE>
Any delay in customer acceptance or shipment could delay our recognition of
revenues which could cause our stock price to decline.
Delays in shipment or customer acceptance of our antenna systems can happen
for a variety of reasons, including:
. an unanticipated shipment rescheduling;
. cancellation or deferral by a customer;
. competitive or economic factors;
. unexpected manufacturing, installation or other difficulties;
. unavailability or delays in deliveries of components, subassemblies or
services by suppliers; or
. the failure to receive an anticipated order.
Our customers are typically large organizations and make equipment purchases on
their own schedules. We have no influence on their internal budgetary
decisions. Additionally, since orders must ordinarily be shipped within 90 days
of receipt of a purchase order, our inability to ship orders on a timely basis
because of our limited capacity could damage relationships with customers and
result in cancellation of orders or lost orders. Any delay in system shipment
could cause revenues and operating results in a particular period to fall below
our expectations as well as below the expectations of public market analysts or
investors. If this occurs, the trading price of our common stock would likely
decline.
Our future revenues depend on the sale of our SpotLight systems and embedded
solutions and if our SpotLight systems and embedded solutions fail to achieve
market acceptance of our SpotLight systems, our revenues will fail to meet
expectations.
Our future success depends upon the degree to which our smart antenna
systems and embedded solutions are accepted. We believe that substantially all
of our revenues in the foreseeable future will be derived from sales of our
SpotLight systems. If our SpotLight systems fail to achieve broad market
acceptance among our customers and potential customers, our revenues could fall
below our and analysts' expectations which could cause our stock price to
decline. In light of the relatively recent introduction of our SpotLight
systems, in particular our SpotLight GSM system which is currently in field
trials in China, Taiwan and Australia, and the rapidly evolving nature of the
wireless communications industry, we cannot predict with any degree of
assurance whether our current or future smart antenna systems will achieve
broad market acceptance. We have not yet completed any commercial sales of our
SpotLight GSM system. We must demonstrate that our systems and embedded
solutions provide a cost-effective spectrum management solution that expands
wireless network operators' capacity within each operator's unique network
configuration and specifications. If our smart antenna systems do not achieve
widespread acceptance with wireless network operators, we will be unable to
increase our revenues as expected.
We may not be able to secure any agreements with manufacturers to integrate our
technology in their base station products.
We intend to develop partnerships with existing and emerging wireless
equipment manufacturers to integrate our technology in their next generation
base station equipment. Although we are currently in discussions with several
equipment manufacturers, we have not signed any definitive agreements to sell
or license our embedded technology for use in their products and we have only
completed one field trial of our embedded smart antenna solutions. Failure of
our embedded smart antenna solutions either to successfully integrate with next
generation base station equipment or to significantly enhance wireless voice
and data capacity could significantly reduce demand for these solutions. Given
the rapidly evolving nature of the wireless communications industry, we cannot
predict whether our embedded smart antenna solutions will
11
<PAGE>
achieve broad market acceptance. Our future growth is dependent in part upon
the acceptance and success of
our embedded smart antenna solutions. If our embedded smart antenna solutions
do not achieve widespread acceptance with wireless network operators, our
prospects for future growth will be adversely affected.
Our smart antenna systems are complex and may have errors or defects that are
detected only after deployments in complex networks, which may lead to loss of
customers and revenues and increased costs.
Our smart antenna systems are highly complex and are designed to be deployed
in complex networks. Although our systems are tested during manufacturing and
prior to deployment, they can only be fully tested when deployed in networks.
Consequently, our customers may discover errors after the systems have been
fully deployed. If we are unable to fix errors or other problems that may be
identified in full deployment, we could experience:
. costs associated with the remediation of any problems;
. loss of or delay in revenues;
. loss of customers;
. failure to achieve market acceptance and loss of market share;
. diversion of deployment resources;
. increased service and warranty costs;
. legal actions by our customers; and
. increased insurance costs.
Our limited experience in installing our systems may result in excessive costs
and delays which could cause us to lose customers.
Because we are one of the first companies to sell and deploy smart antenna
systems, there is little, if any, established field service expertise for the
installation of smart antenna systems in general or for the SpotLight systems
in particular. It is difficult to attract and maintain qualified field service
personnel and to train them to install our SpotLight systems. Failure to have
adequate numbers of trained field service personnel would adversely affect our
ability to competently install our systems on a timely basis, which may
adversely affect our customers and their business. In addition to our own
personnel, we have used and will continue to use subcontractors for some
installation and field service tasks. We may not be able to find sufficient
subcontractors with adequate experience and expertise and we may not be able to
retain their services on acceptable terms, if at all. In addition, we will be
providing expanded project management services to customers in the future, such
as the coordination of site preparation and antenna installation
subcontractors, which we have not previously provided before. We may not be
able to provide these expanded services in a timely and efficient manner,
thereby leading to delays in acceptance of such services by customers and
recognition of the revenue associated with such services by us.
If we are unable to reduce our installation and optimization costs, we may not
be able to achieve profitability.
We charge a fixed fee to install and optimize our SpotLight systems. To
date, our costs to install and optimize our systems have significantly exceeded
the revenues associated with this work. Our smart antenna systems must be
installed, integrated and optimized with existing equipment installed in our
customers' cell sites. This process can be lengthy, causing delays in a
customer's commercial deployment of our systems. These delays may be the result
of factors outside of our control, including:
. zoning restrictions on installing additional equipment in a cell site;
. difficulties associated with the topography of the intended coverage area
of a cell site, such as the presence of water or hillsides;
12
<PAGE>
. inability to easily access cell sites; and
. lack of experienced field service crews, particularly for international
deployments.
Failure to perform these field service tasks at a profit would adversely affect
our overall profitability. Additionally, our inability to correct field service
problems, whether or not in our control, may also harm our reputation and
competitive position in the industry.
We have limited manufacturing experience and facilities which may affect our
ability to expand our business.
Our manufacturing operations consist primarily of supplier and commodity
management and assembling finished goods from components and subassemblies
purchased from outside suppliers. We configure each SpotLight system to be
compatible with customer equipment, and our ability to achieve manufacturing
efficiencies by assembling systems before orders are received, therefore, is
limited. We intend to expand our manufacturing capacity, but due to our limited
experience with large scale operations, we may not be able to develop
internally the management structure or facilities needed to increase this
capacity.
Our current manufacturing facilities consist of a single facility in
Redmond, Washington. If our facilities or the facilities of our suppliers were
incapable of operating, even temporarily, or were unable to operate at or near
full capacity for any extended period, we would be unable to meet customers'
delivery expectations. In connection with our capacity expansion, we intend to
manufacture our SpotLight GSM systems in Taipei, Taiwan and may seek to develop
one or more additional manufacturing facilities. The addition of any facility
will likely increase the complexity of our operations and the risk of
inefficient management of our manufacturing operations. Our manufacturing
facilities are vulnerable to damage or interruption from earthquakes and other
natural disasters, power loss, sabotage, intentional acts of vandalism and
similar events. We do not have a formal disaster recovery plan, and we may not
carry sufficient business interruption insurance to compensate us for losses
that could occur.
Our inability to adequately subcontract our excess manufacturing needs may
cause delays in shipment of our systems and lost revenues.
We intend, in certain instances, to subcontract additional assembly
processes. If we are not able to successfully identify subcontractors with
adequate experience or fail to control the quality of systems produced by these
subcontractors, it may harm our reputation or cause our customers to decrease
spending on our systems. Additionally, we may not be able to contract with
third parties for additional manufacturing capacity on acceptable terms, which
may cause us to delay shipments of systems and consequently lose revenue.
Our reliance on a limited number of suppliers for our smart antenna systems
could impair our ability to manufacture and deliver our systems on a timely
basis.
Some parts and components used in our smart antenna systems are presently
available only from sole sources including linear power amplifiers supplied by
Powerwave Technologies, Inc. and integrated duplexer low-noise amplifiers
supplied by Filtronics Comtek, Ltd. Some other parts and components used in our
systems are available from a limited number of sources. Our 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. Any reduced availability of these parts or components when required
could materially impair our ability to manufacture and deliver our systems on a
timely basis and result in the cancellation of orders, which could
significantly harm our business and operating results.
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<PAGE>
The long lead time of some of our components could impair our ability to timely
deliver our systems if we do not accurately predict future demand or maintain
an inventory.
The purchase of some key components involves long lead times and, in the
event of unanticipated increases in demand for our smart antenna systems, we
may be unable to obtain such components in sufficient quantities to meet our
customers' requirements. We do not have guaranteed supply arrangements with any
of these suppliers, do not maintain an extensive inventory of parts or
components and customarily purchase 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 us by increasing product costs, or eliminating
or delaying the availability of such parts or components. In such event, our
inability to develop alternative sources of supply quickly and on a cost-
effective basis could materially impair our ability to manufacture and deliver
our systems on a timely basis and could significantly affect our revenues.
Our success is dependent on continuing to hire and retain qualified personnel,
and if we are not successful in attracting and retaining these personnel, we
may not be able to operate our business.
The success of our business depends upon the continued contributions of each
of our key technical and senior management personnel each of whom would be
difficult to replace. We have not entered into employment agreements with any
of our employees other than severance arrangements with Robert H. Hunsberger,
Douglas O. Reudink, Richard P. Henderson, Victor K. Liang and Stuart W.
Fuhlendorf and employment arrangements with Albert Jordan and Shimon Scherzer
as part of our acquisition of Adaptive Telecom. Except for Dr. Reudink, Mr.
Jordan and Mr. Scherzer, we have not entered into any non-competition
agreements with any of our employees. In addition, we anticipate that we will
need additional management personnel, if we are to be successful in increasing
production capacity and the scale of our operations as well as operating as a
public company.
To effectively manage our recent growth as well as any future growth, we
will need to attract and retain qualified engineering, financial,
manufacturing, quality assurance, sales, marketing and customer support
personnel. Competition for such personnel, particularly qualified engineers, is
intense in our markets. We have experienced difficulties in recruiting
sufficient numbers of qualified engineers in the past and we expect to continue
to experience difficulties in the future. There may be only a limited number of
persons with the requisite skills to serve in these positions, particularly in
the markets where we are located, and it may be increasingly difficult for us
to hire such personnel over time. As our product development efforts relate to
wireless standards that are widely deployed in foreign countries, such as GSM,
we may be required to recruit foreign engineers who have expertise in such
standards. Current U.S. immigration laws restrict our ability to hire foreign
employees, which could impair our product development efforts. The loss of any
key employee, the failure of any key employee to perform in his or her current
position, our inability to attract and retain skilled employees as needed or
the inability of our officers and key employees to expand, train and manage our
employee base could limit our ability to expand and become profitable.
Our management resources may become strained due to the rapid expansion of our
operations.
The growth of our operations has placed, and is expected to continue to
place, a significant strain on our financial and management resources as well
as our system design, manufacturing, sales and customer support capabilities.
From January 1, 1997 to June 30, 2000, we expanded from 107 to 295 employees.
With the acquisition of Adaptive Telecom in September 2000, we have added 18
employees. Most of our executive officers have no prior experience as executive
officers of publicly traded companies. Our new employees include a number of
key managerial, technical and operations personnel who have not yet been fully
integrated into our operations and we expect to add additional key personnel in
the near future. We have offices in Redmond, Washington, Allen, Texas, and
Campbell, California, and overseas locations, including Taipei, Taiwan,
Shanghai, China and Sao Paulo, Brazil. As we expand our operations to multiple
domestic and international locations, management of our operations has become
and will continue to become increasingly complex, difficult and expensive. In
order to manage growth effectively and increase or maintain profitability,
14
<PAGE>
we must implement and improve our operational, financial and management
information systems, procedures and controls on a timely basis.
Because we need to expand manufacturing capacity and sales, we require
substantial working capital which we may not be able to acquire.
We require substantial working capital to fund our business. Our future
capital requirements will depend upon many factors, including the success or
failure of our efforts to expand our production, sales and marketing efforts,
the status of competitive products, and the requirements of our efforts to
develop new smart antenna systems and system enhancements. We believe that
current capital resources are adequate to fund our operations until at least
October 31, 2001. Thereafter, we may be required to raise additional capital to
maintain growth or expand capacity which may not be available to us on
acceptable terms, if at all. We maintain a line of credit with Imperial Bank
with customary commercial rates and restrictions, which we have recently
renewed and increased. Any inability to obtain needed financing by us could
constrain our ability to meet current obligations or continue growing.
Our substantial sales of our SpotLight systems in international markets subject
us to various risks and costs which may harm our business.
We anticipate that international sales of our SpotLight systems in Asia,
Latin America and other international markets will continue to account for a
significant portion of our revenues for the foreseeable future. Risks and
associated costs inherent in our international business activities include:
. difficulties obtaining foreign regulatory approval for our smart antenna
systems;
. unexpected changes in regulatory requirements relating to the
telecommunications industry;
. greater difficulties collecting delinquent or unpaid accounts;
. lack of suitable export financing for our SpotLight systems;
. dependence upon independent sales representatives and other indirect
channels of distribution of our SpotLight systems;
. political and economic instability in the regions where we sell our
SpotLight systems;
. enforceability of contracts with foreign customers and distributors
governed by foreign laws; and
. lack of experienced technical personnel familiar with our products in
foreign markets.
As more of our international sales are derived from sales in Asia, an
increasing portion of our revenues could be subject to the economic and
political risks associated with that region.
We expect to begin to derive revenues from the sale of our SpotLight GSM
systems in 2000 in Asia in general and the greater China market in particular.
Changes in political or economic conditions in the region could adversely
affect our operations, in particular any deterioration of political relations
between the United States and the People's Republic of China or the People's
Republic of China and Taiwan could negatively affect our business. If economic
growth rates decline in Asia in general or the greater China market in
particular, expenditures for telecommunications equipment and infrastructure
improvements could decrease, which would negatively affect our business and our
operating results.
Our acquisition of Adaptive Telecom could adversely affect combined financial
results.
If the benefits of the merger of Adaptive Telecom into our company do not
exceed the costs associated with the merger, including any dilution to our
stockholders resulting from the issuance of shares in connection with the
merger, our financial results, including earnings per share, could be adversely
affected. In addition, we
15
<PAGE>
have recorded goodwill and intangible assets of approximately $86.0 million in
connection with the merger, which will be amortized over a period of between
three to five years and we have recorded deferred stock compensation of
approximately $17.4 million in connection with the merger which will be
amortized over the remaining vesting periods of related stock options and
restricted stock of up to four years.
The market price of our common stock may decline as a result of the merger of
Adaptive Telecom into our company.
The market price of our common stock may decline as a result of the merger
if:
. the integration of our company and Adaptive Telecom is unsuccessful;
. we do not achieve the perceived benefits of the merger as rapidly or to
the extent anticipated by financial or industry analysts or investors; or
. the effect of the merger on our financial results is not consistent with
the expectations of financial or industry analysts or investors.
The market price of our common stock could also decline as a result of
factors related to the merger which may currently be unforeseen. A decline in
the market price of our common stock could materially and adversely affect our
operating results.
We may engage in future acquisitions that dilute our stockholders, cause us to
incur debt or assume contingent liabilities and subject us to other risks.
We may make additional acquisitions of businesses, products or technologies
in the future. No assurance can be given as to our ability to successfully
integrate additional businesses, products, technologies or personnel that might
have been acquired or may be acquired in the future, and our failure to do so
could significantly affect our business and operating results. Moreover, we may
not be able to locate suitable acquisition opportunities and this inability
could impair our ability to grow as quickly as possible or obtain access to
technology that may be important to the development of our business.
Our limited ability to protect our intellectual property may affect our ability
to compete and we could lose customers.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our intellectual property or
technology. In the foreign markets in which we are active, such as Asia,
intellectual property laws and their enforcement are weaker than in the United
States. If our methods of protecting our intellectual property are not
adequate, our competitors may misappropriate our technology and we could lose
customers to these competitors. In addition, third parties may develop
alternative wireless communication technologies or products that do not
infringe on any of our patents or intellectual property. Moreover, competing
dissimilar technologies, such as those using wireline communication or using
new or different protocols, may be deployed which would cause us to lose
customers.
Claims that we infringe third party intellectual property rights or changes in
wireless standards and protocols could result in significant expense and
restrictions on our ability to sell our systems in particular markets.
From time to time, third parties have asserted patents, copyrights and other
intellectual property rights with regard to wireless and other technologies
that are important to our ability to develop smart antenna systems. We expect
that we 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. Compliance with technology protocols
established by various standards bodies may require configuration or operation
of our products in a manner which would infringe third party patents or other
intellectual property. Standards may be adopted which require the use of
antenna configurations which could require licensing of third party patents or
other intellectual property. In addition, in order to implement our embedded
solutions into third party
16
<PAGE>
equipment, we may be required to license third party patents. Any of this could
result in costly litigation or require us to obtain a license to intellectual
property rights of third parties. See "Business--Intellectual Property" for
more information regarding risks relating to protecting our intellectual
property rights and risks relating to claims of infringement of other
intellectual property rights.
Our systems and the business of our customers are subject to significant
government regulation which may cause uncertainty in the compliance of our
systems and delay in the purchase of our systems.
Many of our smart antenna systems are required to comply with numerous
domestic and international government regulations and standards, which vary by
market. As standards for products continue to evolve, we will need to modify
our systems or develop and support new versions of our systems to meet emerging
industry standards, comply with government regulations and satisfy the
requirements necessary to obtain approvals. Compliance with government
regulations and industry standards can each be a lengthy process, taking from
several months to longer than a year. It may be difficult for us to obtain
additional necessary regulatory approvals or comply with new industry standards
in a timely manner, if at all. Our inability to obtain regulatory approval and
meet established standards in a timely manner could delay or prevent entrance
into or force our departure from markets, which would harm our sales. In
addition, compliance with U.S. export control regulations may delay or prevent
the export of our products, data and technology to foreign customers,
distributors and wireless equipment partners, particularly in China.
In addition, our customers' operations are subject to extensive government
regulations. To the extent that our customers are delayed in deploying their
wireless systems as a result of existing or new standards or regulations, we
could experience delays in orders. Any delay could contribute to fluctuations
in our results of operations. See "Business--Government Regulation" for more
information regarding the governmental control and approval of our business.
Risks Related to the Wireless Industry
We depend on the capital spending patterns of wireless network operators, and
if their capital spending is decreased or delayed it may result in lower than
expected revenues.
Since we rely on wireless network operators to purchase our smart antenna
systems, any substantial decrease or delay in capital spending patterns in the
industry would negatively affect our revenues which could cause our stock price
to decline. The demand for our smart antenna systems depends to a significant
degree upon the magnitude and timing of capital spending by these operators for
constructing, rebuilding or upgrading their systems. The capital spending
patterns of wireless network operators depends on a variety of factors outside
our control, including access to financing, the status of federal, local and
foreign government regulation and deregulation, changing standards for wireless
technology, overall demand for analog and digital wireless services,
competitive pressures and general economic conditions. In addition, capital
spending patterns in the wireless industry can be subject to some degree of
seasonality, with lower levels of spending in the first calendar quarter, based
on annual budget cycles.
We must reduce our costs and introduce new systems in order to achieve and
maintain profitability.
We anticipate that average selling prices for our smart antenna systems will
need to decrease in the future in response to competitive pricing pressures and
new product introductions by competitors. To achieve profitability we will need
to reduce our manufacturing costs. If the price of base station equipment
continues to decrease, the addition of new cell sites may be viewed as a more
cost-effective alternative for wireless network operators seeking increased
capacity. In order to compete, we must lower average selling prices. To lower
average selling prices without adversely affecting gross profits, we will have
to reduce the manufacturing costs of our smart antenna systems through
engineering improvements and economies of scale in production and purchasing.
We may not be able to achieve cost savings at a rate needed to keep pace with
competitive pricing
17
<PAGE>
pressures. If we are unable to reduce costs sufficiently to offset the expected
declining average selling prices, we may not achieve profitability. Further, if
we cannot provide our distribution partners with sufficient financial incentive
to distribute our systems without adversely affecting our profitability, our
distribution strategy would be harmed which could result in the loss of current
and potential customers.
If we do not respond quickly to changing customer needs and product
introductions by our competition, our sales will decline and our products may
become obsolete.
The market for our current smart antenna systems and planned future systems
and embedded solutions is subject to rapid technological change, frequent new
system introductions and enhancements, product obsolescence, changes in
customer requirements and evolving industry standards. To be competitive, we
must successfully develop, introduce and sell new smart antenna systems or
system enhancements and embedded solutions that respond to changing customer
requirements on a timely and cost-effective basis.
Our future success will depend on our ability to develop new smart antenna
systems and system enhancements designed to:
. operate with different digital technologies and in some cases across
other principal manufacturers' base stations;
. achieve market acceptance of our present and future smart antenna systems
and embedded solutions; and
. keep pace with the development and introduction of competitive products
by competitors.
We have in the past experienced and may in the future experience delays in
development and introduction of smart antenna systems and system enhancements.
We may be required to obtain licenses to intellectual property rights held by
third parties to develop new smart antenna systems, system enhancements and
embedded solutions or to comply with evolving industry standards and there can
be no assurance that such licenses will be available on acceptable terms, if at
all. If we fail to timely and cost-effectively develop new smart antenna
systems, system enhancements and embedded solutions that respond to new
technologies and customer needs, the demand for our smart antenna systems may
fall and we could lose revenues.
If we fail to obtain cooperation from base station manufacturers, our smart
antenna systems may no longer be compatible with customers' equipment and we
may not be able to sell our smart antenna systems.
Our product strategy for our smart antenna systems relies on ensuring the
compatibility of our systems with base stations sold by wireless equipment
manufacturers. The commercial success and technical design of our embedded
solutions is dependent upon cooperation with base station manufacturers. If
base station manufacturers change or modify their equipment so that our smart
antenna systems or embedded solutions are no longer compatible, we would need
to redesign our systems and solutions to meet any changed technology or
modified equipment. This may involve substantial costs and potentially a
prolonged development stage for new systems and solutions. Consequently, we may
need to rely on the cooperation of customers or base station manufacturers to
ensure that our smart antenna systems and embedded solutions remain compatible
if base station equipment is modified. As our systems and solutions are
designed to reduce the need to purchase incremental base stations for capacity
expansion of wireless networks, obtaining cooperation from base station
manufacturers may prove difficult. If we are unable to obtain this cooperation
and as a result cannot make our systems and solutions compatible with base
station equipment, we may not be able to sell our smart antenna systems and
embedded solutions.
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<PAGE>
Intense competition in the wireless infrastructure equipment market may lead to
reduced prices, revenues and market share causing the price of our stock to
decline.
The market for spectrum management solutions is relatively new but we expect
it to become increasingly competitive. This market is part of the broader
market for wireless infrastructure equipment which is dominated by a number of
large companies including Lucent, Motorola, Ericsson, Nortel, Nokia, Siemens,
Alcatel and others. Our smart antenna systems compete with other solutions to
expand network capacity. These alternative solutions include other smart
antenna systems, adding base stations for capacity, deploying efficient digital
technologies and various enhancements to digital technologies. We believe that
the principal competitive factor is the cost-effective delivery of increased
capacity to wireless network operators. If our systems are not the most cost-
effective solution, our ability to attract and retain customers would be
harmed. We believe that base station manufacturers, which provide wireless
network capacity through sales of additional base stations or the development
of competitive technologies, represent the most significant competitive threat
to us. For more information on the competitive risks facing us, please see
"Business--Competition."
The failure of the wireless communications services industry to grow at the
rates currently anticipated would seriously harm our business, results of
operation and financial condition.
Our future operating results will depend upon the continued growth and
increased availability and acceptance of wireless communications services.
There can be no assurance that the volume and variety of wireless services or
the markets for and acceptance of such services will grow, or that any such
growth will create a demand for our systems. If the wireless communications
market fails to grow, or grows more slowly than anticipated, our sales will be
lower than expected, which would seriously harm our business.
The wireless 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 wireless technologies will
continue to achieve market acceptance in the future. If a digital technology
for which we develop a smart antenna system is not widely adopted, the
potential size of the market for this system would be limited, and we may not
recover the cost of development. Further, we may not be able to redirect our
development efforts toward those digital wireless technologies that do sustain
market acceptance in a timely manner, which would impede our ability to achieve
or sustain profitability once achieved.
The market for mobile delivery of Internet-based services may not materialize
which would be detrimental to our future prospects.
We anticipate that significant wireless capacity demand will result from the
proliferation of mobile delivery of Internet-based services. Data services
often put more strain on wireless network capacity than voice creating greater
constraints on the limited capacity of wireless network operators. If the
market for mobile delivery of Internet-based services does not expand at
projected rates, our business may suffer.
Risks Related to this Offering
Our existing stockholders have significant control of our management and
affairs, which they could exercise against your best interests.
Following the completion of this offering, our officers and directors,
together with entities that may be deemed affiliates of or related to such
persons or entities, will beneficially own approximately 40.8% of our
outstanding common stock. As a result, these stockholders, acting together, may
be able to control our management and affairs and matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control of Metawave and might affect the
market price of our common stock.
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<PAGE>
The common stock sold in this offering will increase the supply of our common
stock on the public market, which may cause our stock price to decline.
The sale into the public market of the common stock to be sold in this
offering could materially adversely affect the market price of our common
stock. Once the registration statement of which this prospectus forms a part is
declared effective, approximately 85% of the shares of common stock offered
hereby will be eligible for immediate resale into the public market. The
presence of these additional shares of common stock in the public market may
depress our stock price.
Following this offering, a substantial number of our shares of common stock
will become available for sale in the public market, which could cause the
market price of our stock to decline.
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options and warrants) in the
public market in the future, the market price of our common stock could fall.
These sales also might make it more difficult for us to sell equity or equity-
related securities in the future at a time and price acceptable to us. We will
have 43,201,368 outstanding shares of common stock based upon shares
outstanding as of September 30, 2000. Of these shares, the 4,575,467 shares
sold in this offering will be freely transferable without restriction under the
Securities Act, unless held by "affiliates" of Metawave as that term is used in
the Securities Act and the regulations promulgated thereunder. As of September
30, 2000, 845,232 shares are not eligible for sale pursuant to Rule 144.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify forward-
looking statements. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
the wireless communications industry. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
prospectus. Our actual results could differ materially from those anticipated
in these forward-looking statements for many reasons, including the risks faced
by us and described in the preceding pages and elsewhere in this prospectus.
USE OF PROCEEDS
We will not receive any portion of the proceeds from the sale of the
5,361,803 shares of Common Stock being offered by the selling stockholders.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
MTWV. The last reported sale price of our common stock on the Nasdaq National
Market on October 27, 2000 was $9.88. The following table sets forth the range
of high and low closing sale prices, as reported on the Nasdaq National Market,
for each quarter since our initial public offering on April 27, 2000. At
September 30, 2000, we had 234 holders of record of our common stock and
43,201,368 shares outstanding.
<TABLE>
<CAPTION>
Price Range
of Common
Stock
-------------
High Low
------ ------
<S> <C> <C>
Second Quarter (commencing on April 27, 2000)................. $34.19 $10.31
Third Quarter................................................. $30.00 $18.31
</TABLE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock or
other securities. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business and do not
anticipate paying cash dividends in the foreseeable future. The terms of our
credit agreement with Imperial Bank restrict our ability to pay dividends and
in the future the terms of other credit agreements may impose restrictions or
limitations on the payment of dividends.
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CAPITALIZATION
The actual column in the following table sets forth our actual
capitalization as of June 30, 2000.
The pro forma column in the following table gives effect to the acquisition
of Adaptive Telecom Inc. including:
. the issuance of 5,361,803 shares of our common stock to the selling
stockholders of Adaptive Telecom. This includes 786,336 shares of
restricted stock issued to employees, subject to vesting requirements
that may be repurchased by Metawave upon termination at a weighted
average price of $0.11 per share;
. the recognition of $17,350,000 of deferred stock compensation resulting
from the issuance of the restricted stock referred to above and the
issuance of stock options for 138,166 shares of Metawave common stock in
exchange for Adaptive Telecom stock options;
.the recognition of a $10,400,000 charge for in process research and
development resulting from the purchase price allocation, as if the
acquisition had occurred on June 30, 2000.
<TABLE>
<CAPTION>
June 30, 2000
--------------------
Actual Pro Forma
--------- ---------
(in thousands)
<S> <C> <C>
Long-term obligations, less current portion.............. $ 2,690 $ 2,690
Stockholders' equity:
Preferred stock, actual--10,000,000 shares authorized,
none issued and outstanding........................... -- --
Common stock, actual--150,000,000 shares authorized,
37,824,959 shares issued and outstanding; pro forma
43,186,762 shares issued and outstanding.............. 209,541 321,349
Deferred stock compensation.............................. (2,181) (19,531)
Accumulated other comprehensive income................... (59) (59)
Accumulated deficit...................................... (134,921) (145,321)
--------- ---------
Total stockholders' equity............................. 72,380 156,438
--------- ---------
Total capitalization................................... $ 75,070 $ 159,128
========= =========
</TABLE>
The information in the table excludes as of June 30, 2000:
. 4,529,160 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $8.33 per share;
. 107,498 shares issuable upon exercise of an outstanding common stock
warrant at an exercise price of $5.48 per share; and
. an aggregate of 890,809 shares available for future issuance of stock
options under our stock plans.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and notes to our
consolidated financial statements and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
elsewhere in this prospectus. The consolidated statements of operations data
for the years ended December 31, 1997, 1998 and 1999, and the balance sheet
data at December 31, 1998 and 1999, are derived from audited consolidated
financial statements included elsewhere in this prospectus. The consolidated
statement of operations data for the period from inception to December 31, 1995
and for the year ended December 31, 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from audited consolidated
financial statements not included in this prospectus. The consolidated
statement of operations data for the six-month periods ended June 30, 1999 and
2000, and the consolidated balance sheet data at June 30, 2000, are derived
from unaudited interim financial statements that have been prepared on a basis
consistent with our audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of the financial positions and results of operations at
those dates. The results for the six months ended June 30, 2000 are not
indicative of the results that may be expected for the entire year. See notes 1
and 9 of Notes to Consolidated Financial Statements for an explanation of the
number of shares used to compute shares used in calculation of basic and
diluted net loss per share. Pro forma basic and diluted net loss per share
reflects the pro forma effect of convertible and redeemable preferred stock as
if such shares were converted to common stock at the time of issuance.
<TABLE>
<CAPTION>
Period from
January 19, 1995 Six Months Ended
(inception) to Year ended December 31, June 30,
December 31, -------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
---------------- -------- -------- -------- -------- -------- --------
(in thousands, except per share
data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ -- $ 1,291 $ 1,450 $ 15,991 $ 22,596 $ 8,387 $ 20,694
Cost of revenues........ -- 1,097 1,728 18,028 22,236 8,919 15,193
------- -------- -------- -------- -------- -------- --------
Gross profit (loss)..... -- 194 (278) (2,037) 360 (532) 5,501
Operating expenses:
Research and
development............ 883 7,186 13,083 18,495 22,787 11,043 12,687
Sales and marketing..... 84 1,704 5,383 11,346 11,080 5,416 4,876
General and
administrative......... 168 2,434 3,762 5,887 5,732 2,934 2,945
------- -------- -------- -------- -------- -------- --------
Total operating
expenses............... 1,135 11,324 22,228 35,728 39,599 19,393 20,508
------- -------- -------- -------- -------- -------- --------
Loss from operations.... (1,135) (11,130) (22,506) (37,765) (39,239) (19,925) (15,007)
Other income (expense),
net.................... 135 335 402 (6,563) (3,174) (3,722) 726
------- -------- -------- -------- -------- -------- --------
Net loss................ $(1,000) $(10,795) $(22,104) $(44,328) $(42,413) $(23,647) $(14,281)
------- -------- -------- -------- -------- -------- --------
Basic and diluted net
loss per share......... $ (0.55) $ (5.89) $ (12.18) $ (21.88) $ (18.98) $ (10.88) $ (0.99)
======= ======== ======== ======== ======== ======== ========
Shares used in
computation of basic
and diluted net loss
per share ............. 1,833 1,833 1,815 2,026 2,235 2,173 14,378
======= ======== ======== ======== ======== ======== ========
Pro forma basic and
diluted net loss per
share.................. $ (1.77) $ (0.43)
======== ========
Shares used in
computation of pro
forma net loss per
share.................. 23,931 33,129
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------------------------- 2000
1995 1996 1997 1998 1999 Actual
------- ------- ------- ------- -------- ----------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 1,422 $19,092 $13,334 $10,763 $ 20,165 $ 61,356
Working capital......... 4,280 17,722 15,677 (17,135) 22,759 68,993
Total assets............ 6,135 21,747 22,575 32,510 40,946 89,088
Long term obligations,
less current portion... 96 1,757 2,978 4,413 2,503 2,690
Convertible and
redeemable preferred
stock and warrants..... 5,500 30,100 49,410 61,595 144,102 --
Common stock............ 10 10 1,968 2,179 3,573 209,541
Accumulated deficit..... (1,000) (11,795) (33,899) (78,227) (120,640) (134,921)
Stockholders' equity
(deficit).............. (990) (11,785) (33,136) (76,596) (117,954) 72,380
</TABLE>
23
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA AND OTHER DATA
In the table below, set forth is unaudited selected pro forma combined
financial information for Metawave as if our acquisition of Adaptive Telecom
Inc., had been completed on January 1, 1999 for income statement purposes and
on June 30, 2000 for balance sheet purposes.
This unaudited selected pro forma combined financial information should be
read in conjunction with the separate historical financial statements and
accompanying notes of Metawave and Adaptive Telecom and the unaudited pro forma
combined condensed financial statements, which are included elsewhere in this
document. You should not rely on the unaudited selected pro forma financial
information as an indication of the results of operations or financial position
that would have been achieved if the merger had taken place earlier or of the
results of operations or financial position of Metawave after the completion of
the acquisition. Pro forma basic and diluted net loss per share reflects the
pro forma effect of convertible and redeemable preferred stock as if such
shares were converted to common stock at the time of issuance.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
1999 2000
------------ --------------
(Pro Forma) (Pro Forma)
(In thousands,
except per share data)
(unaudited)
<S> <C> <C>
Pro Forma Combined Statement of Operations Data:
Revenues.......................................... $ 26,146 $ 21,202
Cost of revenues.................................. 24,831 15,583
-------- --------
Gross profit (loss)............................... 1,315 5,619
Operating expenses:
Research and development.......................... 30,935 14,549
Sales and marketing............................... 12,260 5,293
General and administrative........................ 11,844 3,404
Amortization of intangibles and goodwill.......... 18,122 9,061
-------- --------
Total operating expenses.......................... 73,161 32,307
-------- --------
Loss from operations.............................. (71,846) (26,688)
Other income (expense), net....................... (3,066) 760
-------- --------
Net loss.......................................... $(74,912) $(25,928)
======== ========
Basic and diluted net loss per share.............. $ (10.61) $ (1.33)
======== ========
Shares used in computation of basic and diluted
net loss per share............................... 7,060 19,537
======== ========
Pro forma basic and diluted net loss per share.... $ (2.61) $ (0.68)
======== ========
Shares used in computation of pro forma net loss
per share........................................ 28,756 38,288
======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, 2000
-------------
(Pro Forma)
(unaudited)
<S> <C>
Pro Forma Combined Balance Sheet Data:
Cash and cash equivalents......................................... $ 61,935
Working capital................................................... 66,704
Total assets...................................................... 176,080
Long term obligations, less current portion....................... 2,690
Common stock...................................................... 321,349
Accumulated deficit............................................... (145,321)
Stockholders' equity.............................................. 156,438
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We provide smart antenna systems and embedded solutions to wireless network
operators facing capacity constraints in the wireless communications industry.
From inception in January 1995 through December 31, 1997, our operating
activities related primarily to conducting research and development, building
market awareness, recruiting management and technical personnel and building an
operating infrastructure. Shipment for commercial sale of our initial SpotLight
system began late in the fourth quarter of 1997 and we first recognized
revenues for the sale of our SpotLight system in the first quarter of 1998.
Since the beginning of 1998, our operating activities have been focused on
increasing sales, new product development and expanding manufacturing capacity.
Since inception, we have incurred significant losses and as of June 30, 2000,
had an accumulated deficit of $134.9 million.
Our revenues are derived primarily from sales of our SpotLight systems,
which includes the sale of hardware and the licensing of software, and from
related installation and optimization services. We believe that substantially
all of our revenues in the near and medium term will be derived from sales of
our SpotLight systems. Our sales cycles can be lengthy and the related
contracts typically include performance specifications and customer acceptance
conditions in connection with the sale of each system to a new customer.
The emergence of Third Generation (3G) air interface standards will lead
wireless infrastructure manufacturers to develop a new generation of equipment.
In addition to providing increased voice capacity, this 3G infrastructure will
also enhance wireless data transmission rates. This may lead to the
proliferation of mobile Internet services. In addition to sales of our
Spotlight systems, we are developing embedded smart antenna solutions for
wireless equipment manufacturers that we believe will enhance wireless voice
and data capacity. Although we are currently in discussions with a number of
wireless equipment manufacturers, we have not signed any definitive agreements
regarding the embedding of our technology in their products.
Acquisition of Adaptive Telecom, Inc.
On September 21, 2000, we acquired Adaptive Telecom, Inc. by issuing
5,361,803 shares of Metawave common stock and stock options for 138,166 shares
of Metawave common stock in exchange for all outstanding capital stock and the
assumption of all outstanding options to acquire Adaptive Telecom common stock.
This acquisition, valued at $114.3 million, resulted in a charge for in-process
research and development of $10.4 million, goodwill of $79.0 million, other
intangible assets of $7.0 million, and deferred stock compensation of $17.4
million. The $10.4 million in-process research and development was expensed in
the quarter ended September 30, 2000. Goodwill and other intangible assets have
estimated useful lives of between three to five years which will be amortized
on a straight-line basis.
For the years ended December 31, 1998 and 1999, Adaptive Telecom had total
revenues of $2.7 million and $3.6 million, respectively. Cost of revenues
increased slightly from $2.3 million in 1998 to $2.6 million in 1999 and
operating expenses increased from $522,000 to $1.0 million. At December 31,
1998 and 1999 Adaptive Telecom had an accumulated deficit of $69,000 and
$26,000, respectively.
Operations
Revenues. We generate revenues through, the sale of our smart antenna
systems and related installation and optimization services. Our Spotlight
systems revenues are recognized when title to the system and risk of loss is
transferred to the customer and all customer acceptance conditions, if any,
have been satisfied, and collection probable. Services revenues, generally for
installation and optimization, are recognized when the services have been
performed and all customer acceptance conditions, if any, have been satisfied.
Our maintenance contract revenues are recognized ratably over the term of the
agreement (typically one year). Any billings in excess of our revenues are
classified as deferred revenue and related systems are recorded as
25
<PAGE>
inventory. Revenues from nonrecurring engineering contracts are recognized
based on the percentage-of-completion method.
Our contract terms including pricing and acceptance criteria, if any,
typically vary depending upon the order. Consequently, our revenues may vary
from quarter to quarter depending on the length of the sales cycle and the
applicable contract terms. To date, our international sales have been
denominated in U.S. dollars. However, in the future, a portion of our
international sales may be denominated in foreign currencies. Sales to ALLTEL,
Grupo Iusacell Celular S.A. de C.V. of Mexico, and Southwestco represent
substantially all our revenues for the year ended December 31, 1999. With the
recent mergers and consolidations in the wireless industry, we expect a limited
number of customers will account for a substantial percentage of revenues for
the foreseeable future. For the six months ended June 30, 2000, AirTouch
Communications, Inc. (now part of Verizon Wireless) and Grupo Iusacell Celular
S.A. de C.V. accounted for over 85.7% of our total revenues.
Cost of Revenues. Our cost of revenues typically consists of material
components, system assembly and testing, and overhead expenses. Our gross
margins are generally higher for hardware revenues than for service revenues.
We anticipate that our overall gross margins will fluctuate from period-to-
period as a result of shifts in product mix, the proportion of direct and
indirect sales, anticipated decreases in average selling prices and our ability
to reduce costs.
Research and Development. Our research and development expense consists
principally of salaries, related personnel expenses, consultant fees and
prototype expenses related to the design, development, testing and enhancement
of our SpotLight systems. As of June 30, 2000, all of our research and
development costs had been expensed as incurred. We believe that continued
investment in research and development is critical to achieving our strategic
product development and cost reduction objectives and, as a result, expect this
expense to continue to increase significantly in absolute dollars in the
future.
Sales and Marketing. Our sales and marketing expense consists of salaries,
sales commissions and related expenses for personnel engaged in marketing,
sales and field service support for new installations and installed base, as
well as promotional expenditures. We believe that these expenses will increase
in absolute dollars as the marketing campaigns for our SpotLight 2000 and
SpotLight GSM systems expand and we increase our sales personnel.
General and Administrative. Our general and administrative expense consists
primarily of salaries and personnel related expenses, recruiting and relocation
expenses, professional and consulting fees, and other general corporate
expenses. We expect this expense to increase as we add personnel and incur
additional costs related to our operation as a public company.
Stock compensation expense. We have recorded deferred stock-based
compensation of $5.6 million related to stock options granted below fair market
value for accounting purposes through June 30, 2000. This amount represents the
difference between the exercise price of these stock option grants and the
deemed fair value of the common stock at the time of grant. Of this amount, we
amortized approximately $3.4 million through that same period. In connection
with our acquisition of Adaptive Telecom, an additional $17.4 million of
deferred stock compensation was recorded in September 2000 related to unvested
stock options and restricted stock of Adaptive Telecom. The remaining
unamortized deferred stock compensation will be amortized using a graded
vesting approach over the remaining vesting periods of the related options and
restricted stock, of up to four years. As a result, the amortization of stock-
based compensation will impact our reported results of operations primarily
through fiscal 2004. Amortization of the deferred stock compensation from the
acquisition will be $6.6 million, $8.8 million, $1.6 million, $379,000 and
$53,000 in 2000, 2001, 2002, 2003 and 2004, respectively. The stock-based
compensation expense has been allocated to costs of revenues, research and
development expense, sales and marketing expensing and general and
administrative expense, as appropriate.
26
<PAGE>
Recent Development
On October 24, 2000, we released our results for the quarter ended September
30, 2000. Revenue for the quarter increased to $15.1 million, a 32% increase
over $11.4 million in the quarter ended June 30, 2000 and a 165% increase over
revenue of $5.7 million for the quarter ended September 30, 1999. Revenue for
the nine months ended September 30, 2000 was $35.8 million, an increase of 154%
over the comparable period in 1999. Gross profit increased to $4.4 million in
the third quarter of 2000 compared to $3.3 million in the second quarter of
2000 and compared to break even margins for the same period in 1999.
Comparatively, gross margins improved to 29.1% in the third quarter of 2000
compared to break even margins in the third quarter of 1999.
Pro forma net loss for the quarter ended September 30, 2000 was $5.6 million
or $0.15 per share, compared to a net loss of $8.8 million or $0.29 per share
in the third quarter of 1999. Pro forma net loss for the nine months ended
September 30, 2000 was $19.9 million or $0.58 per share compared to $32.5
million or $1.49 for the comparable period in 1999. Including Adaptive Telecom
merger-related charges and amortization of purchased intangibles and deferred
stock compensation, we reported a net loss of $17.3 million or $0.45 per share
for the quarter ended September 30, 2000 and a net loss of $31.6 million or
$0.92 per share for the nine months ended September 30, 2000. Pro forma net
losses reflect the eliminations of acquisition related charges and stock
compensation expense resulting from the acquisition.
Results of Operations
Six Months Ended June 30, 2000 and 1999
Revenues. Revenues were $20.7 million for the six months ended June 30, 2000
and $8.4 million for the six months ended June 30, 1999, an increase of 146.4%.
This increase was primarily due to increased unit sales of our CDMA SpotLight
systems and increased revenues derived from sales of optional equipment.
International sales of our systems accounted for 47.5% of total revenues for
the six months ended June 30, 2000 while all of our revenues for the six months
ended June 30, 1999 were derived from sales in the United States. Our largest
international customer, Grupo Iusacell Celular S.A. de C.V. of Mexico,
accounted for 46.2% of our revenues for the first half of year 2000. Grupo
Iusacell Celular S.A. de C.V. of Mexico operates in four of the nine Mexican
geographical regions, and we sold our systems to each of these four regions,
including the most populous region, Mexico City, for the first time in the
second quarter of 2000.
Gross Profit. Gross profit for the six months ended June 30, 2000 increased
to $5.5 million from a loss of $532,000 for the six months ended June 30, 1999.
The increase was primarily due to (1) decreased product cost due to design
changes over the last year, (2) increased overhead absorption due to higher
business volumes in the second half of 2000, (3) lower material product cost
due to purchasing volumes and overall lower component costs and (4) higher
margin product mix of CDMA digital products in the year 2000. As a percentage
of sales, gross margin was 26.6% in the first six months of 2000, compared to a
negative gross margin of 6.3% in the first six months of 1999.
Research and Development. Research and development expense increased 15.5%
to $12.7 million from $11.0 million for the six months ended June 30, 2000 over
the same period in 1999. The increase in research and development expense was
primarily due to continuing development and testing of our SpotLight 2000 CDMA
and our SpotLight GSM systems. In addition, we are continuing to develop new
features and technologies which will be marketed as enhancements to the
existing offerings and as new smart antenna products.
Sales and Marketing. Sales and marketing expense decreased 9.3% from $5.4
million to $4.9 million for the six months ended June 30, 2000 as compared to
the same period in 1999. The decrease was primarily due to staffing realignment
and adjusted sales compensation structure in the year 2000.
General and Administrative. General and administrative expense for the six
months ended June 30, 2000 and 1999 remained constant at $2.9 million.
27
<PAGE>
Other Income (Expense), Net. Our total other income (expense), net amounted
to an income of $726,000 for the six months ended June 30, 2000 compared to an
expense of $3.7 million in the same period in 1999. The change from expense to
income was primarily due to (1) the reduction of interest expense as a result
of the repayment of our $29.0 million Senior Secured Bridge Notes, bearing
interest at 13.75% with the final payment on this note made on April 28, 1999,
and (2) the receipt of $58.9 million from the initial public offering of our
common stock in the second quarter of 2000. All proceeds were invested in high
quality short-term investments. We received interest income of $1.0 million for
the six months ended June 30, 2000.
Years Ended December 31, 1999 and 1998
Revenues. Revenues were $22.6 million in 1999 and $16.0 million in 1998, an
increase of 41.3%. This increase was primarily due to increased unit sales of
our SpotLight systems, increased revenues per unit sold and the introduction of
a new version of our SpotLight 2000 CDMA system in July 1999. International
sales of our systems accounted for 26.0% of revenues in 1999 and 23.5% in 1998.
Cost of Revenues. Our cost of revenues was $22.2 million in 1999 and $18.0
million in 1998, an increase of 23.3%. The increase in cost of revenues was
primarily the result of increased units sold and change in product mix from
analog systems to our SpotLight 2000 CDMA system. Also, in 1999 we began to
include in cost of revenues the personnel expenses related to field
installation and engineering services. This change was made to properly align
direct costs and overhead with revenues.
Research and Development. Research and development expense was $22.8 million
in 1999 and $18.5 million in 1998, an increase of 23.2%. The increase was
primarily due to increased personnel related to the development and testing of
our SpotLight GSM system and our SpotLight 2000 CDMA system.
Sales and Marketing. Sales and marketing expense was $11.1 million in 1999
and $11.3 million in 1998, a decrease of 1.8%. The decrease was primarily due
to including in cost of revenues the personnel expenses associated with field
installation and engineering services.
General and Administrative. General and administrative expense was $5.7
million in 1999 and $5.9 million in 1998, a decrease of 3.4%. The decrease was
primarily due to the reduction of administrative personnel and reductions in
outside professional services.
Other Income (Expense), Net. Our total other income (expense), net amounted
to an expense of $3.2 million in 1999 compared to an expense of $6.6 million in
1998. The decreased expense was primarily the result of reduced interest
expense as a result of the repayment of our $29.0 million Senior Secured Bridge
Notes bearing interest at 13.75% in April 1999. Gross other income increased by
$271,000 from 1998 to 1999 due to income from short-term investments in 1999
made with the proceeds from the Series E preferred stock financing.
Years Ended December 31, 1998 and 1997
Revenues. Revenues were $16.0 million in 1998 and $1.5 million in 1997. This
increase reflected our first full year of revenues resulting from the
commercial deployment of our SpotLight systems. Our revenues for 1997 consisted
primarily of services provided by the Network Services division which was
discontinued and sold in March 1998.
Cost of Revenues. Our cost of revenues was $18.0 million in 1998 and $1.7
million in 1997. The increase was primarily related to costs associated with
introducing our analog system and the first version of our SpotLight CDMA
system.
Research and Development. Research and development expense was $18.5 million
in 1998 and $13.1 million in 1997, an increase of 41.4%. The increase was
primarily attributable to increased personnel related to the introduction of
our analog system, development of the first version of our SpotLight CDMA
system, and start up costs related to the development of our GSM system.
28
<PAGE>
Sales and Marketing. Sales and marketing expense was $11.3 million in 1998
and $5.4 million in 1997, an increase of 110.8%. The increase was primarily
attributable to expansion of our direct sales force, marketing and service
support staff. Also in 1998, we increased expenses associated with initial
field trials, marketing communications, and training and documentation.
General and Administrative. General and administrative expense was $5.9
million in 1998 and $3.8 million in 1997, an increase of 56.5%. The increase
reflected the addition of administrative staff, new facilities in Redmond,
Washington and Allen, Texas, increased outside professional services associated
with financings and expenses associated with the implementation of our
enterprise resource planning system.
Other Income (Expense), Net. Our total other income (expense), net amounted
to an expense of $6.6 million in 1998 compared to income of $402,000 in 1997.
The increased interest expense was primarily the result of issuing the $29.0
million Senior Secured Bridge Notes in May 1998, bearing interest at 13.75% per
annum.
Selected Quarterly Results of Operations
The following table sets forth certain unaudited quarterly consolidated
statement of operations data for the nine quarters ended June 30, 2000. This
unaudited information has been prepared substantially on the same basis as the
annual audited financial statements appearing elsewhere in this prospectus, and
includes all necessary adjustments that we consider necessary to present fairly
the financial information for the periods presented. The quarterly data should
be read in conjunction with the audited consolidated financial statements and
the notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1998 1998 1998 1999 1999 1999 1999 2000 2000
-------- --------- -------- --------- -------- --------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ 3,963 $ 6,557 $ 2,933 $ 6,834 $ 1,553 $ 5,725 $ 8,484 $ 9,329 $11,365
Cost of revenues........ 3,486 6,374 5,258 7,059 1,860 5,768 7,549 7,094 8,099
------- -------- -------- -------- -------- ------- ------- ------- -------
Gross profit (loss)..... 477 183 (2,325) (225) (307) (43) 935 2,235 3,266
Operating expenses:
Research and
development........... 4,450 5,525 4,945 5,392 5,651 5,301 6,443 6,374 6,313
Sales and marketing.... 2,091 3,347 3,912 2,694 2,722 2,434 3,230 2,343 2,533
General and
administrative........ 1,385 1,177 2,281 1,280 1,654 1,360 1,438 1,325 1,620
------- -------- -------- -------- -------- ------- ------- ------- -------
Total operating
expenses............. 7,926 10,049 11,138 9,366 10,027 9,095 11,111 10,042 10,466
------- -------- -------- -------- -------- ------- ------- ------- -------
Loss from operations.... (7,449) (9,866) (13,463) (9,591) (10,334) (9,138) (10,176) (7,807) (7,200)
Other income (expense),
net.................... (1,719) (2,202) (2,696) (3,108) (614) 293 255 62 664
------- -------- -------- -------- -------- ------- ------- ------- -------
Net loss................ $(9,168) $(12,068) $(16,159) $(12,699) $(10,948) $(8,845) $(9,921) $(7,745) $(6,536)
======= ======== ======== ======== ======== ======= ======= ======= =======
</TABLE>
Our revenues increased significantly over the last three quarters primarily
as a result of increased unit sales of our SpotLight systems and expanding
customer base. Our revenues in the last quarter of 1998 decreased compared to
the previous quarter due to delays in receiving orders from a significant
customer. Our revenues in the second quarter of 1999 declined compared to the
previous quarter primarily due to delays in orders associated with the
transition from analog to CDMA systems.
Research and development expense has generally remained constant on a
quarterly basis but increased in the last quarter of 1999 and in the first six
months of 2000 due to expenses associated with costs of prototype systems and
write off of certain capital assets associated with research and development.
Sales and marketing
29
<PAGE>
expense has fluctuated with the number of personnel in sales, marketing and
customer support in 1999. The increase in the fourth quarter of 1999 was due to
$500,000 in commissions expense. General and administrative expense has
fluctuated with the number of personnel. The increase in the fourth quarter of
1998 was the result of the establishment of a bad debt reserve and expenses
associated with the cancellation of a public offering. As a result of our
reduction in force in the third quarter of 1999, general and administrative
expense declined. The increase in the second quarter of 1999 and 2000 was a
result of employee relocation.
Our limited operating history makes the prediction of future operating
results difficult. Our business prospects must be considered in light of the
risks and uncertainties often encountered by early-stage companies in the
wireless communications market. We may not be successful in addressing these
risks and uncertainties. We have experienced significant percentage growth in
revenues in recent periods; however, we do not believe that prior growth rates
are indicative of future growth rates. It is likely that in some future quarter
our operating results may fall below the expectations of securities analysts
and investors. In this event, the trading price of our common stock may fall
significantly.
As a result of our acquisition of Adaptive Telecom Inc., we expect our net
loss to increase significantly through 2005 as we amortize a total of $103.4
million of costs associated with acquired goodwill, and acquired intangible
assets and deferred stock compensation. Goodwill and the intangible assets will
be amortized over their respective useful lives on a straight-line basis. The
amortization expense related to goodwill and intangibles will be $4.5 million,
$18.1 million, $18.1 million, $17.5 million, $15.8 million, and $11.9 million
in 2000, 2001, 2002, 2003, 2004, and 2005, respectively. Deferred stock
compensation will be amortized over the remaining related vesting periods using
the graded vesting approach. Amortization of deferred stock compensation will
be $6.6 million, $8.8 million, $1.6 million, $379,000 and $53,000 in 2000,
2001, 2002, 2003, and 2004, respectively.
Liquidity and Capital Resources
Prior to our initial public offering, we financed our operations primarily
through private sales of preferred stock and common stock and the issuance of
debt instruments. In the second quarter of 2000, we completed our initial
public offering of a total of 7,187,500 shares of our common stock. Net
proceeds from all of the foregoing transactions totaled $242.2 million.
At June 30, 2000, we had $61.4 million in cash and cash equivalents. For the
six months ended June 30, 2000, we used net cash in operating activities of
$16.5 million compared to $19.8 million over the same period in 1999. Our
operating activities included major uses of cash to fund our net loss of $14.3
million, increased inventories of $2.4 million, increased accounts receivable
of $4.0 million and decreased deferred revenues of $1.4 million. We partially
offset cash uses with increases in accounts payable and accrued liabilities of
$3.2 million. For the twelve months ended December 31, 1999, we used net cash
in operating activities of $37.8 million. Our operating activities included
major uses of cash to fund our net loss of $42.4 million. We also used cash by
increasing accounts receivable by $5.8 million and reduced accounts payable and
accrued liabilities by $1.4 million. We partially offset cash uses by lowering
inventories by $3.8 million, increasing deferred revenues by $1.6 million. Our
net cash used in operating activities in 1998 amounted to $34.9 million.
Our net cash used in investing activities for the six months ended June 30,
2000 and 1999 were $174,000 and $1.1 million, respectively. Our net cash used
in investing activities in 1999 was $1.3 million. Our 1998 net cash used in
investing activities was $2.5 million. These investing activities were
primarily for purchasing of testing equipment, manufacturing facilities and
leasehold improvements to support our research and development and
manufacturing efforts.
Our net cash provided by financing activities for the six months ended June
30, 2000 was $57.9 million compared to $49.5 million in the same period in
1999. During the second quarter of 2000, we received net proceeds of $58.9
million from the initial public offering of our common stock. Net cash provided
by financing activities was $48.5 million for year ended December 31, 1999.
This primarily consisted of net proceeds from the sale of Series E preferred
stock of $82.5 million. In April 1999, we repaid $29.0 million in Senior
Secured
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Bridge Notes plus interest of $4.1 million. Our 1998 net cash from financing
activities was $34.8 million consisting of $29.0 million from the sale of
Senior Secured Bridge Notes at 13.75% interest and $7.2 million from the sale
of Series E preferred stock.
As of June 30, 2000, we had $61.4 million in cash and cash equivalents, a
$10.0 million revolving line of credit with Imperial Bank, and a $3.0 million
equipment lease arrangement with Transamerica, of which $232,000 remained
available. As of June 30, 2000 there was an outstanding balance of $30,250 on
the line of credit for renewal fees and a $2.5 million standby letter of credit
to support our obligations under the lease for our Redmond, Washington
facility. The line of credit has a maturity date of one year with interest
payable monthly and principal at maturity. Borrowings under the Transamerica
equipment lease are secured by the equipment financed thereunder. The
Transamerica equipment lease terms vary from 24 to 36 months with an effective
interest rate of 12.26% per annum for domestic equipment leases and 12.86% for
foreign equipment leases, and interest is payable monthly. We have several
capital leases with terms ranging from 24 to 48 months. At June 30, 2000, our
outstanding capital lease obligations were $5.4 million, accruing interest at
rates ranging from 7.25% to 14.50%. See note 4 to the financial statements for
a more complete description of the credit facilities. We anticipate an increase
in our capital expenditures and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel.
We believe that current capital resources are adequate to fund our
operations until at least October 31, 2001. Thereafter, we may be required to
raise additional capital which may not be available to us on acceptable terms,
if at all. Any inability to obtain needed financing by us could have a material
adverse effect on our business and operating results.
Market Risk
We do not use derivative financial instruments. We generally place our
marketable security investments in high credit quality instruments, primarily
U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material; however, these investments are subject
to interest rate risk, whereby if the average interest rate changed 1%, our
results of operations could increase or decrease by approximately $500,000.
In addition, at times our export sales to Mexico, which are denominated in
U.S. dollars, results in concentrations of credit risk in this geographic
region. Further, the continued development of our international operations in
Asia will result in an increased market risk relative to those currencies.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. We do not anticipate
that the adoption of this new standard will have a material effect on our
earnings or our financial position, but we continue to evaluate the impact of
SFAS No. 133.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101, or SAB 101. This summarized certain areas of
the staff's views in applying generally accepted accounting principles as it
applies to revenue recognition. We believe that our revenue recognition
principles comply with SAB 101. We will continue to evaluate interpretations of
SAB 101.
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BUSINESS
Overview
We provide smart antenna systems and embedded solutions to wireless network
operators facing capacity constraints in the wireless communications industry.
We believe that our SpotLight systems enable wireless network operators to
increase overall network capacity, improve or maintain network quality, reduce
network operating costs and better manage their network infrastructure. As the
demand for wireless services has grown in recent years, we have developed
products based on our proprietary technologies that address the associated
network capacity problems faced by wireless network operators. Continued growth
in wireless capacity demands will necessitate that embedded smart antenna
technology be made available to base station manufacturers. We are thus
developing proprietary hardware and software solutions that will allow base
station manufacturers significant performance and time to market benefits.
Our SpotLight systems can reduce the need for more costly infrastructure
upgrades and additional cell site deployments, allowing wireless network
operators to more cost-effectively keep pace with subscriber growth and
increased demand for digital services. These smart antenna systems utilize
proprietary hardware and software to enable a more efficient utilization of the
finite amount of radio frequency spectrum, or "wireless bandwidth." Our
technology is designed to be implemented in a variety of market segments in the
wireless communications industry and currently supports CDMA, GSM and analog
standards. Our customers include AirTouch Communications, Inc., ALLTEL, Bell
Atlantic Mobile, GTE Wireless Inc., Grupo Iusacell Celular S.A. de C.V. of
Mexico, Southwestco and Telefonica Servicios Moviles S.A.C. of Peru. As of June
30, 2000, we had sold an aggregate of 185 SpotLight systems worldwide.
Industry Background
Growth in Wireless Usage
The demand for wireless communications services has grown significantly in
recent years. According to The Strategis Group, U.S. subscriber usage was
expected to increase from approximately 174 billion minutes of use in 1999 to
approximately 372 billion minutes of use by 2003, representing an expected
compound annual growth rate of 20.9%. This increase in usage has been driven by
an increased number of subscribers, lower prices and expanded availability of
existing services. In addition to these factors, the emergence of new data and
Internet-oriented wireless services is expected to contribute to the increase
in subscriber usage in the future.
Increased Subscribers. The number of wireless subscribers has increased
significantly in recent years. According to International Data Corporation, or
IDC, there were approximately 303 million wireless subscribers around the world
in 1998 and that number was expected to reach approximately 1.1 billion
subscribers in 2003, representing an expected compound annual growth rate of
28.9%. According to IDC, in 1998, there were approximately 64 million wireless
subscribers in the United States and that number was expected to grow to
approximately 118 million by 2003, representing an expected compound annual
growth rate of 12.9%.
Lower Price. The price of wireless services has decreased significantly in
recent years. According to data provided by The Strategis Group, the average
price per wireless minute in the United States was expected to decline from
$0.25 per minute in 1999 to $0.12 per minute in 2003. With multiple wireless
network operators competing in most U.S. markets, competitive pricing
strategies, such as discounting and fixed rate plans, have resulted in a
greater number of wireless subscribers, as well as a substantial increase in
subscriber usage. In addition, the greater supply of commercially available
wireless frequency due to increased government allocation of spectrum to
wireless network operators has resulted in increased competition among existing
and new wireless network operators, further reducing costs to subscribers.
Expanded Availability of Existing Services. Due to the high initial fixed
costs involved, early wireless deployments were limited to urban centers and
major traffic corridors. However, to meet increased demands for
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ubiquitous wireless services, wireless network operators accelerated the
buildout and upgrade of their networks. This increased coverage has enabled
these wireless network operators to reach new subscribers and provide a higher
level of service to existing subscribers.
Mobile Internet Services. Consumer demand for "any time, anywhere" access to
the Internet and data services, such as email and instant messaging, has
created a demand for delivery of these services over a wireless network.
Devices with wireless access, such as mobile phones, palm computers and laptop
computers with wireless modems, continue to evolve, providing applications and
ease of use that increase wireless data usage. Standard protocols such as
Wireless Application Protocol, or WAP, have emerged and are designed to create
interoperability of wireless equipment and Internet-based products. Finally,
the next generation of wireless air interface standards will increase wireless
data throughput rates. These protocols are expected to further drive consumer
demand for wireless access to the Internet and data services.
Strains on Wireless Network Capacity
Increased subscriber usage and the demand for ubiquitous wireless access and
the mobile delivery Internet-based services place a significant strain on
wireless network operators given the fixed amount of radio frequency spectrum
that is available. Wireless spectrum is allocated to individual wireless
network operators in fixed amounts by governments in the U.S. and foreign
markets. Thus, the fundamental challenge for wireless network operators is to
increase capacity, while maintaining signal quality, within a fixed amount of
wireless bandwidth. Wireless network operators generally have used two
alternatives to address capacity problems: building additional cell sites or
deploying more efficient digital technologies.
Additional cell sites. Operators of wireless networks often address capacity
problems by building new cell sites. This alternative has three major
disadvantages. First, we believe the cost of constructing a new standard 800
MHz CDMA cell site, including land, building and equipment, can be
approximately $500,000. Second, building cell sites closer together increases
signal interference in the network, which can reduce capacity and call quality,
exacerbating the very problems that the additional cell sites were built to
resolve. Third, wireless network operators face significant community
resistance arising from environmental and zoning concerns and objections to the
appearance of additional cell site towers.
More efficient digital technologies. In addition to building more cell
sites, wireless network operators have deployed more spectrum-efficient digital
technologies such as CDMA, GSM and TDMA to increase capacity. These digital
technologies offer many improvements to wireless network operators and their
customers, including more cost-effective infrastructure, smaller phones with
improved battery life and value-added features, such as the capability to
support data services. According to IDC, 69.2% of subscribers worldwide were
using digital handsets in 1998 and this number was expected to increase to
96.8% by 2003. Despite the improvement offered by digital technologies,
wireless network operators continue to find that portions of their networks
still face capacity limitations. For instance, CDMA lacks the ability to
efficiently add incremental capacity in localized heavy traffic areas of a
network. Consequently, wireless network operators must either deploy new cells,
or dedicate more spectrum to CDMA in significant portions of their network to
resolve isolated capacity constraints. In GSM networks, the capacity is limited
by interference between cell sites within the network. This interference
prevents GSM network operators from adding additional capacity to the network.
The growing demand for wireless services, coupled with the high costs and
technical difficulties associated with increasing network capacity, create the
need for more cost-effective solutions. As wireless network operators seek to
provide ubiquitous wireless service and support increased subscriber usage,
they must address the fundamental challenge of achieving maximum capacity from
the finite spectrum they have been allocated.
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The Metawave Solution
We provide smart antenna systems to wireless network operators and embedded
solutions to base station manufacturers. Our SpotLight systems and embedded
solutions expand network capacity while improving or maintaining overall
network performance. Our SpotLight systems are compatible with CDMA, GSM and
analog base station equipment and our embedded solutions are compatible with
the next generation wireless infrastructure. Our smart antenna systems provide
wireless network operators with the following benefits:
Cost-Effective Capacity Expansion. Our SpotLight systems enable wireless
network operators to increase the capacity of their existing networks and
reduce the need to build and maintain costly new cell sites. Our SpotLight
systems can be deployed selectively within a network in either a single cell
site or multiple cell sites. Based on customer data, current versions of our
SpotLight 2000 system improved CDMA capacity in cell sites from 30% to 50%,
depending on network configuration. Additionally, in a recent field trial, our
SpotLight GSM system demonstrated that, when deployed in a network of cell
sites, GSM network capacity can be increased by 100% without increasing the
number of GSM cell sites. By applying our SpotLight solutions in these targeted
capacity constrained cell sites, overall network capacity can be
correspondingly increased. We believe our embedded solutions can significantly
increase Third Generation (3G) base station capacity.
Improved Network Performance. Our SpotLight systems allow wireless network
operators to increase capacity while maintaining or improving the level of
service and signal quality. Our SpotLight 2000 systems increase CDMA network
performance by efficiently distributing existing network resources to better
match subscriber usage. We believe our SpotLight GSM systems will provide
wireless network operators with better signal reception and reduced
interference thereby improving network performance. Our embedded solutions will
also maintain or improve network performance.
Compatibility with Standards and Equipment. Our SpotLight systems are
designed to be compatible with most existing wireless standards and currently
installed cell site equipment thereby preserving the wireless network
operators' existing investment in equipment and technology. Our smart antenna
systems have been independently developed by us to be compatible with the
Motorola, Lucent and Nortel 800 MHz CDMA base stations, which we believe
represent substantially all of the 800 MHz CDMA base stations deployed in North
America. We believe our SpotLight GSM systems are also compatible with most 900
MHz GSM base stations deployed worldwide. Our embedded solutions will be
compatible with the next generation wireless infrastructure.
Strategy
Our objective is to provide smart antenna systems to the worldwide wireless
communications market. Key elements of our strategy include:
Deliver Solutions to Capacity Constrained Wireless Network Operators. We
will continue to focus on developing solutions to increase capacity for those
wireless network operators facing capacity constraints. To date, we have
developed SpotLight systems to address the capacity and system quality problems
facing 800 MHz CDMA and 900 MHz GSM wireless network operators. According to
IDC, as of 1998, U.S. wireless network operators at these frequencies serviced
more than 75% of wireless subscribers. As capacity issues emerge in wireless
networks using different frequencies, we intend to develop smart antenna
systems that address capacity problems in these wireless networks.
Further Penetrate Existing CDMA Customers. We believe that the 800 MHz CDMA
market will continue to represent a significant opportunity for us. Over the
last two years we have sold SpotLight 2000 systems to the four largest 800 MHz
CDMA wireless network operators in North America, as measured by subscriber
market share data provided by the Radio Communications Review. We intend to
leverage the performance and service of our existing system deployments to
expand our presence and penetration within these wireless network operators.
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Target Additional Strategic Customers. With our products today, we are able
to target additional large multi-system 800 MHz CDMA and 900 MHz GSM wireless
network operators around the world that serve substantial concentrations of
customers and have the greatest market share in their respective markets. We
intend to target these markets by expanding our manufacturing, installation,
sales and service capabilities in the regions served by these wireless network
operators.
Integrate our technology into the next generation wireless
infrastructure. We intend to use our leadership in adaptive array technology to
develop embedded hardware and software solutions for manufacturers of wireless
infrastructure equipment. The solutions will apply to CDMA, GSM, and Third
Generation (3G) air interfaces and will allow these manufacturers to introduce
highly spectrum efficient equipment that increase capacity of wireless
networks.
Markets
In wireless communications networks, there are several wireless standards
that use different technologies to process calls and divide allocated spectrum.
These wireless standards fall into two broad categories, analog and digital.
Advanced Mobile Phone System, or AMPS, is the leading analog standard. Digital
standards are further subdivided into two general schemes, time division and
code division. Time Division Multiple Access, or TDMA, and Global Systems for
Mobile Communications, or GSM, are the leading time division standards. Code
Division Multiple Access, or CDMA, is the leading code division standard. We
have developed smart antenna systems that increase capacity for CDMA, GSM and
analog based networks.
The terms cellular and PCS are often used interchangeably by the popular
press when discussing wireless communications networks. However, within the
wireless industry the distinction between the two is important. Cellular
describes networks operating in the 800 MHz and 900 MHz frequency bands, using
both analog and digital standards. Analog, CDMA, GSM and TDMA are the most
widely deployed cellular standards across the globe. PCS typically describes
networks operating in the 1800 MHz and 1900 MHz frequency bands. CDMA, GSM and
TDMA the most widely deployed PCS standards.
CDMA Market. The CDMA wireless market consists of wireless network operators
at both cellular and PCS frequencies. We believe that approximately half of the
cellular networks in North America have adopted CDMA as their digital
technology. Wireless network operators are overlaying CDMA networks on top of
existing analog networks thereby allocating spectrum between CDMA and analog.
We also believe that CDMA is the most widely deployed PCS digital technology in
North America.
The CDMA Development Group, a trade association, estimated there were 50
million CDMA subscribers worldwide at year end 1999, accessing both the 800 MHz
and 1900 MHz networks. Roughly 90% of these are in North America and Asia.
Frost and Sullivan estimated there were 46,716 CDMA 800 MHz base stations in
operation in 1999, up from 26,200 in 1998. These base stations represent the
target market for our CDMA systems. Frost and Sullivan also estimated 38,082
CDMA PCS base stations were in operation in 1999, up from 20,730 in 1998.
GSM Market. The GSM market consists of wireless network operators at both
cellular and PCS frequencies. According to the GSM Association, GSM is the most
widely deployed digital standard worldwide and has been deployed in 142
countries, with more than 250 million subscribers, predominantly in Europe and
Asia, at year end 1999. According to Frost and Sullivan, there were 98,133 GSM
base stations in operation at 900 MHz in 1999, up from 46,515 in 1998. These
base stations represent the market for our GSM systems. Frost and Sullivan also
estimated there were 55,711 PCS base stations using GSM in operation in 1999,
up from 31,690 in the prior year.
TDMA Wireless Market. The TDMA market consists of wireless network operators
at both cellular and PCS frequencies. According to the Universal Wireless
Communication Consortium, there were an estimated 30 million TDMA wireless and
PCS subscribers worldwide as of September 30, 1999.
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Third Generation Standards. Over the next several years, wireless network
operators may begin to migrate their systems to next generation air interface
standards, which include cdma2000, WCDMA, GPRS, and EDGE. We intend to develop
hardware and software solutions that will be embedded in wireless
infrastructure base station products and will further enhance the spectral
efficiency of the new air interface standards.
Broadband Fixed Wireless. In fixed, broadband wireless networks, no
predominant standards currently exist. This market is often described under the
umbrella term, broadband wireless access. The Broadband Wireless Access market
services both mobile and fixed end users. Services range from high speed
Internet access, to combined high capacity data and voice offerings.
Metawave Products
We have developed smart antenna systems and embedded solutions that enable
wireless network operators to increase overall network capacity, improve or
maintain network quality, reduce network operating costs and better manage
their network infrastructure.
SpotLight 2000 Platform. Our SpotLight smart antenna system was initially
designed for use in analog networks and was first shipped for commercial sale
in November 1997. The second generation SpotLight 2000 system was designed to
support both analog and CDMA wireless standards. Our SpotLight 2000 connects to
Motorola HDII, SC2400, SC4812 and SC9600 base stations, Lucent Series II base
stations, and Nortel Metrocell base stations.
We have analyzed data from numerous CDMA networks and have found that the
distribution of traffic within a network and even within a cell varies
considerably. Thus, wireless network operators are faced with the challenge of
allocating spectrum resources to uneven and varied subscriber traffic. CDMA
lacks the ability to efficiently add incremental capacity in localized areas.
Consequently, to resolve isolated capacity constraints, wireless network
operators must either deploy new cells or dedicate more spectrum to CDMA in
significant portions of their network.
Cells are most often divided into three sectors. Because of imbalanced
traffic, one sector is often utilized to its maximum capacity, while the
neighboring sectors have unused or excess capacity. When a sector's capacity is
fully utilized, new calls cannot be originated within the sector without
negatively affecting network performance despite call servicing capability
remaining unused in adjacent sectors. In addition, subscriber calls cannot be
transferred into the overloaded sector when moving from an adjacent cell or
sector. This results in either calls being blocked or calls being terminated.
Our proprietary SpotLight 2000 system balances the traffic load within a
cell, reducing the problem of having one sector overloaded while the other
sectors are underutilized. As traffic varies throughout the day, our SpotLight
system can accommodate these variations and balance the traffic accordingly.
This load balancing increases network efficiency and capacity.
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Load Balancing Through Sector Synthesis
Load Balancing Through Sector Synthesis
Graphical depiction with 2 cell sites demonstrating the load balancing
capability of the SpotLight 2000 CDMA system through sector synthesis.
Language under the cell site graphic on the left states:
Before SpotLight 2000
Peak traffic loading strains capacity in one sector, while capacity remains idle
in others.
Language under the cell site graphic on the right states:
After SpotLight 2000
Load balancing by reorienting and resizing sectors increases cell site capacity.
As illustrated above, our SpotLight 2000 system addresses traffic loading by
controlling the transmission and reception of CDMA radio signals by base
stations through a process called sector synthesis. Our SpotLight 2000 system
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 dynamically adjust sector antenna patterns through a software-
driven process. As a result, wireless network operators can optimize their CDMA
networks with increased flexibility and precision, thereby enhancing network
capacity and performance in response to changing traffic patterns taking into
account local terrain and variable radio frequency conditions.
The SpotLight 2000 system can be deployed in three different configurations
depending on customer network requirements. The CDMA-only configuration uses
our SpotLight system to support only the CDMA interface. This is the baseline
SpotLight system for customers who are interested in improving the capacity of
their CDMA system without changing their analog network. The second available
configuration is CDMA with Analog Pass Through, or CDMA/APT. This system
provides capacity benefits to the CDMA interface while "passing" the analog
signals through our SpotLight system without changing the analog network. The
CDMA/APT system allows the service provider to support both CDMA and analog
networks with a single antenna and set of power amplifiers. The third system
configuration is the dual mode system which provides capacity improvements to
both the CDMA and analog wireless standards, configuring and optimizing each
wireless standard separately, while using only a single set of antennas.
Each of the three configurations described above can be deployed in three-
sector cell sites or can be used to increase the sectorization of a CDMA cell
site from three sectors to four, five or six sectors. In cell sites where more
than a single sector is heavily loaded, the wireless network operator may use
the SpotLight 2000 system to increase the sectorization of the cell site and
gain additional capacity over the original three-sector cell site. The
SpotLight system enables wireless network operators to use our software-
controlled antenna patterns to reduce handoff overhead and optimization
problems normally associated with four, five or six sector deployments. At the
same time, the SpotLight system provides an efficient way to increase the
sectorization of the cell site without having to add additional antennas,
cables, duplexers, filters or power amplifiers.
Our SpotLight 2000 system can be administered and monitored locally or
remotely through our Windows-based software application called SiteSculptor.
SiteSculptor allows real time monitoring of system performance through
graphical displays. Further, we offer networked access to our SpotLight 2000
system with our SiteNet network application. SiteNet utilizes our SiteSculptor
software package to provide a means for remote SpotLight configuration and
centralized collection of performance statistics in analog and CDMA networks.
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SpotLight for GSM. Our SpotLight GSM system is designed to increase GSM
network capacity by reducing cell site and network interference levels using a
beam-switching technology. Currently, the capacity of dense urban GSM networks
is limited by interference between cell sites within the network. This
interference prevents wireless network operators from adding additional
capacity to the network.
Our SpotLight system segments the normal three sector coverage area into
twelve narrow beam patterns. Our SpotLight GSM system tracks the location of
each subscriber within the sector coverage area and then assigns a single
narrow beam to them. As the subscriber moves through the sector coverage area,
our SpotLight GSM system continues to track the position of the subscriber and
switches the correct narrow beam to them. As illustrated below, the
interference received by and transmitted from the host cell site can be
significantly reduced, allowing the wireless network operator to increase
capacity while maintaining signal quality.
Interference Reduction Through Switched Beam Technology
Graphical depiction with two cell sites demonstrating the switched beam
capability of the SpotLight GSM system.
Language under the cell site on the left states:
Before SpotLight GSM
Conventional sectors cause interference to be received by and transmitted for
the cell site over a large area
Language under the cell site on the right states:
After SpotLight 2000
Narrow beams reduce the interference received by and transmitted from the cell
site
Our SpotLight GSM system is designed to be compatible with most existing 900
MHz GSM base station equipment. We intend to develop systems to be compatible
with 1800 MHz base station equipment. Our SpotLight GSM system can be
configured to support one, two or three sectors within the cell site, allowing
the wireless network operator to use our SpotLight GSM system to reduce
interference only in the capacity limited sectors. Based on a recent field
trial, our SpotLight GSM system, when deployed in a network of cell sites, can
increase GSM network capacity by up to 100% without increasing the number of
cell sites. To date, we have not completed any commercial sales of our
SpotLight GSM system, but our SpotLight GSM system is currently in field trials
in China, Taiwan and Australia.
Embedded Smart Antenna Solutions. We have developed embedded adaptive array
solutions which have been field tested to demonstrate CDMA (IS-95) systems
performance enhancements. The same methods can be applied to cdma2000 and W-
CDMA. Our embedded solutions increase network capacity by utilizing fully
adaptive beam forming techniques that track individual mobile subscribers, and
hence reduce interference from surrounding mobile users and base stations. A
significant capacity increase has been demonstrated in field experiments in
real operating cellular environment. To date, we have not entered into any
definitive agreements with equipment manufacturers for the sale or licensing of
this technology.
Core Technology
We believe that one of our key competitive advantages is our investment and
expertise in the core technologies that enable efficient spectrum management of
wireless networks. Spectrum management encompasses a number of technical
components, including advanced antenna concepts, radiowave propagation models,
network performance monitoring tools, wireless standards knowledge and
communications systems hardware implementations. These core competencies, when
applied in combination, allow wireless network
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operators to optimize capacity, coverage and quality across their networks. We
have developed, and continue to expand upon, the following fundamental
technical elements:
Phased-Array Antenna Systems. We have 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. We have designed antennas to
synthesize multiple narrow fixed-beams and adjustable beams, which can be used
to track individual users within a cell site. In addition, we have 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
wireless standard independent, and can therefore be applied to many wireless
environments, including cellular, PCS, enhanced specialized mobile radio, two-
way paging, multi-channel multipoint distribution service, or MMDS, other
broadband wireless markets, and emerging satellite-based wireless services. We
continue to develop and focus on improving the functionality and quality of our
antenna systems as well as reducing the costs and time associated with
manufacturing and deploying our antennas in the field.
Multibeam Hardware Architectures. We have 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.
Our beam-switching technology allows us to effectively switch the call from
beam to beam within a cell while maintaining call quality. It is adaptable to
GSM, TDMA and analog wireless standards, where rapid beam switching is
required. Additionally, we have developed proprietary hardware techniques to
dynamically adjust CDMA sector patterns and maintain call quality by
calibrating phased-array antenna configurations. To monitor the radio
environment and adjust the sector coverage patterns for both our CDMA and GSM
systems, we have developed scanning receivers designed to accurately operate
over various channel bandwidths. Our spatial technology allows the simultaneous
operation of multiple wireless standards, currently CDMA/analog, through the
same physical antenna structure, while maintaining independent optimization of
the performance for each wireless standard.
Real Time Network Control Algorithms. We have developed algorithms to
control beam switching hardware in 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. In addition, we have developed
expertise in the optimization of wireless network performance for CDMA, GSM and
analog wireless standards. This expertise allows network control algorithms to
be customized based on the specific wireless standard and network deployment
scenario. We have also developed internal software tools for performance
modeling wireless networks, allowing us to further customize systems for
wireless network operators based on their specific needs.
Adjustable beam forming techniques. We design and build antenna systems with
a broad range of standard and custom beam types and shapes using adaptive beam-
forming technology. 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. With respect to CDMA, our
system makes use of phased-array antennas to create custom sector antenna
patterns through a software-driven process known as sector synthesis.
Fully adaptive beam techniques. Fully adaptive beam forming allows each
individual subscriber to be continuously followed and serviced by high gain
antenna beams. The result is significant improvement in interference rejection
and therefore, system capacity increase. In addition, the technical ability to
track and locate subscribers may enable location-based services.
Applications Software. We develop applications software that allow wireless
network operators to analyze network performance and make appropriate
modifications to manage their spectrum more efficiently. We have designed the
SiteSculptor application software to allow users of our SpotLight system to
quickly and
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easily simulate antenna patterns and implement those patterns through software
configuration of our SpotLight systems. The antenna pattern editor allows the
wireless network operator to load per-sector traffic data into our SpotLight
system for analysis. SiteSculptor analyzes the data and provides the operator
with suggested sectorization patterns. SiteSculptor also allows the user to
modify the antenna pattern as required, view a simulation of the pattern, and
then load the pattern directly into our SpotLight system.
Research and Development
Our success depends on a number of factors, which include our ability to
identify and respond to emerging technological trends in our target markets,
develop and maintain competitive systems, enhance our existing systems by
adding features and functionality that differentiate them from those of our
direct and indirect competitors and bring systems to market on a timely basis
and at competitive prices. As a result, we have made, and we intend to continue
to make, significant investments in research and product development. Our
research and development expenses amounted to $12.7 million for the six months
ended June 30, 2000. Our research and development expenses were $22.8 million
in 1999, and $18.5 million in 1998. As of June 30, 2000, we had 117 employees
engaged in research and product development, and we continue to recruit
additional skilled personnel to enhance our research and development
department.
Our development efforts in the near term will be focused on using our
technology to develop capacity solutions to the existing and emerging wireless
communications markets. Our core technology can be used to address spectrum
management issues in many large wireless networks. Principal areas of focus
include the following: integrating our technology into wireless base station
equipment; developing optimal solutions for mobile data service; developing
smart antenna systems for use by wireless network operators at 1800 MHz and
1900 MHz PCS spectrum; exploring the development of systems for TDMA wireless
standard technology; and exploring the development of systems for the broadband
wireless market.
Customers
Our customers for Spotlight systems are wireless network operators worldwide
who face network capacity constraints. As of June 30, 2000, we had sold 185
SpotLight CDMA systems. These sales have been to customers located in the
United States, Mexico, Russia, Peru and Paraguay.
We have master supply agreements with five of the six largest 800 MHz CDMA
wireless network operators in North America, as measured by subscriber market
share. These customers are AirTouch, ALLTEL, Bell Atlantic, GTE, and Grupo
Iusacell Celular S.A. de C.V. of Mexico. We have also sold systems to Millicom-
St. Petersburg Telecom and Millicom-Telefonica Celular. Three of our customers,
AirTouch, Bell Atlantic and GTE combined their wireless business operations
into an entity named Verizon Wireless in the second quarter of 2000. Bell
Atlantic owns 47.2% of Grupo Iusacell Celular S.A. de C.V. of Mexico. Effective
April 1, 2000, ALLTEL acquired Southwestco Wireless (d.b.a. CellularOne)
properties that are located in Arizona and New Mexico.
Our GSM SpotLight system is in field trials in China, Taiwan and Australia.
Our potential customers for embedded solutions are existing and emerging
wireless infrastructure manufacturers. Although we are currently in discussions
with several equipment manufacturers, as of September 30, 2000, we had not
entered into a definitive agreement with any manufacturer for the sale or
licensing of our embedded solutions. In August 2000, we announced a field trial
of a PCS version of our SpotLight 2000 CDMA smart antenna system to be
undertaken jointly with a major PCS service provider in a large urban market.
This trial is expected to be completed by the end of the first quarter of 2001.
During the quarter ended June 30, 2000, sales to Grupo Iusacell Celular S.A.
de C.V. of Mexico and AirTouch (now part of Verizon Wireless) accounted for
46.2% and 39.5% of revenues, respectively. During the twelve months ended
December 31, 1999, sales to ALLTEL, Grupo Iusacell Celular S.A. de C.V. of
Mexico
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and Southwestco accounted for 44.8%, 26.0% and 20.9% of revenues, respectively.
Sales to these customers are expected to continue to account for a significant
amount of our revenues in 2000. During the twelve months ended December 31,
1998, sales to Millicom-St. Petersburg Telecom, Millicom-Telefonica Celular,
ALLTEL and GTE accounted for 13.4%, 10.1%, 61.8% and 13.4% of revenues,
respectively.
International sales of our systems accounted for 47.5% of revenues for the
six months ended June 30, 2000 and 26.0% and 23.5% of revenues for the fiscal
years ended December 31, 1999 and 1998, respectively. We expect sales to
foreign customers, such as Grupo Iusacell Celular S.A. de C.V. of Mexico and
others to continue to account for a significant proportion of our revenues in
fiscal year 2000.
The terms of our master supply agreements for our SpotLight systems with our
customers specify pricing terms, delivery terms, ordering lead times, invoicing
terms and warranty and extended maintenance terms and procedures. In addition,
pursuant to the agreements, we are generally obligated to indemnify our
customers for certain third party claims and other losses. The agreements
generally run for between one and two years and are generally terminable by
either party at any time in their discretion.
As of December 31, 1999, our backlog of orders was approximately $12.8
million, compared to backlog of $2.6 million as of December 31, 1998. We only
include in backlog customer commitments which are scheduled to be shipped in
the next six months. System orders in our 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 internal
scheduling of production resources, backlog as of any particular date may not
be a reliable measure of sales for any future period.
Sales, Marketing and Customer Support
We sell our smart antenna systems in the United States through a direct
sales force supported by systems engineers. Our international sales and
marketing efforts are conducted through distributors, our direct sales force
and agents. Sales personnel are assigned on a customer account basis and are
responsible for generating system sales, providing system and customer support
and soliciting customer feedback for system development. We have entered into
non-exclusive distribution agreements covering territories in Asia, Australia
and New Zealand. In addition, sales personnel receive support from our
marketing communications organization which is responsible for the branding and
marketing of our products and services.
Our sales and marketing efforts are primarily focused on establishing and
developing long-term relationships with potential customers. A relationship
with a new customer typically begins with a field trial or conditional sale in
a particular market of a customer. These are designed to satisfy performance
conditions prior to the completion of the sale. We generally only have one
field trial or conditional sale per customer and the results of the field trial
or conditional performance period must be approved at the senior level of our
customers' management. Consequently, the sales process associated with the
initial purchase of our systems is typically complex and lengthy, lasting in
some cases up to 18 months. However, once the system successfully meets the
applicable performance criteria, we typically negotiate and enter into
corporate-wide master supply agreements. After this agreement is in place,
purchasing decisions are generally made on a market-by-market basis pursuant to
purchase orders placed under the master supply agreement which are not subject
to the satisfaction of performance criteria. Consequently, the sales cycle for
subsequent purchases by individual markets or regions is generally much
shorter. Our SpotLight GSM system is currently in field trials in China, Taiwan
and Australia.
Our customer support organization performs network design, system
installation, network optimization, training, consulting and repair and
maintenance services to support our SpotLight systems. Recent improvements to
our pre-shipment integration and testing processes at our manufacturing
facility in Redmond, Washington, combined with the integration of experienced
subcontractors into our installation teams, has significantly reduced
installation times for our systems.
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Our customer services organization also offers services to optimize the
network following the installation of a SpotLight system. These services
utilize our expertise in radio frequency network design, knowledge of
individual network configurations and knowledge of our SpotLight system
capabilities.
We generally warranty our systems for 12 months. Warranty support and
extended maintenance services for our CDMA/analog systems are performed at our
headquarters in Redmond, Washington and will be performed for GSM systems at
our offices in Taipei, Taiwan.
Manufacturing
We rely to a substantial extent on outside suppliers to manufacture many of
the components and subassemblies used in our SpotLight systems. Our
manufacturing operations at our Redmond, Washington facility consist primarily
of supplier and commodity management and the assembling and testing of finished
systems from the components and subassemblies purchased from these outside
suppliers. We monitor 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. We have been certified as ISO 9001
compliant since September 1998. We expect to begin manufacturing the SpotLight
GSM systems in Taipei, Taiwan beginning in late fiscal year 2000.
We rely on detailed sales forecasts to determine our production requirements
and manage our inventory. Our assembly and testing processes have been designed
to facilitate configuration of our systems tailored to the specific needs of
our customers. We have programs focusing on material cost reduction and supply
base management designed to reduce costs and reduce inventory exposures.
Certain parts and components used in our smart antenna systems, including
linear power amplifiers supplied by Powerwave Technologies, Inc. and integrated
duplexer low noise amplifiers and filters supplied by Filtronic Comtek Ltd.,
are presently only available from a single source. We have a supply agreement
with Powerwave Technologies, Inc. pursuant to which they have agreed to supply
all linear power amplifiers ordered by us. Certain other parts and components
are available from a limited number of sources. For a more detailed discussion
of the risks associated with having a limited source of suppliers see the risk
factor titled "Our reliance on a limited number of suppliers for our smart
antenna systems could impair our ability to manufacture and deliver our systems
on a timely basis."
Competition
The market for spectrum management solutions is part of the broader market
for wireless infrastructure equipment which is dominated by a number of large
companies including Lucent, Motorola, Ericsson, Nortel, Nokia, Siemens, Alcatel
and others. Our smart antenna systems compete with other solutions to expand
network capacity. These alternative solutions include other smart antenna
systems, additional base stations for capacity, deploying efficient digital
technologies and various enhancements to digital technologies.
Other smart antenna systems are offered by various competitors. Alcatel,
Hazeltine, E-Systems, Boeing and Raytheon have offered smart antenna systems
for analog networks. Arraycomm has offered a smart antenna product that is
integrated into a Personal Handyphone System standard base station in Japan.
Ericsson has announced a GSM smart antenna system called GSM Capacity Booster
that includes an Ericsson base station as well as the smart antenna system.
Nortel has offered a smart antenna equipped GSM base station in the past. Most
of the large wireless infrastructure equipment providers, including Lucent,
Motorola, Nortel, Ericsson, Nokia, Siemens, Alcatel, Samsung and NEC have large
development organizations and have either announced their intention to examine
smart antenna technologies, or have the core technology competence to do so for
the CDMA, GSM, TDMA and 3G standards. If base station manufacturers
successfully develop and integrate smart antenna solutions into their product
offerings, it may materially and adversely affect our business.
The addition of more cell sites often will provide more capacity to wireless
networks and therefore is a substitute for our systems and, therefore, the cost
of base station equipment contained in these cell sites has
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decreased in recent years and affects our ability to compete effectively. Other
related costs for new cell sites including real estate, towers, and building
construction generally have not declined. Base stations are sold by wireless
infrastructure equipment manufacturers such as the companies listed above.
Efficient digital technologies and enhancements to these technologies will
provide more capacity to wireless networks and, therefore, are substitutes for
our systems. These digital technologies include existing technologies, such as
CDMA, GSM and TDMA, as well as emerging 3G standards, such as CDMA 2000 and
WCDMA. There are enhancements to the existing CDMA and GSM standards, commonly
referred to as 2.5G standards, which provide additional capacity. There are
also various enhancements, such as improved voice coding for CDMA and various
frequency hopping techniques for GSM, which are designed to increase the
capacity of these standards. These digital technologies and various
enhancements are also offered by the large wireless infrastructure equipment
providers listed above. We believe that our smart antenna technology can be
compatible with these digital technologies and their various enhancements. Our
technology, and its ability to enhance capacity, is additive to the capacity
enhancement provided by these digital technologies. Customers, however, may
delay or cancel deployment of our smart antenna systems while they deploy these
more efficient digital technologies and other enhancements which would harm our
business.
We believe the principal competitive factors in the spectrum management
solutions market include:
. expertise in the core technologies needed for radio frequency
communication systems;
. system performance, features and reliability;
. price and performance characteristics;
. timeliness of new system introductions;
. customer service and support;
. established customer relationships; and
. size of installed customer base.
We believe we will be competitive with respect to many of these factors;
however most of our existing and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases, greater
financial, technical, sales, marketing and other resources, and more
established customer relationships. To be competitive we must invest
significant resources to address these competitive factors and achieve customer
satisfaction. If we fail to do so our smart antenna systems will not compete
favorably with our competitors which will materially and adversely affect our
business.
Intellectual Property
We rely on patent, copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. We
currently have 25 issued U.S. patents, 3 allowed U.S. patents and 48 pending
U.S. patent applications. In addition, we are seeking patent protection for our
inventions in foreign countries. The patent positions of companies in the
worldwide wireless communications industry are generally uncertain and involve
complex legal and factual questions. We cannot be certain that patents will be
issued with respect to pending or future patent applications or that our
patents will be upheld as valid or will be sufficient to prevent the
development of competitive products. While we believe that our patents will
make it more difficult for competitors to develop and market similar products,
our patents may be invalidated, circumvented or challenged. Our patent rights
may fail to provide us with competitive advantages.
We have received two registered federal copyrights for our software and four
more copyright applications are pending. The source code for our proprietary
software is also protected as a trade secret. In addition, we enter into
confidentiality agreements with our employees, customers, vendors and strategic
partners, and control access to, and the distribution of our software,
documentation and other confidential and proprietary
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information. Our primary trademarks are registered with the U.S. Patent and
Trademark Office and certain other foreign jurisdictions. We have applied for
trademark protection for a number of other marks which are pending in the
United States and in foreign countries.
Despite these efforts, it may be possible for unauthorized third parties to
copy certain portions of our intellectual property contained in our systems,
design around our patents, or to reverse-engineer or otherwise obtain and use
our proprietary information. In addition, the laws of some countries do not
protect our proprietary rights to the same extent as the laws of the United
States. Accordingly, we may not be able to protect our proprietary rights
against unauthorized third-party copying or use, which could significantly harm
our business. We may have to pursue litigation in the future to enforce our
proprietary rights or to defend against claims of infringement. These claims,
regardless of their merits, may require us to enter into license arrangements
or may result in protracted and costly litigation.
In addition, we cannot be certain that others will not develop substantially
equivalent or superceding proprietary technology, or that equivalent products
will not be marketed in competition with our smart antenna systems, thereby
substantially reducing the value of our proprietary rights.
Patents and patent applications relating to products used in the wireless
communications industry are numerous. Current and potential competitors and
other third parties 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 us. We may not be aware of all patents or patent
applications that may materially affect our 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 us. We expect that we 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 us in the future, and such
assertions could result in costly litigation, the diversion of management and
engineering resources and require us to obtain a license to intellectual
property rights of such parties. There can be no assurance that these licenses
would be available on terms acceptable to us, 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 materially and adversely affect our business and
operating results.
Government Regulation
Our smart antenna systems must obtain regulatory approval to be used. In the
United States, our systems must be certified by the Federal Communications
Commission before sales to customers may commence. Smart antenna systems must
be certified by the FCC to ensure that they will not cause wireless base
stations to exceed the prescribed technical standards. In addition, these
systems are required to comply with electrical safety standards to ensure that
the base station operators will be in compliance with relevant Occupational
Safety and Health Administration's regulations.
Other countries have similar regulations that must be complied with before
our systems can be used. Foreign countries' regulatory programs are generally
similar to those in the United States. In most jurisdictions, smart antenna
systems must be of a type approved for use with cellular base stations under
national standards specific to each country. Smart antennas are also required
to demonstrate compliance with electrical safety standards that may be national
or international in scope. These governmental approval processes frequently
involve substantial delay, which could result in the cancellation, postponement
or rescheduling of systems by our customers. Any event like this in turn may
adversely affect our ability to sell systems to these customers. Because of the
expenses associated with government approvals of our systems in some countries,
we only plan to seek product approval in those countries once we have a
customer who intends to purchase our systems. This practice may take several
months and may deter customers or contribute to delays in receiving or filling
orders.
In addition, our customers' operations are subject to extensive government
regulations. To the extent that our customers are delayed in deploying their
wireless networks as a result of existing or new standards or
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regulations, we could experience delays in orders. These delays could
materially and adversely affect on our business and operating results.
We are also subject to U.S. government export controls. Our sales and
distributorship agreements require that the export or resale of our systems to
end users located in other countries must be in compliance with U.S. export
controls.
Employees
As of June 30, 2000, we had 295 employees, of which 117 were primarily
engaged in research, development and product management, 47 in manufacturing,
80 in sales, marketing and customer support and 51 in general and
administration. With the acquisition of Adaptive Telecom, our total number of
employees increased to 313. We have no collective bargaining agreement with our
employees and we have never experienced a work stoppage. We believe that our
employee relations are good.
Facilities
We are headquartered in Redmond, Washington, where we lease an aggregate of
approximately 96,000 square feet, housing our principal administrative, sales
and marketing, customer support and manufacturing facilities. Our lease for
this facility expires on May 31, 2005 and we have an option to renew this lease
for two additional five year terms. We sublease approximately 13,000 square
feet of this space. We have a three-year lease for sales, service and
manufacturing facilities totaling approximately 14,500 square feet in Taipei,
Taiwan and a five-year lease for a sales and engineering support office in
Dallas, Texas. Through our acquisition of Adaptive Telecom, we also have a
facility in Campbell, California. In addition, we have representative offices
in Sao Paulo, Brazil and Shanghai, China that are subject to short-term leases.
Legal Proceedings
We may become involved in legal proceedings from time to time in the
ordinary course of business. As of the date of this prospectus, we are not
involved in any pending material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of September 30, 2000
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert H. Hunsberger.... 54 Chairman of the Board and Chief Executive Officer
Stuart W. Fuhlendorf.... 38 Senior Vice President and Chief Financial Officer
Shimon Scherzer......... 51 Chief Technical Officer
Victor K. Liang......... 48 President, GSM
Albert Jordan........... 39 President, CDMA
Martin J. Feuerstein.... 37 Senior Vice President and General Manager, Embedded and Data Products
Richard P. Henderson.... 39 Senior Vice President and General Manager, SpotLight CDMA
Douglas O. Reudink...... 61 Director and Strategic Advisor
Bandel L. Carano(1)..... 39 Director
Bruce C. Edwards........ 46 Director
David R. Hathaway(1).... 56 Director
Scot B. Jarvis(1)(2).... 40 Director
Jennifer Gill
Roberts(2)............. 37 Director
David A. Twyver(2)...... 53 Director
</TABLE>
--------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Robert H. Hunsberger has served as our chief executive officer since July
1997, chairman of the board of directors since October 2000 and president from
July 1997 until October 2000. 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
Nortel, a telecommunications company, 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 holds a B.S.
from the University of Virginia and an M.B.A. from Arizona State University.
Stuart W. Fuhlendorf has served as our senior vice president and chief
financial officer since March 2000. From 1993 to March 2000, Mr. Fuhlendorf
served as chief financial officer of EFTC Corporation, formerly Electronic Fab
Technology Corporation, an electronic component manufacturing company. Mr.
Fuhlendorf holds a B.A. from the University of Northern Colorado and an M.B.A.
from the University of San Diego.
Shimon Scherzer has served as our chief technical officer since October 2000
and senior vice president of technology from September to October 2000. Mr.
Scherzer was a founder of Adaptive Telecom and served as chief technical
officer of Adaptive Telecom from 1997 to September 2000. From 1987 until 1996,
Mr. Scherzer held several positions at Lucas Zeta, Inc., a defense electronics
company. Most recently, he was vice president of engineering. Mr. Scherzer
holds a B.S.E.E. from Technion, in Haifa, Israel.
Victor K. Liang has served as our president, GSM since October 2000, senior
vice president of GSM products group since July 1998 and general manager of
Metawave Communications Taiwan Ltd., a subsidiary since October 1998. From 1989
until March 1998, Mr. Liang held various senior executive positions
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with Siemens and its subsidiaries, most recently serving as managing director
of two Siemens' joint ventures in China, Siemens Shanghai Mobile Communications
and Siemens Shanghai Communication Terminals. From 1995 to 1998, 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 holds a
B.S. from Chiao Tung University in Taiwan and a degree in Business
Administration from Cheng Chih University.
Albert Jordan has served as our president, CDMA since October 2000 and
senior vice president of CDMA products from September to October 2000. From May
2000 to September 2000, Mr. Jordan served as president and chief executive
officer of Adaptive Telecom. From 1994 to April 2000, Mr. Jordan served in a
variety of positions at Lucent Technologies. Most recently, Mr. Jordan was
Director of Product Management and Strategy for Lucent's Mobile Internet Group.
From 1997 to 1999, Mr. Jordan was the Product Line Manager of Lucent's CDMA
infrastructure business. From 1995 to 1997, Mr. Jordan was the Product Team
Leader for Lucent's Flexent line of base stations and network elements. Mr.
Jordan holds a B.A. from Claremont McKenna College, as well as a B.S.E.E.,
M.S.E.E. and an M.B.A. from Stanford University.
Martin J. Feuerstein has served as our senior vice president and general
manager, embedded and data products since October 2000, vice president of
product development since August 1998 and director of research from March 1997
to July 1998. From 1995 to March 1997, Dr. Feuerstein served as technical
manager at Lucent. From 1992 to 1995, he served as a senior member technical
staff at US WEST. Mr. Feuerstein holds a B.E. from Vanderbilt University, an
M.S. from Northwestern University and a Ph.D. from Virginia Polytechnic
Institute.
Richard P. Henderson has served as our senior vice president and general
manager, SpotLight CDMA since October 2000 and vice president of sales and
marketing 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 holds a B.S. from Texas A&M University and an
M.B.A. from the University of Dallas.
Douglas O. Reudink, a co-founder, has served as one of our directors since
1995. Dr. Reudink served as our chief technical officer from our inception
until October 2000 and as chairman of the board of directors from April 1997
until October 2000 and is currently serving as a Strategic Advisor. From 1991
to 1995, Dr. Reudink served as director of wireless planning at US WEST
NewVector Group, Inc., a wireless telecommunications company. From 1986 to
1991, he served as the 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, in various research and management positions. Dr.
Reudink holds a B.S. from Linfield College and a Ph.D. from Oregon State
University.
Bandel L. Carano has served as one of our directors since 1995. Mr. Carano
has been a general partner of Oak Investment Partners, a venture capital firm,
since 1987. Mr. Carano 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 Wireless Facilities, Inc., a systems
integrator for wireless service providers, and Virata Corporation, a
manufacturer of digital subscriber line chip sets. Mr. Carano holds a B.S. and
an M.S. from Stanford University.
Bruce C. Edwards has served as one of our directors since May 1998. Mr.
Edwards has served as president, chief executive officer and a director of
Powerwave Technologies, Inc., a telecommunications equipment company, since
February 1996. Mr. Edwards was executive vice president, chief financial
officer and a director of AST Research, Inc., a personal computer company, 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 director of
Emulex Corporation, a publicly-held computer equipment/peripheral company, and
Silicon Wave, a privately-held consumer electronics/communications company. Mr.
Edwards holds a B.S. from Rider University and an M.B.A. from the New York
Institute of Technology.
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David R. Hathaway has served as one of our directors since 1995. Mr.
Hathaway has been a general partner of the venture capital firms Venrock
Associates, Venrock Associates II, L.P. and Venrock Associates III, L.P. since
1980, 1995 and July 2000, respectively. Mr. Hathaway serves as a director of
several private companies. Mr. Hathaway holds a B.A. from Yale University.
Scot B. Jarvis has served as one of our directors 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 co-
founder and executive vice president of NEXTLINK Communications, Inc., a
wireless service operator. Mr. Jarvis serves as a director of Wireless
Facilities, Inc., a wireless telecommunications company, Point.com, Inc., an
Internet services company, Leap Wireless International, Inc., a wireless
communications company, and Cricket Communications, Inc., a wireless
communications company. Mr. Jarvis holds a B.A. from the University of
Washington.
Jennifer Gill Roberts has served as one of our directors since 1995. Ms.
Roberts has been a general partner of Sevin Rosen Funds, a venture capital
firm, since 1994. Ms. Roberts serves as a director of several private
companies. Ms. Roberts holds a B.S. and an M.B.A. from Stanford University and
an M.S. from the University of Texas.
David A. Twyver has served as one of our directors since May 1998. He is
currently president and chief executive officer of Ensemble Communications
Inc., a wireless communications equipment company. From 1996 to 1997, Mr.
Twyver served as chief executive officer of Teledesic Corporation, a satellite
telecommunications company. From 1974 to 1996, Mr. Twyver served in several
management positions at Nortel, most recently serving as president of the
wireless networks group from 1993 to 1996. Mr. Twyver serves as a director of
Airspan Networks, a wireless communications company, as well as several private
companies. Mr. Twyver holds a B.S. from the University of Saskatchewan.
Board Composition
Our bylaws currently provide for a board of directors consisting of nine
members. All directors hold office until the next annual meeting of our
stockholders and until their successors have been duly elected and qualified.
Our officers 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 Scot Jarvis, Jennifer Gill Roberts
and David Twyver. The audit committee reviews the results and scope of the
audit and other services provided by our independent auditors.
The members of the compensation committee are Bandel Carano, David Hathaway
and Scot Jarvis. The compensation committee reviews and approves the
compensation and benefits for our executive officers, administers our stock
purchase and stock option plans and makes recommendations to the board of
directors regarding such matters.
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 Bruce Edwards, Scot
Jarvis and David Twyver who each receive $1,000 for each board meeting attended
and $500 for each committee meeting attended. Directors who are our employees
are eligible to participate in the 1995 Stock Option Plan, the 1998 Stock
Option Plan, the 2000 Stock Option Plan and the 2000 Employee Stock Purchase
Plan. Directors who are not our employees are eligible to participate in the
1998 Amended and Restated Directors' Stock Option Plan. See "Stock Plans."
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Compensation Committee Interlocks and Insider Participation
No member of the compensation committee has at any time been an officer or
employee of ours or any subsidiary of ours. See "Certain Relationships and
Related Transactions" for a description of certain transactions and
relationships between us and Bandel Carano, Bruce Edwards, David Hathaway,
Jennifer Gill Roberts and Scot Jarvis and entities affiliated with them.
Executive Compensation
The following table sets forth information concerning compensation awarded
to, earned by or paid to our chief executive officer and our four other most
highly compensated executive officers whose total cash compensation exceeded
$100,000 during the year ended December 31, 1999 (collectively, our "Named
Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Long-Term Compensation
----------------- --------------------------
Securities
Underlying All Other
Name and Principal Position Salary Bonus(1) Options Compensation(2)
--------------------------- -------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Robert H. Hunsberger, Chairman and
Chief Executive Officer.......... $270,766 $12,150 66,666 $ 912
Richard P. Henderson, Senior Vice
President and General Manager,
SpotLight CDMA................... 159,539 80,686 10,000 262
Victor K. Liang, President, GSM... 190,263 4,309 86,666 567
Douglas O. Reudink, Chairman and
Chief Technology Officer (as of
December 31, 1999)............... 175,488 7,875 33,333 2,364
Martin J. Feuerstein, Senior Vice
President and General Manager,
Embedded and Data Products....... 139,604 21,075 30,000 251
</TABLE>
--------
(1) Bonus represents the amount earned by the employee in 1999 and includes
commissions.
(2) Consists of life insurance premiums paid by us.
The following table sets forth information for each of our Named Executive
Officers concerning stock options granted to them during the fiscal year ended
December 31, 1999.
Option Grants in Fiscal Year 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percentage of Annual Rates of Stock
Shares Total Options Price Appreciation for
Underlying Granted to Exercise Option Term(5)
Options Employees Price per Expiration -----------------------
Name Granted(1) in 1999(2) Share(3) Date(4) 5% 10%
---- ---------- ------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Hunsberger.... 66,666 4.8% $6.75 6/22/09 $ 527,332 $ 1,106,234
Richard P. Henderson.... 10,000 0.7 6.75 6/22/09 79,101 165,937
Victor K. Liang......... 26,666 1.9 6.75 6/22/09 210,929 442,487
60,000 4.2 6.75 5/19/09 474,603 995,621
Douglas O. Reudink...... 33,333 2.4 6.75 6/22/09 263,666 553,117
Martin J. Feuerstein.... 10,000 0.7 6.75 5/19/09 79,101 165,937
20,000 1.4 6.75 6/22/09 158,201 331,874
</TABLE>
--------
(1) Each of the above options was granted pursuant to our 1998 Stock Option
Plan.
(2) In the last fiscal year, we granted options to employees to purchase an
aggregate of 1,386,736 shares.
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<PAGE>
(3) In determining the fair market value of our common stock, our board of
directors considered factors such as our financial condition and business
prospects, our operating results, the absence of a market for our common
stock and the risks normally associated with companies comparable to us.
(4) Options granted on June 22, 1999 and expiring on June 22, 2009 vested 50%
upon the effectiveness of our initial public offering on April 26, 2000 and
the remaining 50% vests on April 26, 2001. Those options granted on May 19,
1999 vest 25% one year from date of grant and the remaining 75% vest
monthly over three years.
(5) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent our estimate or projection of our future common stock prices.
These figures are based on the initial offering price of $9.00 per share.
Option Grants in the First Three Quarters of 2000
The following table provides certain information concerning the number and
value of options granted to our Named Executive Officers in the first three
quarters of 2000.
<TABLE>
<CAPTION>
Percentage of Potential Realizable
Total Options Value at Assumed
Number of Granted to Annual Rates of Stock
Shares Employees in Exercise Price Appreciation
Underlying the First Price for Option Term(5)
Options Quarter of Per Expiration ---------------------
Name Granted 2000(3) Share(4) Date 5% 10%
---- ---------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Hunsberger.... 166,666(1) 7.4% $6.00 1/20/10 $1,443,336 $2,890,602
Richard P. Henderson.... 10,000(1) 0.4% 6.00 1/20/10 86,601 173,437
50,000(2) 2.2% 13.94 5/16/10 438,340 1,110,838
Victor K. Liang......... 40,000(2) 1.8% 13.94 5/16/10 350,672 888,671
Douglas O. Reudink...... -- -- -- -- -- --
Martin J. Feuerstein.... 13,333(1) 0.6% 6.00 1/20/10 115,464 231,243
50,000(2) 2.2% 13.94 5/16/00 438,340 1,110,838
Stuart W. Fuhlendorf.... 310,000(1) 13.8% 12.00 3/27/10 824,616 3,516,541
</TABLE>
--------
(1) Option granted pursuant to our 1998 Stock Option Plan.
(2) Option granted pursuant to our 2000 Stock Plan.
(3) In the first three quarters of 2000, we granted options to employees to
purchase an aggregate of 2,253,270 shares.
(4) In determining the fair market value of our common stock, our board of
directors considered factors such as our financial condition and business
prospects, our operating results, the absence of a market for our common
stock and the risks normally associated with companies comparable to us.
(5) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent our estimate or projection of our future common stock prices.
These figures are based on the initial public offering price of $9.00 per
share.
50
<PAGE>
Option Exercises in Last Fiscal Year and Year-End Option Values
There were no option exercises by our Named Executive Officers in 1999. The
following table provides information concerning the number and value of
unexercised options held by each of our Named Executive Officers as of December
31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1999(1) December 31, 1999(2)
------------------------ ------------------------
Name Vested Unvested Vested Unvested
---- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Robert H. Hunsberger............ 356,500 304,166 $ 2,925,375 $ 2,066,625
Richard P. Henderson............ 55,554 61,112 333,328 329,172
Victor K. Liang................. 46,040 240,626 -- --
Douglas O. Reudink.............. -- 33,333 -- 75,000
Martin J. Feuerstein............ 35,110 61,556 116,288 70,892
</TABLE>
--------
(1) Certain options granted under the 1998 Stock Option Plan and 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 us with respect to any unvested shares. The
unvested shares are subject to a right of repurchase in favor of Metawave
which lapses over time.
(2) Based on the initial public offering price of $9.00 per share, minus the
exercise price, multiplied by the number of shares underlying the option.
Severance Arrangements
We have entered into severance arrangements with Robert H. Hunsberger, chief
executive officer, Stuart W. Fuhlendorf, senior vice president and chief
financial officer, Shimon Scherzer, chief technical officer, Victor K. Liang,
president, GSM, Albert Jordan, president, CDMA, Richard P. Henderson, senior
vice president and general manager, SpotLight CDMA and Douglas O. Reudink, our
former chairman and chief technical officer, who is currently serving as a
strategic advisor.
On July 7, 1995, in connection with the Series A preferred stock financing,
we entered into an agreement with Dr. Reudink which provides that if we were to
terminate his employment without cause after July 7, 1996, we 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 us.
On June 27, 1997, in connection with the employment of Mr. Hunsberger, we
entered into an arrangement with Mr. Hunsberger which provides that if we were
to terminate his employment without cause, we 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 October 29, 1997, in connection with the employment of Mr. Henderson, we
entered into an arrangement with Mr. Henderson which provides that if we were
to terminate his employment without cause, we 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, we entered
into an arrangement with Mr. Liang that provides that if we were to terminate
his employment without cause within the first two years of his employment, we
would be obligated to make a lump-sum payment to Mr. Liang equal to six months
of his then-current base salary.
51
<PAGE>
On March 10, 2000, in connection with the employment of Mr. Fuhlendorf, we
entered into an agreement with Mr. Fuhlendorf that provides that if we were to
terminate his employment without cause, we would be obligated to make a lump
sum payment to Mr. Fuhlendorf equal to six months of his then-current base
salary.
On September 21, 2000, in connection with our acquisition of Adaptive
Telecom, we entered into an agreement with Mr. Jordan that provides that if Mr.
Jordan were to resign his employment within the first year of his employment
for good reason or if we were to terminate his employment without cause within
the first year of employment, we would be obligated to make a lump sum payment
to Mr. Jordan equal to twelve months of his then-current base salary. The
agreement also provides that if he were to resign his employment for good
reason after the first year of employment or we were to terminate his
employment without cause after the first year of his employment, we would be
obligated to make a lump sum payment to Mr. Jordan equal to six months of his
then-current base salary.
On September 21, 2000, in connection with our acquisition of Adaptive
Telecom, we entered into an agreement with Mr. Scherzer that provides that if
he were to resign his employment for good reason after the first year of
employment or we were to terminate his employment without cause within the
first year of employment, we would be obligated to make a lump sum payment to
Mr. Scherzer equal to twelve months of his then-current base salary, and if he
were to resign his employment for good reason after the first year of
employment or we were to terminate his employment without cause after the first
year of his employment, we would be obligated to make a lump sum payment to Mr.
Scherzer equal to six months of his then-current base salary.
Stock Plans
2000 Stock Plan. Our 2000 stock option plan provides for the grant of
incentive stock options to employees, including employee directors, and of
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. The purposes of the 2000 stock plan are to attract and retain
the best available personnel, to provide additional incentives to our employees
and consultants and to promote the success of our business. The 2000 plan was
originally adopted by our board of directors in February 2000 and was approved
by our stockholders in April 2000. The 2000 plan provides for this issuance of
options and rights to purchase up to 1,333,333 shares of our common stock, plus
an automatic annual increase on the first day of each of our fiscal years
beginning in 2001 through 2009 equal to the lesser of 2,000,000 shares, 5% of
our outstanding common stock on the last day of the immediately preceding
fiscal year, or a lesser number of shares as our board of directors determines.
As of September 30, 2000, options to purchase 1,218,436 shares of Common Stock
with a weighted average exercise price of $16.36 were outstanding, 138 shares
have been issued upon exercise of options issued under the plan with a weighted
average purchase price of $14.22 and 114,897 shares remain available for future
grant. Unless terminated earlier by the board of directors, the 2000 plan will
terminate ten years following its effective date.
The 2000 plan may be administered by the board of directors or a committee
of the board, each known as the administrator. The administrator determines the
terms of options and stock purchase rights granted under the 2000 plan,
including the number of shares subject to the award, the exercise or purchase
price, and the vesting and/or exercisability of the award and any other
conditions to which the award is subject. No employee may receive awards for
more than 1,333,333 shares under the 2000 plan in any fiscal year. Incentive
stock options granted under the 2000 plan must have an exercise price of at
least 100% of the fair market value of the common stock on the date of grant.
The plan does not impose restrictions on the exercise or purchase price
applicable to nonstatutory stock options and stock purchase rights, although we
expect that nonstatutory stock options and stock purchase rights granted to our
Chief Executive Officer and our four other most highly compensated officers
will generally equal at least 100% of the grant date fair market value. Payment
of the exercise or purchase price may be made in cash or any other
consideration allowed by the administrator.
With respect to options granted under the 2000 plan, the administrator
determines the term of options, which may not exceed 10 years. Generally, an
option is nontransferable other than by will or the laws of
52
<PAGE>
descent and distribution, and may be exercised during the lifetime of the
optionee only by such optionee. In certain circumstances, the administrator has
the discretion to grant nonstatutory stock options with limited transferability
rights. Stock options are generally subject to vesting, meaning that the
optionee earns the right to exercise the option over a specified period of time
only if he or she continues to provide services to Metawave over that period.
Shares of stock issued pursuant to stock purchase rights granted under the 2000
plan are generally subject to a repurchase right exercisable by Metawave upon
the termination of the holder's employment or consulting relationship with us
for any reason (which lapses in accordance with the terms of the stock purchase
right determined by the administrator at the time of grant). In addition, the
2000 stock plan provides that options to purchase vested shares will terminate,
and we will have the right to repurchase vested shares issued under the plan,
if we terminate a participant's employment or consulting relationship with us
for cause.
If we are acquired, we would expect that options and stock purchase rights
outstanding under the 2000 plan at the time of the transaction would be assumed
or replaced with substitute options by our acquiror. If our acquiror did not
assume or replace outstanding awards, then the vesting of these awards would
accelerate so that the holder of an outstanding award would be able to exercise
and retain the number of shares that he or she would have vested in had he or
she continued working for us for another 12 months (if the holder had been
employed by us for less than 2 years at the time of the acquisition) or for
another 24 months (if the holder had been employed for us for 2 years or more
at the time of the acquisition) from the acquisition date. In addition, if our
acquiror assumed or replaced outstanding awards at the time of the acquisition
and a plan participant holding assumed or replaced awards experienced an
involuntary termination of his or her employment or consulting relationship
within six months following the transaction, then the vesting of outstanding
options or stock held by any such person who is not a Section 16 reporting
person at the time of the acquisition would accelerate as to 12 or 24 months
(depending upon the duration of the person's service relationship with us and
our acquiror as described above), and as to all the shares underlying an award
held by a person who is a Section 16 reporting officer at the time of the
acquisition. Outstanding awards, the number of shares remaining available for
issuance under the 2000 plan, the maximum number of shares subject to awards
that may be granted to an employee during a year and the fixed number in the
plan's evergreen formula will adjust in the event of a stock split, stock
dividend or other similar change in our capital stock. The administrator has
the authority to amend or terminate the 2000 plan, but no action may be taken
that impairs the rights of any holder of an outstanding option or stock
purchase right without the holder's consent. In addition, we must obtain
stockholder approval of amendments to the plan as required by applicable law.
1995 and 1998 Stock Option Plans. In addition to our 2000 stock plan, we
have two prior employee stock plans, our Third Amended and Restated 1995 Stock
Option Plan and our 1998 Stock Option Plan. These plans provide for the grant
of incentive stock options to employees, including employee directors, and the
grant of nonstatutory stock options to employees, consultants and directors.
Our 1995 stock plan was originally adopted by our board of directors in
August 1995 and approved by our stockholders in January 1996. It has been
amended several times since its adoption such that there are currently
2,766,666 shares of common stock reserved for issuance under this plan. As of
September 30, 2000, options to purchase 2,699,687 shares of common stock at a
weighted average exercise price of $4.72 were outstanding, 962,153 shares with
a weighted average purchase price of $4.74 have been issued upon exercise of
options and 66,979 shares remain available for issuance under our 1995 plan.
Unless terminated earlier, the 1995 plan will terminate in August 2005.
Our 1998 stock option plan was originally adopted by our board of directors
in May 1998 and approved by our stockholders in September 1998. An aggregate of
1,763,369 shares of common stock has been reserved for issuance under the 1998
plan. As of September 30, 2000, options to purchase 1,602,310 shares of common
stock at a weighted average exercise price of $8.42 were outstanding, 16,485
shares with a weighted average exercise price of $8.58 have been issued upon
exercise of options and 232,787 shares remain available for future grant.
Unless terminated earlier, this plan will terminate in May 2008.
53
<PAGE>
The terms of awards issued under our 1995 and 1998 plans are generally the
same as those that may be issued under our 2000 stock plan, except with respect
to the following features. Neither the 1995 plan nor the 1998 plan provides for
the issuance of stock purchase rights to employees and consultants. The 1998
plan provides that, as of our first stockholders meeting following the third
calendar year after the year in which this offering takes place, the maximum
number of shares that may be granted to any individual employee during a fiscal
year is 566,666 shares. The 1995 plan does not impose an annual limitation on
the number of shares of stock subject to options that may be granted to any
individual employee during a fiscal year. Under both plans, generally an option
is nontransferable other than by will or the laws or descent or distribution.
In addition, the 1995 Stock Option Plan does not provide for forfeiture of
vested options or stock upon a termination of the holder's service relationship
with us for cause.
Assumed Adaptive Telecom 1997 Stock Plan. We assumed the Adaptive Telecom
1997 Stock Plan in connection with our acquisition of Adaptive Telecom in
September 2000. The Adaptive Telecom plan provided for the grant to employees
of incentive stock options and the grant of nonstatutory stock options and
stock purchase rights to employees, consultants and directors. As of September
21, 2000, options to purchase 124,377 shares of common stock at a weighted
average of $19.69 were outstanding under this plan. The terms of options issued
under the Adaptive Telecom 1997 stock plan are generally the same as those that
may be issued under our 2000 stock plan. In the event of a sale of all or
substantially all of our assets or merger with or into another corporation, or
other change of control event in which our acquiror did not assume or replace
with substitute options outstanding awards, the Adaptive Telecom plan provides
for full acceleration of vesting for all options.
2000 Employee Stock Plan. Our 2000 employee stock purchase plan was adopted
by the board of directors in February 2000 and was approved by our stockholders
in April 2000. A total of 233,333 shares of common stock has been reserved for
issuance under the 2000 purchase plan, none of which have been issued as of the
date of this offering. The number of shares reserved for issuance under the
2000 purchase plan will be subject to an automatic annual increase on the first
day of each of our fiscal years beginning in 2001 through 2010 equal to the
lesser of 266,666 shares, 1% of our outstanding common stock on the last day of
the immediately preceding fiscal year or a lesser number of shares as the board
of directors determines. The 2000 purchase plan becomes effective upon the date
of this offering. Unless terminated earlier by the board of directors, this
plan will terminate in February 2020.
The 2000 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, will be implemented by a series of overlapping
offering periods of approximately 24 months' duration, with new offering
periods (other than the first offering period) commencing on May 1 and November
1 of each year. Each offering period will generally consist of four consecutive
purchase periods of six months' duration, at the end of which an automatic
purchase will be made for participants. The initial offering period commenced
on April 26, 2000, the effective date of our initial public offering, and ends
on April 30, 2002; the initial purchase period began on April 26, 2000 and
ended on October 31, 2000, with subsequent purchase periods ending on April 30,
2001, October 31, 2001 and April 30, 2002. The 2000 purchase plan will be
administered by the board of directors or by a committee appointed by the
board. Our employees (including officers and employee directors), or of any
majority-owned subsidiary designated by the board, are eligible to participate
in the 2000 purchase plan if they are employed by us or a designated subsidiary
for at least 20 hours per week and more than five months per year. The 2000
purchase plan permits eligible employees to purchase common stock through
payroll deductions at a rate of not more than 15% of an employee's
compensation. The purchase price is equal to the lower of 85% of the fair
market value of the common stock at the beginning of each offering period or at
the end of each purchase period, subject to certain adjustments as provided in
the plan. Employees may end their participation in the 2000 purchase plan at
any time during an offering period, and participation ends automatically on
termination of employment. No employee may purchase more than 1,333 shares of
common stock under the 2000 Purchase Plan in any one purchase period.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 2000
purchase plan will be assumed or an equivalent right substituted by
54
<PAGE>
our acquiror. If our acquiror did not agree to assume or substitute stock
purchase rights, any offering period and purchase period then in progress would
be shortened and a new exercise date occurring prior to the closing of the
transaction would be set. Outstanding awards, shares remaining available for
issuance under the plan, the fixed number in the plan's evergreen formula, and
the maximum number of shares that may be purchased during a six-month purchase
period will each adjust in the event of a stock split, stock dividend or other
similar change in our capital stock. Our board of directors has the power to
amend or terminate the 2000 purchase plan and to change or terminate offering
periods as long as such action does not adversely affect any outstanding rights
to purchase stock thereunder. However, the board of directors may amend or
terminate the 2000 purchase plan or an offering period even if it would
adversely affect outstanding options in order to avoid our incurring adverse
accounting charges.
Amended and Restated 1998 Directors' Stock Option Plan. The 1998 directors'
stock option was adopted by the board of directors in February 1998 and
approved by our stockholders in April 1998. It was amended in February 2000 by
our board of directors to increase the total number of shares of common stock
reserved for issuance under the plan to 466,666 shares, and our stockholders
approved this amendment in April 2000. As of September 30, 2000, options to
purchase 149,994 shares of common stock with a weighted average exercise price
of $6.38 were outstanding and 16,666 shares had been purchased upon exercise of
options issued under the plan with a weighted average price of $12.00 and
316,672 shares remain available for future grant.
The directors' plan provides for the grant of nonstatutory stock options to
our nonemployee directors. The plan provides for automatic formula grants to
our nonemployee directors. The directors' plan is designed to work without
administration; however, to the extent administration is necessary, it will be
performed by our board of directors. To the extent they arise, it is expected
that conflicts of interest will be addressed by abstention of any interested
director from both deliberations and voting regarding matters in which a
director has a personal interest. Unless terminated earlier, the directors'
plan will terminate in February 2008.
The directors' plan provides that each person who becomes a nonemployee
director will be granted a nonstatutory stock option to purchase 16,666 shares
of common stock on the date on which such individual first becomes a member of
our board of directors. In addition, on the date of each annual stockholders
meeting, each nonemployee director who will continue serving on the board
following the meeting and who has been a director of Metawave for at least six
months prior to the meeting date will be granted an option to purchase 6,666
shares of common stock.
All options granted under the directors' plan will have a term of ten years
and an exercise price equal to the fair market value of on the date of grant
and will be transferable only to members of a directors' immediate family and
to trusts and other entities for the benefit their family members. Options
granted under the directors' plan to new nonemployee directors following this
offering will vest as to 25% of the shares underlying the option on the first
anniversary of the date of the option grant and as to 1/48th of the shares each
month after the first anniversary so that these options will be fully vested on
the fourth anniversary of the grant date. Options granted to our nonemployee
directors at the time of each annual stockholders meeting following this
offering will vest as to 1/36th of the shares underlying the option so that
these options will be fully vested on the third anniversary of the grant date.
If Metawave determines that a director has engaged in fraud, embezzlement or
similar acts against us, or if a director has disclosed information that is
confidential to Metawave or engaged in any conduct constituting unfair
competition against us, we have the right to suspend or terminate that
director's right to exercise an option under the directors' plan.
If we are acquired by another corporation, we would expect each option
outstanding under our 1998 directors' plan to be assumed or replaced with
equivalent options by our acquiror. If our acquiror did not assume or replace
outstanding options, then the vesting of outstanding awards would accelerate so
that nonemployee directors holding options would be able to exercise and retain
the number of shares that he or she would have vested in had he or she
continued serving as a member of our board of directors for us for another 12
months (if the director had been a member of our board us for less than 2 years
at the time of the acquisition) or for another 24 months (if he or she had been
a member of our board for 2 years or more at the
55
<PAGE>
time of the acquisition) following the acquisition date. Outstanding awards,
the number of shares remaining available for grant under the plan, and the
number of shares subject to the automatic director grants described above will
each adjust in the event of a stock split, stock dividend or other similar
change in our capital stock. Our board of directors may amend or terminate the
directors' plan as long as such action does not adversely affect any
outstanding option. We will obtain stockholder approval for any amendment to
the plan to the extent required by applicable law.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by the Delaware General Corporation Law. Delaware law
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 for:
. any breach of the director's duty of loyalty to us or to our
stockholders,
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
. unlawful payments of dividends or unlawful stock repurchases or
redemptions, or
. any transaction from which a director derives an improper personal
benefit.
Our bylaws provide that we shall indemnify our directors and officers and
may indemnify our other employees and agents to the fullest extent permitted by
law. We believe that indemnification under our bylaws covers at least
negligence and gross negligence on the part of an indemnified party. Our bylaws
also permit us 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
Metawave upon an undertaking by such party to repay such advances if it is
ultimately determined that such party is not entitled to indemnification. This
advancement of expenses is subject to authorization by the board of directors
in the case of non-executive officers, employees and agents.
We have entered into separate indemnification agreements with each of our
directors and officers. These agreements require us, among other things, to
indemnify the director or officer against expenses, including attorney's fees,
judgments, fines and settlements paid by the individual in connection with any
action, suit or proceeding arising out of his or her status or service as one
of our directors or officers 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 us. We believe that our certificate of
incorporation and bylaw provisions and indemnification agreements are necessary
to attract and retain qualified persons as directors and officers. We also
maintain directors' and officers' liability insurance.
At present we are not aware of any pending litigation or proceeding
involving any of our directors, officers, employees or agents where
indemnification will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Sales of Equity Securities
Certain stock option grants to our directors and executive officers are
described herein under the caption "Management--Executive Compensation."
Since June 1997, we have issued, in private placement transactions, shares
of stock as follows:
. an aggregate of 2,397,727 shares of Series D preferred stock at $8.00
per share in August 1997;
. an aggregate of 18,276,151 shares of Series E preferred stock at $5.00
per share in December 1998, and January, April and June 1999; and
. 5,361,803 shares in September 2000, in exchange for all outstanding
shares of the capital stock of Adaptive Telecom and the issuance of
138,166 options for the assumption of all outstanding options to acquire
common stock of Adaptive Telecom.
Listed below are those directors, executive officers and five percent
stockholders who have made equity investments in Metawave during the last three
fiscal years. We believe 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 we could have obtained from unaffiliated third parties.
<TABLE>
<CAPTION>
Series D Series E
Preferred Preferred
Investor(1) Stock(2) Stock(2)
----------- --------- ---------
<S> <C> <C>
Entities affiliated with Venrock Associates(3)............ 175,654 589,164
Entities affiliated with Oak Investment Partners(4)....... 175,654 5,351,064
Entities affiliated with The Sevin Rosen Funds(5)......... 175,654 589,164
Entities affiliated with MeriTech Capital Partners L.P. .. -- 4,761,900
General Motors Investment Management Corporation.......... -- 3,333,330
Entities associated with Merrill Lynch, Pierce, Fenner &
Smith Incorporated....................................... -- 2,380,950
</TABLE>
--------
(1) Shares held by affiliated persons and entities have been aggregated. See
"Principal Stockholders."
(2) Shown on an as-converted basis. All outstanding shares of preferred stock
converted into common stock in connection with the closing of our initial
public offering in April 2000.
(3) David R. Hathaway, a director, is a general partner of Venrock Associates.
(4) Bandel L. Carano, a director, is a general partner of Oak Investment
Partners.
(5) Jennifer Gill Roberts, a director, is a general partner of the Sevin Rosen
Funds.
On April 3, 1998, Dr. Reudink sold 20,513 shares of common stock at a price
of $9.75 per share to Cedar Grove Investment L.L.C., a limited liability
corporation which is managed by Mr. Scot Jarvis, one of our directors. On April
17, 1998, Dr. Reudink sold 13,333 shares of common stock at a price of $9.75
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, we 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 Technologies, Inc. of which Bruce Edwards, one
of our directors, is president and chief executive officer. In addition, we
issued warrants to purchase an aggregate of 537,500 shares of our Series D
preferred stock at a purchase price of $0.01 per share. The number of shares of
Series D preferred stock issuable upon exercise of these warrants was adjusted
in December 1998 in connection with our sale of Series E preferred stock. On
April 28, 1999 all outstanding principal and accrued interest on these notes
were repaid in full. On April 26, 1999 all of the warrants issued in connection
with these notes were exercised and 620,702 shares of Series D preferred stock
57
<PAGE>
were issued. Powerwave purchased $2,500,000 in aggregate principal amount of
the 13.75% Senior Secured Bridge Notes and was issued a 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 which was exercised in full in April 1999 for 53,509
shares of Series D preferred stock as a result of certain adjustments.
Powerwave Technologies, Inc., of which Bruce Edwards, one of our directors,
is president and chief executive officer, is currently our sole supplier of
linear power amplifiers, a component in our smart antenna systems. From January
1, 2000 to June 30, 2000 and from January 1, 1999 to December 31, 1999, we
purchased a total of $5.3 million and $6.4 million, respectively of linear
power amplifiers and related components from Powerwave. Pursuant to a
manufacturing agreement, Powerwave will manufacture and sell to us 100% of our
requirements for linear power amplifiers that Powerwave manufactures.
On September 21, 2000, we acquired Adaptive Telecom, Inc. pursuant to which
Adaptive Telecom became our wholly owned subsidiary. In connection with the
acquisition, we issued approximately 5,500,000 shares of our common stock in
exchange for all outstanding shares of Adaptive Telecom and the assumption of
all outstanding options to acquire Adaptive Telecom common stock. Upon the
closing of our acquisition of Adaptive Telecom, Albert Jordan became our senior
vice president of CDMA technology. Mr. Jordan was a shareholder of Adaptive
Telecom and received 373,315 shares of our common stock in the merger. Upon the
close of the merger, our right to repurchase lapsed with respect to fifty
percent (50%) of the shares held by Mr. Jordan. We have entered into an
employment agreement with Mr. Jordan, which provides that, if Mr. Jordan
resigns for good reason or is terminated without cause in his first year of
employment with us, he will receive a lump sum payment equal to twelve months
of his then-current base salary. The agreement also provides that if Mr. Jordan
resigns for good reason or is terminated after his first year of employment, he
will receive a lump sum payment equal to six months of his then-current base
salary. On October 19, 2000, the board approved a $1,000,000 loan to Mr. Jordan
to finance the purchase of a residence. The loan bears interest at 6% and is
secured by 186,658 shares of Metawave common stock held by Mr. Jordan. All
principal and accrued interest under the loan is due and payable on the earlier
of twenty-four months from the date of the loan, or six (6) months following
the termination of Mr. Jordan's employment, whether voluntary or involuntary.
In addition, upon the closing of the merger, Simon Scherzer became our
senior vice president of technology. Mr. Scherzer was a shareholder of Adaptive
Telecom, and received 1,166,820 shares of our common stock in the merger. We
have entered into an employment agreement with Mr. Scherzer, which provides
that, if Mr. Scherzer resigns for good reason or is terminated without cause in
his first year of employment with us, he will receive a lump sum payment equal
to twelve months of his then-current base salary, or if Mr. Scherzer resigns
for good reason or is terminated after his first year of employment, he will
receive a lump sum payment equal to six months of his then-current base salary.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us regarding beneficial
ownership of our common stock as of September 30, 2000, and as adjusted to
reflect the sale of 5,361,803 shares of a common stock being offered by the
selling stockholders pursuant to this prospectus, as to:
. each person, or group of affiliated or associated persons, who owns
beneficially more than 5% of the outstanding shares of our common stock,
. each of our directors,
. each of our Named Executive Officers, and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each stockholder is: c/o Metawave
Communications Corporation, 10735 Willows Road NE, P.O. Box 97069, Redmond, WA
98073-9769.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
September 30, 2000 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other person.
The percent of beneficial ownership for each stockholder is based on 43,201,368
shares of common stock outstanding as of September 30, 2000, including the
5,361,803 shares of common stock issued in connection with our acquisition of
Adaptive Telecom, Inc. Unless otherwise indicated in the footnotes below, the
persons and entities named in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community property
laws where applicable.
<TABLE>
<CAPTION>
Percent of Shares
Outstanding
Shares -----------------
Beneficially Prior to After
Name and Address Owned Offering Offering
---------------- ------------ -------- --------
<S> <C> <C> <C>
Bandel L. Carano(1).......................... 7,710,239 17.8% 17.8%
Oak Investment Partners
525 University Avenue, Suite 1300
Palo Alto, CA 94301-1902
David R. Hathaway(2)......................... 2,944,337 6.8% 6.8%
Venrock Associates
30 Rockefeller Plaza
New York, NY 10112-0184
Jennifer Gill Roberts(3)..................... 2,948,524 6.8% 6.8%
The Sevin Rosen Funds
550 Lytton Avenue, Suite 200
Palo Alto, CA 94301-1542
MeriTech Capital Partners(4)................. 4,761,899 11.0% 11.0%
90 Middlefield Road, Suite 200
Menlo Park, CA 94025
General Motors Investment Management
Corporation(5).............................. 3,333,330 7.7% 7.7%
767 Fifth Avenue
New York, New York 10153
Merrill Lynch, Pierce, Fenner & Smith
Incorporated(6)............................. 2,380,948 5.5% 5.5%
World Financial Center, South Tower
New York, New York 10080-6123
Robert H. Hunsberger(7)...................... 679,628 1.5% 1.5%
Victor K. Liang(8)........................... 136,664 * *
Richard Henderson(9)......................... 123,470 * *
Martin J. Feuerstein(10)..................... 81,508 * *
Douglas O. Reudink(11)....................... 851,484 2.0% 2.0%
Scot B. Jarvis(12)........................... 75,025 * *
Bruce C. Edwards(13)......................... 23,180 * *
David A. Twyver(14).......................... 31,180 * *
All directors and executive officers as a
group (14 persons)(15)...................... 18,305,059 40.8% 40.8%
</TABLE>
--------
* Represents less than 1% ownership.
Footnotes appear on following pages.
59
<PAGE>
(1) Includes 2,876,710 shares held by Oak Investment Partners VI, L.P.,
4,671,424 shares held by Oak Investment Partners VIII, L.P., 67,120
shares held by Oak VI Affiliates Fund, L.P., 90,476 shares held by Oak
VIII Affiliates Fund, L.P. and 4,514 shares issuable upon the exercise of
immediately exercisable options held by Mr. Carano within 60 days of
September 30, 2000. Bandel L. Carano, one of our directors, 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.
(2) Includes 1,715,298 shares held by Venrock Associates, 1,222,531 shares
held by Venrock Associates II, L.P., 4,514 shares issuable upon the
exercise of immediately exercisable options held by Mr. Hathaway within
60 days of September 30, 2000 and 2,000 shares held in trust for Mr.
David R. Hathaway's son. 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.
(3) Includes 10,146 shares held by Sevin Rosen Bayless Management Co.,
1,998,944 shares held by Sevin Rosen Fund IV L.P., 884,694 shares held by
Sevin Rosen Fund V L.P., 37,822 shares held by Sevin Rosen V Affiliates
Fund L.P., 8,272 shares held by Ms. Roberts and 4,514 shares issuable
upon the exercise of immediately exercisable options held by Ms. Roberts
within 60 days of September 30, 2000. Jennifer Gill Roberts, one of our
directors, 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.
(4) Includes 4,685,709 shares held by MeriTech Capital Partners and 76,190
shares held by MeriTech Capital Affiliates, L.P.
(5) Includes 3,333,330 shares held by Chase Manhattan Bank, as trustee for
First Plaza Group Trust, General Motors Investment Management
Corporation.
(6) Includes 952,380 shares held by ML IBK Positions, Inc, 599,999 shares
held by Merrill Lynch KECALP L.P. 1997, 657,142 shares held by Merrill
Lynch KECALP L.P. 1999, 114,285 shares held by Merrill Lynch KECALP
International L.P. 1997 and 57,142 shares held by Merrill Lynch KECALP
International L.P. 1999.
(7) Includes 679,628 shares issuable upon the exercise of immediately
exercisable options held by Mr. Hunsberger within 60 days of September
30, 2000, 100,000 shares of which are subject to our right of repurchase.
(8) Includes 136,664 shares issuable upon the exercise of immediately
exercisable options held by Mr. Liang within 60 days of September 30,
2000, 8,333 shares of which are subject to our right of repurchase that
lapses over time.
(9) Includes 123,470 shares issuable upon the exercise of immediately
exercisable options held by Mr. Henderson within 60 days of September 30,
2000, 26,666 shares of which are subject to our right of repurchase that
lapses over time.
(10) Includes 5,333 shares held by Mr. Feuerstein and 76,175 shares issuable
upon the exercise of immediately exercisable options held by Mr.
Feuerstein within 60 days of September 30, 2000, 6,543 shares of which
are subject to our right of repurchase that lapses over time.
(11) Includes 818,151 shares held by Dr. Reudink and 16,667 shares issuable
upon the exercise of immediately exercisable options held by Dr. Reudink
within 60 days of September 30, 2000, none of which are subject to our
right of repurchase that lapses over time and includes 16,666 shares held
in trust for Dr. Reudink's son.
60
<PAGE>
(12) Includes 70,511 shares owned by Cedar Grove Investments, LLC and Cedar
Grove Partners LLC, 5,208 shares of which are subject to our right of
repurchase that lapses over time and 4,514 shares issuable upon the
exercise of immediately exercisable options held by Mr. Jarvis within 60
days of September 30, 2000 . Mr. Jarvis, a managing member of each Cedar
Grove entity, disclaims beneficial ownership of such shares, except to
the extent of his pecuniary interest in such shares.
(13) Includes 2,000 shares held by Mr. Edwards and 21,180 shares issuable upon
the exercise of immediately exercisable options held by Mr. Edwards
within 60 days of September 30, 2000, 6,250 shares of which are subject
to our right of repurchase that lapses over time.
(14) Includes 10,000 shares held by Mr. Twyver and 21,180 shares issuable upon
the exercise of immediately exercisable options held by Mr. Twyver within
60 days of September 30, 2000, 6,250 shares of which are subject to our
right of repurchase that lapses over time.
(15) Includes shares referred to in footnotes (7)-(17), as well as 1,540,135
shares held by other executive officers, 171,106 shares of which are
subject to our right of repurchase that lapses over time and
33,333 shares issuable upon the exercise of immediately exercisable
options held by other executive officers within 60 days of September 30,
2000, none of which are subject to our right of repurchase.
61
<PAGE>
ISSUANCE OF COMMON STOCK TO THE SELLING STOCKHOLDERS
In connection with our acquisition of Adaptive Telecom, Inc. in September
2000, we acquired all outstanding shares of the capital stock of Adaptive
Telecom and assumed all outstanding options to acquire common stock of Adaptive
Telecom in exchange for 5,500,000 shares of our common stock, 5,361,803 of
which shares are being registered for re-sale pursuant to this prospectus on
behalf of the selling stockholders.
PLAN OF DISTRIBUTION
The selling stockholders may sell the shares being registered hereunder in
whole or in part, from time to time on the over-the-counter market at prices
and on terms prevailing at the time of any such sale. Any sale may be made in
broker's transactions through broker-dealers acting as agents, in transactions
directly with market makers or in privately negotiated transactions where no
broker or other third party (other than the purchaser) is involved. Each
selling stockholder will pay selling commissions or brokerage fees, if any,
with respect to the sale of that person's shares in amounts customary for the
type of transaction effected. Each selling stockholder will also pay all
applicable transfer taxes and all fees and disbursements of counsel for that
selling stockholder that may be incurred in connection with the sale of shares.
Each selling stockholder has advised us that before or during the time that
the selling stockholder is engaged in an attempt to sell shares registered
hereunder, he or she will cause to be furnished to each person to whom the
shares are being offered, and to each broker-dealer, if any, through whom the
shares are being offered, the appropriate number of copies of this prospectus,
as supplemented or amended, as may be required by such person.
The selling stockholders, and any other persons who participate in the sale
of the shares registered hereunder, may be deemed "underwriters" as defined in
the Securities Act. Any commissions paid or any discounts or concessions
allowed to any of the foregoing persons, and any profits received on resale of
the shares, may be deemed to be underwriting discounts and commissions under
the Securities Act.
We have agreed to maintain the effectiveness of this registration statement
until February 28, 2001, taking into account any periods of delay permitted. No
sales may be made pursuant to this prospectus after that time unless we amend
or supplement this prospectus to indicate that we have agreed to extend the
period of effectiveness. The selling stockholders may only make sales pursuant
to this prospectus once it has been declared effective during the following
periods: (i) October 27, 2000 through and including November 30, 2000 and (ii)
January 26, 2001 through and including February 28, 2001.
We have agreed to indemnify the selling stockholders against certain
liabilities, including liabilities under the Securities Act.
62
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders and the
number of shares being registered for sale as of the date of this prospectus
and sets forth the number of shares of common stock known by us to be
beneficially owned by each of the selling stockholders. The following table
assumes that the selling stockholders will sell all of the shares being offered
for their account by this prospectus. However, we are unable to determine the
exact number of shares that actually will be sold. None of the selling
stockholders has had a material relationship with us within the past three
years other than as a result of the ownership of our shares of other
securities. The shares offered by this prospectus may be offered from time to
time by the selling stockholders. This information is based upon information
provided by each respective selling stockholder and public documents filed with
the SEC, and is not necessarily indicative of beneficial ownership for any
other purpose. The number of shares of common stock beneficially owned and used
to calculate the percentage beneficial ownership of each listed person includes
the shares of common stock underlying warrants or options held by such persons
that are exercisable or convertible within 60 days of September 30, 2000. The
term "selling stockholders" includes the stockholders listed below and their
transferees, assignees, pledgees, donees or other successors. The percent of
beneficial ownership for each stockholder is based on 43,201,368 shares of
common stock outstanding as of September 30, 2000.
<TABLE>
<CAPTION>
Beneficial Number Number of Percent of
Ownership of of Shares Shares to be Shares to be
Shares Prior to Covered by Owned Owned
Offering This Prospectus After Offering After Offering
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Selling Stockholders:
William L. Abbott...... 93,081 93,081 0 0.0%
241 West Floresta Way
Portola Valley, CA
94028
August Capital......... 1,214,298 1,214,298 0 0.0
2480 Sand Hill Road,
Suite 101
Menlo Park, CA 94025
Attn: Andy Rappaport
Shanon K. Burke........ 689 689 0 0.0
113 El Camino Del Mar
Aptos, CA 95003
Amihud Cohen........... 133,356 133,356 0 0.0
4097 Ashbrook
San Jose, CA 95124
Damiana M. Dann........ 827 827 0 0.0
5032 Severance Drive
San Jose, CA 95136
John D. Del Rosario.... 11,031 11,031 0 0.0
34423 Maybird Circle
Fremont, CA 94555
Serguei G. Dorofeev.... 19,305 19,305 0 0.0
646 Santa Barbara
Terrace
Sunnyvale, CA 94086
Alexey G. Dymchenko.... 49,643 49,643 0 0.0
966 Fremont Street, #B
Menlo Park, CA 94025
Gary S. Flood.......... 108,250 108,250 0 0.0
19006 Brookview Drive
Saratoga, CA 95070
James R. Fredrickson... 8,439 8,439 0 0.0
1282 Albion Lane
Sunnyvale, CA 94087
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Beneficial Number Number of Percent of
Ownership of of Shares Shares to be Shares to be
Shares Prior to Covered by Owned Owned
Offering This Prospectus After Offering After Offering
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Selling Stockholders:
Benjamin Friedlander.... 91,013 91,013 0 0.0
450 San Antonio Road,
#57
Palo Alto, CA 94306
Moshe Handelsman........ 53,780 53,780 0 0.0
21453 Arrowhead Lane
Saratoga, CA 95070
Amanda L. Howe.......... 2,757 2,757 0 0.0
1013 Sherman Street, #A
San Jose, CA 95110
Susan Hughes............ 82,739 82,739 0 0.0
20 Toro Court
Portola Valley, CA
94028
Albert Jordan(1)........ 373,315 373,315 0 0.0
1321 Harker Avenue;
Palo Alto, CA 94301
Gene Manheim............ 340,733 340,733 0 0.0
615 Templeton Court
Sunnyvale, CA 94087
Thomas K. Micali Trust.. 744,655 744,655 0 0.0
20 Toro Court
Portola Valley, CA
94028
Miles Family Living
Trust.................. 24,821 24,821 0 0.0
P.O. Box 1130
Rangeley, ME 04970
Rachel E. Obstler....... 55,159 55,159 0 0.0
2005 California Street,
#18
Mountain View, CA 94040
Bryan D. Pollock........ 28,958 28,958 0 0.0
1048 Almarida Drive
San Jose, CA 95128
Shimon B. Scherzer(2)... 1,166,820 1,166,820 0 0.0
1648 Mariani Drive
Sunnyvale, CA 94087
Roger L. Sellgren....... 132,383 132,383 0 0.0
20124 Chateau
Saratoga, CA 95070
Alexander V. Tesler..... 82,739 82,739 0 0.0
3731 Middlefield Road
Palo Alto, CA 94303-
4715
Joe Y. Tom.............. 41,369 41,369 0 0.0
1306 Melbourne Street
Foster City, CA 94404
Dmitri V. Vaesanofiev... 33,699 33,699 0 0.0
5462 Caminito Vista
Lujo
San Diego, CA 92130
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Beneficial Number Number of Percent of
Ownership of of Shares Shares to be Shares to be
Shares Prior to Covered by Owned Owned
Offering This Prospectus After Offering After Offering
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Selling Stockholders:
John D. White Jr.
(Jack)................. 2,746 2,746 0 0.0
10366 Elysian Way
Nevada City, CA 95959
Amos Wilnai............. 24,821 24,821 0 0.0
1950 Barbara Drive
Palo Alto, CA 94303
Amos Wilnai Trust....... 82,739 82,739 0 0.0
1950 Barbara Drive
Palo Alto, CA 94303
Colin J. Wilson......... 22,753 22,753 0 0.0
4553 La Salle Avenue
Fremont, CA 94536
Michael L. Winfield..... 12,410 12,410 0 0.0
326 Endmoor Court
San Jose, CA 95119
Piu Bill Wong........... 275,798 275,798 0 0.0
17280 Clara Street
Monte Sereno, CA 95030
Jiangfeng (Jennifer)
Wu..................... 22,063 22,063 0 0.0
350 Budd Avenue, #I-7
Campbell, CA 95008
Cong Ye................. 5,309 5,309 0 0.0
2155 Main Street, #219
Santa Clara, CA 95050
Alexei N. Zenkin ....... 19,305 19,305 0 0.0
1036 Colorado Avenue,
#2M
Palo Alto, CA 94303
</TABLE>
--------
(1) Albert Jordan has served as our president, CDMA since October 2000.
(2) Shimon Scherzer has served as our chief technical officer since October
2000.
65
<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 150,000,000 shares of common stock,
$0.0001 par value, and 10,000,000 shares of preferred stock, $0.0001 par value.
As of September 30, 2000, there were 43,201,368 shares of common stock
outstanding that were held of record by 234 stockholders.
Common Stock
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.
In the event of a liquidation, dissolution or winding up of Metawave, 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.
Preferred Stock
The board of directors is authorized to issue up to 10,000,000 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 Metawave 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 we
currently have no plans to issue any shares of preferred stock.
Warrants
As of September 30, 2000, we had warrants outstanding to purchase an
aggregate of 107,498 shares of common stock.
In connection with a equipment lease line entered into with Transamerica
Business Credit Corporation in May 1999, we issued a warrant to purchase up to
an aggregate of 20,833 shares of common stock at an exercise price of $6.75 per
share. The warrant expires on May 19, 2004. In connection with an equipment
lease line entered into in December 1995, we issued a warrant to purchase up to
an aggregate of 32,500 shares of common stock to Comdisco, Inc. at an exercise
price of $3.28123 per share. The warrant expires on December 13, 2002. In
connection with a second equipment lease line entered into in April 1996, we
issued a warrant to purchase up to an aggregate of 11,110 shares of common
stock to Comdisco at an exercise price of $3.28123 per share. The warrant
expires on April 9, 2003. In connection with a third equipment lease line
entered into in August 1996, we issued a warrant to purchase up to an aggregate
of 13,332 shares of common stock to Comdisco at an exercise price of $7.1512
per share. The warrant and the extension expire on August 20, 2003. In
connection with a fourth equipment lease line entered into in June 1997, we
issued a warrant to purchase up to an aggregate of 29,723 shares of common
stock to Comdisco at an exercise price of $7.06498 per share. The warrant
expires on June 9, 2004.
66
<PAGE>
Registration Rights of Certain Holders
The holders of 34,286,577 shares of common stock or certain of their
transferees are entitled to rights with respect to the registration of such
shares under the Securities Act. These rights are provided under the terms of
an agreement between us 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 we use our best efforts to register the
registrable securities for public resale, provided that the proposed aggregate
offering price is at least $7,500,000. No shares of common stock are being
registered on behalf of these holders in this offering. Furthermore, in the
event we elect to register any of our common stock for purposes of effecting
any public offering, the holders of registrable securities are entitled to
include their shares of common stock 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 us 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. In addition, we have agreed to indemnify the holders of
registration rights against liabilities under the Securities Act.
In addition to the registration rights described above, in connection with
our acquisition of Adaptive Telecom we entered into a registration rights
agreement with the former stockholders of Adaptive Telecom. Pursuant to this
registration rights agreement, the former Adaptive Telecom shareholders may
sell their shares of our common stock received in the merger subject to volume
limitations set forth in the registration rights agreement once this prospectus
has been declared effective, during two periods (first, from October 27, 2000
until November 30, 2000, and second, from January 25, 2001 until February 28,
2001). We may also prepare and file an S-3 Registration Statement for the
benefit of the former Adaptive Telecom shareholders as soon as we are S-3
eligible which will be after the one year anniversary of our initial public
offering (April 28, 2001). Furthermore, in the event we elect to register any
of our common stock for purposes of effecting any public offering, the former
Adaptive Telecom shareholders are entitled to include their shares of common
stock in the registration. This 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. Furthermore, in the
event we elect to register any of our common stock for purposes of effecting
any public offering, the former Adaptive Telecom shareholders are entitled to
include their shares of common stock in the registration. This 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.
Anti-Takeover Provisions of Delaware and Washington Law and Charter Documents
We are subject to the provisions of Section 203 of the Delaware General
Corporate Law. 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 Metawave without further action by the
stockholders.
The laws of the State of Washington, where our principal executive offices
are located, impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act, or 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
67
<PAGE>
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:
. the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act,
. the corporation's principal executive office is located in Washington,
and
. 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, we
anticipate this statute will apply to us. Depending upon whether we meet 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 Metawave.
In addition, certain provisions of our 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 Metawave, which could have an adverse effect on the market price
of our common stock. Our 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 Metawave 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 10,000,000 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 our outstanding voting stock, thereby
delaying, deferring or preventing a change in control of Metawave. 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. We have
no present plan to issue shares of preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services L.L.C. and their number is (206) 674-3030.
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 2000, we had outstanding 43,201,368 shares of common
stock. The 180 day lockup period imposed in connection with our initial public
offering for our shares ended October 24, 2000. Currently, 973,669 shares are
eligible for resale pursuant to Rule 701, 10,749,447 are eligible for resale
pursuant to Rule 144(k) and 18,082,446 are eligible for resale pursuant to Rule
144.
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. On April 28, 2000, we filed
a registration statement under the Securities Act to register shares to be
issued pursuant to our employee benefit plans. As a result, any options
exercised under the 1995 stock option plan, the 1998 stock option plan, the
2000 stock option plan, the 2000 director option plan, the 2000 employee stock
purchase plan or any other benefit plan after the effectiveness of such
registration statement are freely tradable in the public market, except that
shares held by affiliates will still be subject to the volume limitation,
manner of sale, notice and public information requirements of Rule 144 unless
otherwise resalable under Rule 701. As of September 30, 2000, there were
outstanding options for the purchase of 5,670,427 shares of our common stock
under our employee benefit plans.
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 our "affiliates", 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 us. In
addition, a person who is not deemed to have been an affiliate of us at any
time during the 90 days preceding a sale, and who has 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.
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 our
common stock in the public market after the lapse of the restrictions described
above could adversely affect the prevailing market price and our ability to
raise equity capital in the future at a time and price which we deem
appropriate. The holders of the registrable securities are entitled to certain
demand and piggyback rights with respect to registration of their shares under
the Securities Act. Registration of those shares under the Securities Act would
result in such shares becoming freely tradable without restriction under the
Securities Act (except for shares purchased by our affiliates) immediately upon
the effectiveness of such registration. 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 our common stock. If we were to include in a
registration initiated by us, any registrable securities pursuant to the
exercise of piggyback registration rights, such sales may have an adverse
effect on our ability to raise needed capital.
69
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by our counsel, Venture Law Group, a Professional Corporation, Kirkland,
Washington.
EXPERTS
The financial statements and schedules of Metawave Communications
Corporation as of December 31, 1997, 1998 and 1999 and the related statements
of operations, stockholders' equity (deficit), and cash flows for the years
then ended 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.
The financial statements of Adaptive Telecom, Inc. as of December 31, 1998
and 1999 and the related statements of operations, shareholders' equity and
cash flows for the years then ended appearing in this prospectus and
registration statement have been audited by Mohler, Nixon & Williams
Accountancy Corporation, independent accountants, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report, given on the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act. This prospectus, which is a
part of the registration statement, does not contain all of the information set
forth in the registration statement, including items contained in the exhibits
to the registration statement. For further information about our company and
the common stock being offered by this prospectus, you should see the
registration statement and the exhibits, financial statements and notes filed
with the registration statement. Copies of the registration statement,
including exhibits, financial statements and notes, may be inspected without
charge at the SEC principal office in Washington, D.C. or obtained at
prescribed rates from the public reference room of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information regarding the
public reference Room by calling the SEC at 1-800-SEC-0330. The SEC 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 SEC. We have filed the registration
statement, including the exhibits and schedules, electronically with the SEC
via the SEC EDGAR system.
Upon request, we will provide without charge a copy of this prospectus, and
a copy of any and all of the information that has been or may be incorporated
by reference in this prospectus. Requests for these copies should be directed
to Investor Relations, Metawave Communications Corporation, 10735 Willows Road
NE, Redmond, Washington 98052.
You should rely only on the information provided in this prospectus or any
prospectus supplement. We have authorized no one to provide you with different
information. We are not making an offer of these securities in any state where
the offer is not permitted.
70
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
METAWAVE COMMUNICATIONS CORPORATION
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................ F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
ADAPTIVE TELECOM, INC.
Report of Mohler, Nixon & Williams Accountancy Corporation, Independent
Accountants............................................................. F-26
Balance Sheets........................................................... F-27
Statements of Operations................................................. F-28
Statements of Shareholders' Equity....................................... F-29
Statements of Cash Flows................................................. F-30
Notes to Financial Statements............................................ F-31
METAWAVE COMMUNICATIONS CORPORATION
Unaudited Pro Forma Combined Condensed Financial Statements.............. F-40
Unaudited Pro Forma Combined Condensed Statements of Operations.......... F-41
Unaudited Pro Forma Combined Condensed Balance Sheet..................... F-43
Notes to Unaudited Pro Forma Combined Condensed Financial Statements..... F-44
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Metawave Communications Corporation
We have audited the accompanying consolidated balance sheets of Metawave
Communications Corporation as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Metawave
Communications Corporation at December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Seattle, Washington
February 11, 2000 except for the
first two paragraphs of Note 6 as
to which the date is May 2, 2000
F-2
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------- June 30,
1998 1999 2000
-------- --------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.................. $ 10,763 $ 20,165 $ 61,356
Accounts receivable, less allowances of
$693 in 1998, $908 in 1999 and
June 30, 2000............................. 4,329 10,127 14,142
Inventories................................ 7,929 4,149 6,566
Debt issuance costs, net of amortization of
$4,170 in 1998, $6,491 in 1999 and none
for June 30, 2000......................... 2,321 -- --
Prepaid expenses and other assets.......... 621 613 947
-------- --------- ---------
Total current assets...................... 25,963 35,054 83,011
Property and equipment, net.................. 6,355 5,701 5,892
Other noncurrent assets...................... 192 191 185
-------- --------- ---------
Total assets.............................. $ 32,510 $ 40,946 $ 89,088
======== ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
------------------------------------
Current liabilities:
Accounts payable........................... 5,412 3,758 6,547
Accrued liabilities........................ 2,334 2,493 2,489
Accrued compensation....................... 1,461 1,511 1,910
Senior secured notes....................... 31,704 -- --
Current portion of notes payable........... 134 75 8
Current portion of capital lease
obligations............................... 1,908 2,692 2,709
Deferred revenues.......................... 145 1,766 355
-------- --------- ---------
Total current liabilities................. 43,098 12,295 14,018
Notes payable, less current portion.......... 87 8 23
Capital lease obligations, less current
portion..................................... 4,326 2,479 2,651
Other long-term liabilities.................. -- 16 16
Commitments
Convertible and redeemable preferred stock--
issued and outstanding shares: 14,029,088,
32,027,203 and 0 in 1998, 1999 and June 30,
2000, respectively, at liquidation value.... 56,472 143,945 --
Convertible and redeemable preferred stock
warrants.................................... 5,123 157 --
Stockholder's equity (deficit):
Preferred stock, $.0001 par value:
Authorized shares--37,000,000 at December
31, 1998 and 1999 and 10,000,000 shares at
June 30, 2000;............................
Outstanding shares designated as
convertible redeemable preferred stock--
14,029,088, 32,027,203 and 0 in 1998, 1999
and June 30, 2000, respectively........... -- -- --
Common stock, $.0001 par value :
Authorized shares--50,000,000 at December
31, 1998 and 1999 and 150,000,000 shares
at June 30, 2000; issued and outstanding
shares--2,112,229, 2,390,910 and
37,824,959, in 1998, 1999 and June 30,
2000, respectively........................ 2,179 3,573 209,541
Deferred stock compensation................ (554) (906) (2,181)
Accumulated other comprehensive income
(loss).................................... 6 19 (59)
Accumulated deficit........................ (78,227) (120,640) (134,921)
-------- --------- ---------
Total stockholders' equity (deficit)...... (76,596) (117,954) 72,380
-------- --------- ---------
Total liabilities and stockholders' equity
(deficit)................................ $ 32,510 $ 40,946 $ 89,088
======== ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------- ---------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 1,450 $ 15,991 $ 22,596 $ 8,387 $ 20,694
Cost of revenues........ 1,728 18,028 22,236 8,919 15,193
--------- --------- --------- --------- ----------
Gross profit (loss)..... (278) (2,037) 360 (532) 5,501
Operating expenses:
Research and
development.......... 13,083 18,495 22,787 11,043 12,687
Sales and marketing... 5,383 11,346 11,080 5,416 4,876
General and
administrative....... 3,762 5,887 5,732 2,934 2,945
--------- --------- --------- --------- ----------
Total operating
expenses............... 22,228 35,728 39,599 19,393 20,508
--------- --------- --------- --------- ----------
Loss from operations.... (22,506) (37,765) (39,239) (19,925) (15,007)
Other income, net....... 851 790 1,165 358 1,011
Interest expense........ (449) (7,353) (4,339) (4,080) (285)
--------- --------- --------- --------- ----------
Other income (expense),
net.................... 402 (6,563) (3,174) (3,722) 726
--------- --------- --------- --------- ----------
Net loss................ $ (22,104) $ (44,328) $ (42,413) $ (23,647) $ (14,281)
========= ========= ========= ========= ==========
Basic and diluted net
loss per share......... $ (12.18) $ (21.88) $ (18.98) $ (10.88) $ (0.99)
========= ========= ========= ========= ==========
Weighted average shares
used in computation of
basic and diluted net
loss per share......... 1,815,000 2,025,741 2,234,798 2,172,848 14,378,271
========= ========= ========= ========= ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997, 1998 and 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated Total
Common Stock Deferred Other Stockholders'
-------------------- Stock Comprehensive Accumulated Equity
Shares Amount Compensation Income Deficit (Deficit)
---------- -------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 1,767,335 $ 10 $ 0 $ 0 $ (11,795) $ (11,785)
Exercise of stock
options............... 188,061 77 -- -- -- 77
Deferred stock
compensation.......... -- 1,881 (1,881) -- -- --
Stock compensation
expense............... -- -- 676 -- -- 676
Net loss and
comprehensive loss.... -- -- -- -- (22,104) (22,104)
---------- -------- ------- ---- --------- ---------
Balance at December 31,
1997................... 1,955,396 1,968 (1,205) 0 (33,899) (33,136)
Repurchased restricted
stock................. (92,266) (5) -- -- -- (5)
Exercise of stock
options............... 241,766 106 -- -- -- 106
Issuance and exercise
of common stock
warrants.............. 7,333 110 -- -- -- 110
Stock compensation
expense............... -- -- 651 -- -- 651
Comprehensive income
(loss):
Foreign exchange
translation gain...... -- -- -- 6 -- 6
Net loss............... -- -- -- -- (44,328) (44,328)
---------
Comprehensive loss..... (44,322)
---------- -------- ------- ---- --------- ---------
Balance at December 31,
1998................... 2,112,229 2,179 (554) 6 (78,227) (76,596)
Exercise of stock
options............... 278,681 137 -- -- -- 137
Issuance of common
stock warrants........ -- 88 -- -- -- 88
Deferred stock
compensation.......... -- 1,169 (1,169) -- -- --
Stock compensation
expense............... -- -- 817 -- -- 817
Comprehensive income
(loss):
Foreign exchange
translation gain...... -- -- -- 13 -- 13
Net loss............... -- -- -- -- (42,413) (42,413)
---------
Comprehensive loss..... (42,400)
---------- -------- ------- ---- --------- ---------
Balance at December 31,
1999................... 2,390,910 3,573 (906) 19 (120,640) (117,954)
Exercise of stock
options (unaudited)... 273,327 447 -- -- -- 447
Issuance of common
stock from initial
public offering
(unaudited)........... 7,187,500 58,887 -- -- -- 58,887
Conversion of
convertible and
redeemable preferred
stock to common stock
(unaudited)........... 27,972,907 143,945 -- -- -- 143,945
Conversion of preferred
stock warrants to
common stock warrants
(unaudited)........... -- 157 -- -- -- 157
Exercise of common
stock warrants
(unaudited)........... 315 -- --
Deferred stock
compensation
(unaudited)........... 2,532 (2,532) -- -- --
Stock compensation
expense (unaudited)... -- 1,257 -- -- 1,257
Comprehensive income
(loss):
Foreign exchange
translation loss
(unaudited)........... -- -- -- (78) -- (78)
Net loss (unaudited)... -- -- -- -- (14,281) (14,281)
---------
Comprehensive loss
(unaudited)........... (14,359)
---------- -------- ------- ---- --------- ---------
Balance at June 30,
2000................... 37,824,959 $209,541 $(2,181) $(59) $(134,921) $ 72,380
========== ======== ======= ==== ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss..................... $(22,104) $(44,328) $(42,413) $(23,647) $(14,281)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization expense...... 1,841 2,623 3,035 1,568 1,515
(Gain)/loss on disposal of
assets.................... -- 8 208 -- (1)
Stock compensation
expense................... 676 651 817 476 1,257
Reserve for loss on
assets.................... 425 -- -- -- --
Accrued interest expense on
senior notes.............. -- 2,704 -- -- --
Debt financing
amortization.............. -- 2,673 2,321 2,321 --
Noncash warrant expense.... -- 110 88 -- --
Changes in operating assets
and liabilities:
Decrease (increase) in
accounts receivable...... (1,323) (2,885) (5,798) (1,959) (4,015)
Decrease (increase) in
inventories.............. (4,080) (3,849) 3,780 (4,387) (2,417)
Decrease (increase) in
prepaids and other
noncurrent assets........ (34) (502) 8 47 (328)
Increase (decrease) in
accounts payable, accrued
liabilities, and accrued
compensation............. 926 7,915 (1,441) 1,930 3,184
Increase in other long-
term liabilities......... -- (5) -- -- --
Increase (decrease) in
deferred revenues........ 114 30 1,621 3,842 (1,411)
-------- -------- -------- -------- --------
Net cash provided by (used
in) operating activities.... (23,559) (34,855) (37,774) (19,809) (16,497)
Investing activities
Proceeds on sale of assets... -- 78 -- -- --
Purchases of equipment....... (621) (2,593) (1,317) (1,083) (174)
-------- -------- -------- -------- --------
Net cash used in investing
activities.................. (621) (2,515) (1,317) (1,083) (174)
Financing activities
Net proceeds from issuance of
preferred stock............. 19,182 7,190 82,507 82,507 --
Net proceeds from issuance of
common stock................ -- -- -- -- 58,887
Net proceeds from exercise of
common stock options........ 77 101 138 76 447
Proceeds from notes payable.. -- 29,000 -- -- --
Payments on notes payable.... (115) (182) (31,841) (31,760) (52)
Principal payments on capital
lease obligations........... (722) (1,317) (2,319) (1,285) (1,343)
-------- -------- -------- -------- --------
Net cash provided by
financing activities........ 18,422 34,792 48,485 49,538 57,939
Net increase (decrease) in
cash........................ (5,758) (2,578) 9,394 28,646 41,268
Effect of exchange rate
changes on cash............. -- 7 8 (48) (77)
Cash and cash equivalents at
beginning of period......... 19,092 13,334 10,763 10,763 20,165
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period............... $ 13,334 $ 10,763 $ 20,165 $ 39,361 $ 61,356
======== ======== ======== ======== ========
Noncash transactions and
supplemental disclosures
Capital lease obligations
incurred to purchase
assets...................... $ 2,665 $ 3,104 $ 1,256 $ 471 $ 1,531
Inventories reclassified to
property and equipment...... -- 171 -- -- --
Noncash conversion of
preferred stock warrants to
preferred stock............. -- -- 620 4,966 --
Noncash conversion of
preferred stock to common
stock....................... -- -- -- -- 143,945
Noncash conversion of
preferred stock warrants to
common stock warrants....... -- -- -- -- 157
Deferred stock compensation.. 1,881 -- 1,169 -- 2,532
Interest paid................ 450 596 1,653 1,703 226
</TABLE>
See accompanying notes.
F-6
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of Business
The Company provides smart antenna systems and embedded solutions to
wireless network operators facing capacity constraints in the wireless
communications industry. Our SpotLight smart antenna systems consist of
antennas that improve the reception and transmission of radio signals
dynamically through the use of our proprietary software. We believe that
wireless operators can increase overall network capacity, improve or maintain
network quality, reduce network operating costs and better manage network
infrastructure by implementing our SpotLight systems. As the demand for
wireless services continues to grow, we will develop embedded solutions based
on our proprietary technologies that address the associated network capacity
problems faced by wireless network operators.
On September 2, 1998, the Company formed Metawave International
Communications Corporation ("MICC"), a wholly owned Delaware subsidiary. On
October 5,1998, the Company formed a Hong Kong subsidiary, Metawave
Communications (Asia) Limited, which is now owned by Metawave Communications
(Cayman Islands) ("Metawave Cayman"). On December 7, 1998, the Company formed
Metawave Communications (Cayman Islands), a wholly owned subsidiary of MICC. On
April 2, 1999 Metawave Communications (Cayman Islands) formed a Taiwan
subsidiary, Metawave Communications Taiwan Co. Ltd. Our Hong Kong subsidiary
has a representative office in China.
In the third quarter of 2000, the Company added subsidiaries in Brazil
(Mexico do Brasil Ltda.), China (Metawave Communications (Shanghai Co. Ltd.),
and Mexico (Metawave de Mexico, S. de R.L. de C.V. and Metawave Services de
Mexico, S. de R.L. de C.V.). All of these subsidiaries are majority owned by
MICC, and minority owned by Metawave Cayman, except for Metawave Shanghai which
is wholly owned by Metawave Cayman.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
In 1998, the Company adopted a 52 week fiscal year ending on the Sunday
closest to December 31, 1999. The 1999 fiscal year ends on January 2, 2000,
with each of the fiscal quarters representing a 13-week period. For convenience
of presentation, all fiscal periods in these financial statements are treated
as ending on a calendar month end.
Liquidity
The Company experienced net losses of $42,413,000 and $14,281,000 for the
twelve month period ended December 31, 1999 and the six month period ended June
30, 2000, respectively. These losses are the result of intense product
development efforts and the costs associated with the development of the
Company's manufacturing and sales operations. Management believes that the
Company will experience substantial losses in 2000 and 2001, even if commercial
sales of the Company's systems continue to grow. Management believes that
existing cash, unused credit facilities, and revenues from systems sales, will
be sufficient to fund operations through October 31, 2001. Any substantial
inability to achieve the current business plan could have a material adverse
impact on the Company's financial position, liquidity or results of operations
and may require the Company to reduce expenditures to enable it to continue
operations through October 31, 2001.
Unaudited Interim Financial Information
The financial information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited, but includes all adjustments, consisting
only of normal recurring adjustments, that the Company
F-7
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
considers necessary for a fair presentation of the financial position at those
dates and of the operations and cash flows for the periods then ended.
Operating results for the six months ended June 30, 2000 are not necessarily
indicative of results that may be expected for the entire year.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to U.S. dollars at
the exchange rate in effect on the balance sheet date. Revenues and expenses
are translated at the average rates of exchange prevailing during the month.
The translation adjustment resulting from this process is shown within
accumulated other comprehensive income (loss) as a component of stockholders'
equity. Gains and losses on foreign currency transactions are included in the
consolidated statement of operations as incurred. To date, gains and losses on
foreign currency transactions have not been significant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Accordingly, actual results may differ from those
estimates. The Company has used estimates in determining certain provisions,
including the allowance for doubtful accounts receivable, inventory reserves,
useful lives for property and equipment, and warranty accruals.
Revenue Recognition
The Company generates revenues through the sales of smart antenna systems
and related installation and optimization services. System revenues are
recognized when title to the system and risk of loss has been transferred to
the customer and all customer acceptance conditions, if any, have been
satisfied, and when collection is probable.
Service revenues, generally for installation and optimization, are
recognized when the services have been performed and all customer acceptance
conditions, if any, have been satisfied. Revenues from maintenance contracts
are deferred and recognized ratably over the term of the agreement (which is
typically one year). Any billings in excess of revenues are classified as
deferred revenues and related systems are recorded as inventory.
Revenues from the customization of an original equipment manufacturer (OEM)
telecommunications system are recognized using contract accounting over the
period that services are performed under the percentage-of-completion method.
For agreements accounted for using the percentage-of-completion method, the
Company determines progress-to-completion using input measures based on labor
hours incurred. Customer billing occurs in accordance with contract terms.
Amounts billed to customers in excess of revenue recognized are recorded as
deferred revenues and customer advances are recorded as customer deposits on
uncompleted contracts.
Upon completion of the customization of the Company's technology to the
OEM's telecommunications system, the Company's revenues would be derived from
licenses of its intellectual property. For each license arrangement, the
Company would determine whether persuasive evidence of an agreement exists,
delivery of the product has occurred, there are not significant remaining
Company obligations, the fee is fixed or determinable and collectibility is
probable. If any of these criteria are not met, revenue recognition would be
deferred until such time as the criteria are met.
F-8
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents and trade
receivables. The carrying value of financial instruments approximates market
value.
The Company's customers are primarily wireless 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 26.0% of revenues
in the year ended December 31, 1999, 23.5% in 1998 and none in 1997.
The Company performs ongoing 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.
Net Loss per Share
Basic net loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted net loss per share reflects the potential dilution of
securities by including other common stock equivalents, including stock options
and redeemable convertible preferred stock, in the weighted average number of
common shares outstanding as if such shares were converted to common stock at
the time of issuance. Common stock equivalents, including stock options and
warrants and convertible redeemable preferred stock, are excluded from the
computation as their effect is anti-dilutive. For the periods presented, there
is no difference between the basic and diluted net loss per share.
Pro forma loss per share (unaudited) is computed by dividing net loss by the
weighted average number of shares of common stock outstanding and the weighted
average number of shares of convertible and redeemable preferred stock
outstanding as if such shares were converted to common stock at the time of
issuance.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. The Company
invests with various high-quality institutions and, in accordance with Company
policy, limits the amount of credit exposure to any one institution.
The Company accounts for its marketable securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." All
marketable securities are classified as available-for-sale and are carried at
fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. As of December 31, 1998 and 1999
and at June 30, 2000 all marketable securities were cash equivalents and
unrealized holdings gains and losses were not significant.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of purchased parts, subassemblies and finished goods.
F-9
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
Property and Equipment
Property, equipment and leasehold improvements are recorded at cost.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of two to seven years of the related assets for
financial statement purposes. Leasehold improvements are amortized over the
lesser of the lease term or the estimated useful life.
Warranty
The Company generally provides a 12 month warranty, which may vary depending
upon specific contractual terms, on all systems 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. Advertising expense of
$535,000, $692,000 and $1,387,000 was recorded for the years ended December 31,
1997, 1998 and 1999, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). APB
No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123 (refer to Note 6). The Company recognizes compensation expense
for options and warrants granted to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force Consensus 96-18.
Other Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. The only item of other
comprehensive income (loss) which the Company currently reports is foreign
currency translation adjustments.
Business Segments
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information about operating segments in annual financial statements. The
Company operates in one segment as a provider of certain wireless
telecommunication equipment. SFAS No. 131 also establishes standards for
related disclosures about systems and services, geographic areas and major
customers. Information related to international operations and major customers
is contained in Notes 12 and 13.
F-10
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. The Company does not
anticipate that the adoption of this new standard will have a material effect
on earnings or the financial position of the Company, but continues to evaluate
the impact of SFAS No. 133.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101 ("SAB 101"). This summarized certain areas of
the staff's views in applying generally accepted accounting principles as it
applies to revenue recognition. The Company believes that its revenue
recognition principles comply with SAB 101. The Company will continue to
evaluate interpretations of SAB 101.
2. Inventories
<TABLE>
<CAPTION>
December 31, June 30,
------------- -----------
1998 1999 2000
------ ------ -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Purchased parts ........................... $4,922 $2,251 $4,037
Subassemblies.............................. 2,332 1,144 1,351
Finished goods............................. 675 754 1,178
------ ------ ------
$7,929 $4,149 $6,566
====== ====== ======
</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,
---------------- -----------
1998 1999 2000
------- ------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Equipment ........................... $ 9,384 $10,100 $11,778
Furniture and fixtures............... 869 976 985
Leasehold improvements............... 920 910 911
------- ------- -------
11,173 11,986 13,674
Accumulated depreciation and
amortization........................ (4,818) (6,285) (7,782)
------- ------- -------
$ 6,355 $ 5,701 $ 5,892
======= ======= =======
</TABLE>
F-11
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment--(continued)
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of $9,591,000, $8,920,000 and $8,776,000 as
of December 31, 1998, 1999 and June 30, 2000, respectively. Accumulated
amortization on the leased assets was $3,357,000, $3,749,000 and $5,506,000 as
of December 31, 1998, 1999 and June 30, 2000, respectively.
In connection with the Master Lease Agreement with Transamerica Business
Credit Corporation, on June 30, 2000 the Company entered into a three-year
capital lease for testing equipment and computer hardware and a two-year
capital lease for software for $702,863 and $372,831, respectively.
4. Notes Payable
<TABLE>
<CAPTION>
December 31, June 30
------------ -----------
1998 1999 2000
------- ---- -----------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Senior Secured Notes, repaid in April 1999 .. $31,704 $ -- $ --
Note payable to U.S. Bank with monthly
payments of $217, bearing interest at 11%,
repaid in November 1999 .................... 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 .. 202 72 --
Notes payable to Ford Motor Credit Company
with monthly payments aggregating $466,
bearing interest at 3.9% ................... -- -- 21
Notes payable to Chrysler Financial with
monthly payments aggregating $347, bearing
interest at 10% ............................ 15 11 10
------- ---- ----
31,925 83 31
Less current portion......................... 31,838 75 $ 8
------- ---- ----
Long term portion ........................... $ 87 $ 8 $23
======= ==== ====
</TABLE>
Senior Secured Notes
On April 28, 1998, the Company issued $29.0 million aggregate principal
amount of Senior Secured Notes ("Senior Notes"), with a maturity date of April
28, 2000. The Senior Notes accrue interest at 13.75%, payable semiannually at
the option of the Company in either additional Senior Notes or cash. In October
1998, the Company issued additional Senior Notes of approximately $2.7 million
in connection with the related accrued interest.
In connection with the Senior Notes, the noteholders received warrants to
purchase 537,500 shares of Series D Preferred Stock at $0.01 per share. The
Company recorded debt issuance fees of approximately $4.3 million related to
the estimated fair value of these warrants. The debt issuance fees were
amortized over the period during which the Senior Notes were outstanding.
On December 21, 1998, the Company issued an additional 83,202 warrants at
$0.01 per share to the Senior Noteholders in connection with certain
antidilution provisions. The fair value of these additional warrants was
estimated to be approximately $671,000 which was being amortized over the
remaining term of the Senior Notes.
F-12
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Notes Payable--(continued)
In April 1999, the Company retired all of the principal and accrued interest
on the Senior Notes aggregating $33,124,570. In addition, the warrants issued
in connection with the Senior Notes were exercised by the noteholders for an
aggregate 620,702 shares of Series D Preferred Stock. Amortization of debt
issuance costs, which has been included in interest expense, aggregated
$4,170,000 in 1998 and $2,321,000 in 1999.
Line of Credit Agreement
The Company has a credit facility with Imperial Bank. The facility 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. Outstanding balances on the credit line bear interest at the
bank's prime rate (8.5% as of December 31, 1998 and 1999), and are secured by
the Company's accounts receivable. At December 31, 1998 and 1999, $2.5 million
was outstanding related to the issuance of a standby letter of credit. The
Company is required to comply with certain covenants set forth in the line of
credit agreement. The Company is currently in compliance with these covenants.
In June 2000, we renewed our line of credit with Imperial Bank increasing
available funds from $7.5 million to $10.0 million to support our working
capital requirements. The line of credit has a maturity date of one year with
interest payable monthly and principal at maturity. As of June 30, 2000, we had
an outstanding balance of $30,250 on this credit line.
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, or $1.00 per share.
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, or $3.375 per share.
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, or $6.16 per share.
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, or $8.00 per share.
In December 1998, the Company issued 898,738 shares of Series E Preferred
Stock ("Series E") through a private offering. Proceeds from the initial round
of Series E financing amounted to $7,189,904, or $8.00.
In January 1999, the Company issued 726,264 additional shares of Series E at
$8.00 per share with gross proceeds of $5,810,112. In April and June 1999, the
Company issued 15,676,153 additional shares of Series E at $5.00 per share with
gross proceeds of $78,380,765. In connection with the issuance of the Series E
at $5.00 per share in April, the existing Series E shareholders were issued
974,996 additional Series E shares adjusting the price per share from $8.00 to
$5.00.
Holders of Series A, B, C, D and E have preferential rights to dividends
($.08, $.27, $.49, $.64 and $.40 per share per annum, respectively) when and if
declared by the Board of Directors. Dividends are not cumulative until January
1, 2002. 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.
F-13
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Convertible and Redeemable Preferred Stock--(continued)
Every three shares of Series A and B is convertible into two shares of
common stock at the option of the holder. In July 1999, in accordance with
certain adjustment provisions of the Amended and Restated Certificate of
Incorporation, the Series C, D, and E conversion rate to common stock was
amended to 1.30786, 1.44144 and 1.42857, respectively. The conversion rate of
the Series A, B, C, D and E Preferred Stock is subject to adjustment in the
event the Company issues shares of capital stock at a price per share below the
original purchase price for each Series, subject to certain exceptions. In
addition, the conversion rate is automatically adjusted in the event of a stock
split, stock dividend, recapitalization or similar event. On April 12, 2000,
the Board of Directors approved a two-for-three reverse stock split of the
common stock. As a result of the split, the Series A, B, C, D and E conversion
rates to common stock were adjusted to 0.66667, 0.66667, 0.87190, 0.96096, and
0.95238, respectively. In conjunction with the closing of the Company's initial
public stock offering, on May 2, 2000, all series of preferred stock were
converted to 27,972,907 shares of common stock.
6. Stockholders' Equity
Initial Public Offering and Reverse Stock Split
In February 2000, the Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit
the Company to offer up to 12,000,000 shares of common stock to the public. In
February 2000, the Board of Directors authorized an increase in the
capitalization of the Company to 160,000,000 authorized shares with 150,000,000
shares of common stock, par value $0.0001 per share and 10,000,000 shares
designated as preferred stock, par value $0.0001 per share upon the effective
date of the Company's initial public offering. In April 2000, the Board of
Directors approved a two-for-three reverse stock split of the common stock. All
share and per share data and all conversion rate disclosures in the
accompanying financial statements have been retroactively adjusted to reflect
this split.
On May 2, 2000, the Company completed an initial public offering of its
common stock. A total of 7,187,500 shares of common stock offered were sold at
$9.00 per share. The aggregate gross proceeds from the sale were $64.7 million.
Net proceeds from the offering amounted to $58.9 million and are invested in
high quality short-term investments.
Stock Repurchases
On January 10, 1998, the Company repurchased 91,850 shares of common stock
from one of its founders for $501 pursuant to the terms of a stock repurchase
agreement with the founder. In addition, the Company caused one of its founders
to surrender 66,666 shares of common stock in 1996 for no consideration.
In December 1998, the Company repurchased 416 shares from one of its
employees for $5,000.
Stock Option Plans
The Company's 1995 Stock Option Plan (the "1995 Plan") provides for the
granting of incentive stock options and nonqualified stock options to
employees, officers, directors and consultants. Options under the 1995 Plan
have been granted at fair market value on the date of grant and expire ten
years after the date of the grant. Options granted under the 1995 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
2,766,666 shares of common stock for issuance under the 1995 Plan.
F-14
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity--(continued)
In May 1998, the Board of Directors approved the 1998 Stock Option Plan (the
"1998 Plan"). Options granted under the 1998 Plan generally vest on the same
terms as the 1995 Plan and are exercisable for a period of ten years. 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 Plan
automatically increase by an amount equal to three percent of the Company's
outstanding common stock, up to a maximum of 666,666 shares in any calendar
year, or such lower amount as approved by the Board of Directors. The Company
initially reserved 566,666 shares under the 1998 Plan, and was increased to
1,763,369 shares in April 1999 by the Board of Directors.
In June 1999, the Board of Directors approved the adoption of the Employee
Option Incentive Program (the "Incentive Program") under the 1998 Plan. Options
granted under the Incentive Program originally vested over five years from the
date of grant, however, vesting was accelerated for 50% of such options on
April 26, 2000, and the remaining 50% of the options shall vest on April 26,
2001. Options under the Incentive Program were granted at estimated fair value
on the date of grant and expire ten years after the date of the grant. The
Board of Directors issued 336,666 shares under this program.
In February 2000, the Board approved the 2000 Employee Stock Purchase Plan
(the "ESPP"), subject to shareholder approval. The Company implemented the ESPP
on April 26, 2000, and the ESPP will continue until April 30, 2020. The ESPP,
subject to certain limitations, permits eligible employees of the Company to
purchase common stock through payroll deductions of up to 15% of their
compensation. The Company has authorized the issuance of up to 233,333 shares
of common stock under the ESPP, plus an automatic annual increase, to be added
on the first day of the fiscal year beginning in 2001, equal to the lesser of
266,666 shares, 1% of the common stock outstanding on the last day of the
preceding fiscal year, or a lesser number of shares as determined by the Board
of Directors.
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 200,000 shares of common stock have been reserved
for issuance under the Directors' Plan. The Directors' Plan provides for
discretionary grants of nonstatutory stock options to nonemployee directors of
the Company. The Plan provides automatic formula based grants to the
nonemployee directors. In February 2000, the Board of Directors amended the
Directors' Plan, and our shareholders approved the amendment in April 2000. The
amended plan became effective on April 26, 2000. An automatic grant is made to
each non-employee director who joins the Board after the closing of the initial
public offering for an option to purchase 16,666 shares of common stock.
Additionally, at each annual shareholder meeting, each non-employee director is
granted an additional option to purchase 6,666 shares of common stock provided
that the director continues serving on the Board and has served as a director
six months prior to grant date. The amended Directors' Plan increases the
issuance of options under the plan to 466,666. Initial options granted under
the directors' plan to new nonemployee directors following the IPO will vest as
to 25% of the shares underlying the option on the first anniversary of the date
of the option grant and as to 1/48th of the shares each month after the first
anniversary so that these options will be fully vested on the fourth
anniversary of the grant date. Options granted to our nonemployee directors at
the time of each annual stockholders meeting following this offering will vest
as to 1/36th of the shares underlying the option so that these options will be
fully vested on the third anniversary of the grant date. The exercise price of
all stock options granted under the Directors' Plan shall be equal to the
estimated fair 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.
The 2000 Stock Option Plan (the "2000 Plan") provides for the grant of
incentive stock options to employees, including employee directors, and of
nonstatutory stock options and stock purchase rights to
F-15
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity--(continued)
employees, directors and consultants. The 2000 Plan was originally adopted by
our board of directors in February 2000 and was approved by our stockholders in
April 2000. The 2000 Plan provides for this issuance of options and rights to
purchase up to 1,333,333 shares of our common stock, plus an automatic annual
increase on the first day of each fiscal year beginning in 2001 through 2009
equal to the lesser of 2,000,000 shares, 5% of our outstanding common stock on
the last day of the immediately preceding fiscal year, or a lesser number of
shares as our board of directors determines. Unless terminated earlier by the
board of directors, the 2000 Plan will terminate ten years following its
effective date.
Deferred stock compensation is calculated as the difference between the
exercise price and the deemed fair value of the Company's common stock at the
date of grant. The deferred stock compensation is amortized over the vesting
period of the related options using a graded vesting approach. In 1997 and 1999
and during the six months ended June 30, 2000, deferred stock compensation of
$1,881,000, $1,169,000, and $2,523,000 was recorded for options granted under
the various stock option plans. Amortized stock compensation of $676,000,
$651,000, $817,000, and $1,257,000 was recorded during each of the years ended
December 31, 1997, 1998, 1999, and the six months ended June 30, 2000,
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:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net loss:
As reported................................. $(22,104) $(44,328) $(42,413)
Pro forma................................... (22,109) (44,728) (43,231)
Basic and diluted net loss per share:
As reported................................. (12.18) (21.88) (18.98)
Pro forma................................... (12.18) (22.08) (12.82)
</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 estimated
fair value of the common stock 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 1996 through 1999
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, 1998 and 1999 grants.
F-16
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity--(continued)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 December 31, 1999 June 30, 2000
-------------------- -------------------- -------------------- --------------------
(unaudited)
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.............. 1,295,236 $ .36 2,099,196 $ 1.19 2,531,996 $4.59 2,885,294 $ 5.25
Granted at fair value.. 447,988 2.93 1,478,547 13.02 914,820 6.96 1,053,151 14.54
Granted at above deemed
fair value............ -- -- -- -- 16,666 6.75 476,893 12.00
Granted at below deemed
fair value............ 906,190 1.02 -- -- 455,250 4.61 530,059 6.46
Canceled............... (362,157) .44 (803,981) 12.56 (754,757) 6.53 (142,910) 7.34
Exercised.............. (188,061) .41 (241,766) .44 (278,681) .50 (273,327) 1.43
--------- --------- --------- ---------
Outstanding at end of
period................. 2,099,196 1.19 2,531,996 4.59 2,885,294 5.25 4,529,160 8.33
========= ========= ========= =========
Exercisable at end of
period................. 1,426,668 1.46 2,213,954 5.13 2,837,236 5.33 3,260,243 6.63
========= ========= ========= =========
Weighted-average fair
value of options
granted during the
period:
Granted at fair value... 2.93 12.84 3.59 13.93
Granted at below fair
value.................. 2.84 -- 4.50 7.22
</TABLE>
The following information is provided for options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------- -------------------------
Average
Weighted- Remaining Weighted-
Range of Average Contractual Average
Exercise Number of Exercise Life Number of Exercise
Price Options Price (Years) Options Price
------------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.15 - 0.53 228,411 $0.26 6.12 214,441 $0.24
0.93 - 1.80 777,695 0.96 7.48 743,606 0.96
3.00 - 5.04 561,950 4.23 9.02 561,950 4.23
5.25 - 6.75 655,174 6.62 8.96 655,174 6.62
7.50 - 12.00 662,064 11.54 8.06 662,065 11.54
--------- ---------
2,885,294 5.25 8.47 2,837,236 5.33
========= =========
</TABLE>
Stock options available for future grants under the Company's stock option
plans total 1,136,232 and 890,809 as of December 31, 1999 and June 30, 2000,
respectively.
F-17
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' Equity--(continued)
Common Stock Warrants
In connection with various leasing agreements since 1996, the Company has
issued warrants providing for the purchase of various series of convertible
redeemable preferred stock and common stock. The warrant agreements expire
after seven years or 18 months to three years from the effective date of the
Company's initial public offering, whichever comes later. The value of the
warrants was recorded as additional debt issuance cost and is being amortized
using the interest method over the term of the related lease agreements. The
warrants were valued using the Black-Scholes valuation model based upon the
exercise prices described above, a risk free rate of 4.5%-6.0%, a dividend
yield rate of 0%, volatility of .6 and an expected life of 2-5 years.
As a result of the two-for-three reverse stock split and the Company's
initial public offering in April, 2000, all of the convertible and redeemable
preferred stock warrants were converted to 90,870 common stock warrants with
exercise prices ranging from $3.28 to $8.32 per share. On May 2, 2000, in
connection with the initial public offering, a warrant holder exercised all
4,205 shares of its common stock warrants on a net exercise basis, thereby
resulting in the issuance of 315 shares of common stock. As of June 30, 2000,
there were 107,498 shares of common stock warrants outstanding.
Common Shares Reserved for Future Issuance
The Company has reserved shares of common stock as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
Stock options outstanding.......................... 2,885,294 4,529,160
Stock options available for future grant........... 1,136,232 890,809
---------- ---------
4,021,526 5,419,969
Conversion of:
Series A Preferred Stock......................... 3,666,664 --
Series B Preferred Stock......................... 1,827,157 --
Series C Preferred Stock......................... 2,172,677 --
Series D Preferred Stock......................... 2,900,577 --
Series E Preferred Stock ........................ 17,405,832 --
---------- ---------
27,972,907 5,419,969
Convertible redeemable preferred stock warrants.... 90,870 --
Common stock warrants.............................. 20,833 107,498
---------- ---------
32,106,136 5,527,467
========== =========
</TABLE>
7. Income Taxes
As of December 31, 1999, the Company had federal net operating loss
carryforwards (NOL) of approximately $108.4 million and research and
development tax credit carryforwards of approximately $1.9 million. 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 equity
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 $83.1 million of the NOL is limited to approximately
$4.0 million per year. The remaining NOL is not subject to limitation as of
December 31, 1999.
F-18
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. 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 assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Prepaid assets......................................... $ 47 $ 57
Deferred tax assets:
Net operating loss carryforwards....................... 22,664 36,880
Research and development tax credit carryforwards...... -- 1,872
Accrued compensation................................... 380 335
Fixed assets........................................... 90 175
Accrued expenses and reserves.......................... 1,146 2,195
Deferred revenues...................................... -- 564
Stock compensation..................................... 80 82
-------- --------
Total deferred tax assets................................ 24,360 42,103
-------- --------
24,313 42,046
Less valuation reserve................................... (24,313) (42,046)
-------- --------
Net deferred taxes....................................... $ -- $ --
======== ========
</TABLE>
8. Commitments
The Company leases its facilities under noncancelable operating lease
agreements that expire on various dates through 2005. The Company leases
certain equipment under noncancelable capital leases that expire on various
dates through 2002.
In June 1998, the Company moved into a new building. The lease on this
building expires on 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 12 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-19
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Commitments--(continued)
Following is a summary of future minimum payments under capital leases and
operating leases, including the principal facility, that have initial or
remaining noncancelable lease terms in excess of one year at December 31, 1999:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(In thousands)
<S> <C> <C>
2000..................................................... $3,015 $ 2,001
2001..................................................... 2,238 2,089
2002..................................................... 620 1,969
2003..................................................... -- 2,108
2004 and thereafter...................................... -- 2,867
------ -------
5,873 $11,034
=======
Less interest............................................ 702
------
5,171
Less current portion..................................... 2,692
------
$2,479
======
</TABLE>
Rental expense for operating leases was $667,939, $1,304,007 and $2,041,328
for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company entered into agreements with certain leasing companies to
provide up to $3.0 million in 1997, $3.5 million in December 31, 1998 and $3.0
million at December 31, 1999 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 7.25% in
1997, 14.5% at December 31, 1998 and 12.25% at December 31, 1999. The leases
are secured by the underlying equipment. In connection with these lease
agreements, warrants were issued to purchase preferred stock (see Note 5).
F-20
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Net Loss Per Share
Basic and diluted net loss per share is calculated using the weighted
average number of shares of common stock outstanding. The effect of stock
options, warrants and convertible and redeemable preferred stock have not been
included in the calculation of diluted net loss per share as their effect is
antidilutive. Pro forma basic and diluted net loss per share is computed on the
basis of the weighted average number of shares of common stock outstanding plus
the pro forma effect of convertible preferred shares as if such shares were
converted to common stock at the time of issuance.
<TABLE>
<CAPTION>
Six Months Ended
Year ended December 31, June 30,
---------------------------- ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net loss (A).............. $(22,104) $(44,328) $(42,413) $(23,647) $(14,281)
======== ======== ======== ======== ========
Weighted average shares
outstanding:
Common stock (B)........ 1,815 2,026 2,235 2,173 14,378
Convertible and
redeemable preferred
stock.................. 7,773 8,804 21,696 15,316 18,751
-------- -------- -------- -------- --------
Pro forma weighted average
shares outstanding (C)... 9,588 10,830 23,931 17,489 33,129
======== ======== ======== ======== ========
Basic and diluted net loss
per share (A/B).......... $ (12.18) $ (21.88) $ (18.98) $ (10.88) $ (0.99)
======== ======== ======== ======== ========
Pro forma net loss per
share (A/C).............. $ (2.31) $ (4.09) $ (1.77) $ (1.35) $ (0.43)
======== ======== ======== ======== ========
</TABLE>
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 to the plan.
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 former Chief Financial Officer
("CFO"). Both loans bear interest at 5.5%. The secured loan was payable in full
on October 28, 2002, or earlier, based upon certain events specified in the
agreement. Under the original terms of the unsecured loan, $50,000 of the
principal amount of the loan was to be forgiven over a three-year period
provided that the CFO remained 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 terminated. In accordance with the loan agreement,
a total of $16,665 was forgiven in 1998 and was expensed as compensation.
The CFO resigned from the Company in January 1999. The Board authorized an
extension of due dates on the secured loan of $162,500 and the unsecured loan
and accrued interest balance of $62,460 to the earlier of January 30, 2000, or
190 days after an IPO of the Company. The Board authorized an amendment to the
Security Agreement securing the obligations of the former CFO under the secured
and unsecured promissory
F-21
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Related-Party Transactions--(continued)
notes that provide for an acceleration of the notes based upon certain events
specified in the Agreement. These notes were repaid in full in February 2000.
Powerwave Technologies, Inc. ("Powerwave"), whose chief executive officer is
a director of the Company, is the Company's sole supplier of linear power
amplifiers, a component in the Company's systems. Pursuant to a manufacturing
agreement with Powerwave (which agreement was approved by a majority of the
Company's disinterested directors), Powerwave will manufacture and sell to the
Company 100% of the Company's requirements for linear power amplifiers that
Powerwave manufactures. The initial term of the agreement is 18 months with an
automatic 18-month extension, unless either party otherwise terminates the
agreement. The Company's purchases from Powerwave totaled $2,203,217,
$8,047,401 and $6,427,026 in 1997, 1998, and 1999, respectively.
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
In December 1997, the Company determined that it would discontinue the
Network Services division. Accordingly, the carrying value of these fixed
assets were 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 revenues for the year ended December 31, 1997 and 1998 were
revenues of $1,450,000 and $200,000 respectively, relating to the Network
Services division and the cost of revenues were $1,728,000 and $242,000,
respectively.
In June 1998, in connection with certain patent licenses, the Company paid
$250,000 in cash and issued 7,333 common stock warrants for an aggregate amount
of $360,000. The common stock warrants had an exercise price of $.015 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 recorded as
research and development expense in 1998.
Revenues from customers representing more than 10% of annual sales in each
year were as follows:
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, June 30,
---------------- ------------
1997 1998 1999 1999 2000
---- ---- ---- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C>
AirTouch Communications, Inc. ............. 27.0% -- -- -- 39.5%
Alltel Communications Inc. ................ -- 61.8% 44.8% 88.2% --
Cox Communications Inc. ................... 63.0% -- -- -- --
GTE Wireless............................... -- 13.4% -- -- --
Grupo Iusacell S.A. de C.V. ............... -- -- 26.0% -- 46.2%
OJSC St. Petersburg Telecom................ -- 13.4% -- -- --
Southwestco Wireless....................... -- -- 20.9% -- --
Telefonica Servicios Moviles S.A. ......... -- 10.1% -- -- --
</TABLE>
F-22
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. International Operations
Metawave sells its smart antenna systems and services throughout the world,
and operates in a single industry segment. While certain expenses for sales and
marketing activities are incurred in various geographical regions,
substantially all of Metawave's assets are located and the majority of its
operating expenses are incurred at its corporate headquarters. Revenue
information by geographic region is the only segment information presented as
follows:
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
---------------------- --------------
1997 1998 1999 1999 2000
------ ------- ------- ------ -------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
United States........................ $1,450 $12,233 $16,717 $8,387 $10,863
Paraguay............................. -- 1,615 -- -- --
Peru................................. -- -- -- -- 269
Russia............................... -- 2,143 -- -- --
Mexico............................... -- -- 5,879 -- 9,562
------ ------- ------- ------ -------
Total................................ $1,450 $15,991 $22,596 $8,387 $20,694
====== ======= ======= ====== =======
</TABLE>
14. Subsequent Event (Unaudited)
On September 21, 2000, the Company completed the acquisition of Adaptive
Telecom, Inc. with the issuance of 5,361,803 shares of common stock and 138,166
stock options of Metawave in exchange for all the outstanding capital stock and
the assumption of all outstanding options to acquire Adaptive Telecom common
stock. In accordance with the Agreement and Plan of Merger among Metawave and
Adaptive Telecom, Adaptive Telecom became a wholly-owned subsidiary of
Metawave. The acquisition was accounted for under the purchase method of
accounting.
Common stock issued by the Company was valued at $20.37 per share. The value
of options issued was determined by estimating their fair market value using
the Black-Scholes option pricing model. A summary of the consideration issued
by the Company and the estimated direct and incremental costs of the
acquisition are as follows (in thousands):
<TABLE>
<S> <C>
Common stock....................................................... $90,582
Restricted common stock............................................ 20,204
Estimated fair value of stock options.............................. 1,022
Estimated direct and incremental acquisition costs................. 2,500
-------
114,308
Amounts attributable to future services for unvested stock options
and restricted stock.............................................. 17,350
-------
Net purchase price............................................... $96,958
=======
</TABLE>
F-23
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Subsequent Event (Unaudited)--(continued)
Based on the assessment of the fair value of net assets acquired, the
purchase price allocated to the acquired assets of Adaptive Telecom as of
September 21, 2000 are as follows:
<TABLE>
<CAPTION>
Purchase Price Amortization
Allocation Life
-------------- ------------
(In thousands)
<S> <C> <C>
Purchase price allocation:
Tangible net assets acquired................. $ 579 --
Intangible net assets acquired:
In-process research and development........ 10,400 immediate
Assembled workforce........................ 1,380 3
Patents.................................... 5,570 3
Goodwill................................... 79,029 5
-------
Total.................................... $96,958
=======
</TABLE>
Tangible net assets acquired includes the estimated fair value of cash and
cash equivalents, prepaid expenses, and property and equipment. Liabilities
assumed principally include accounts payable, accrued compensation, customer
deposits, and shareholder loans.
The value allocated to in-process research and development will be charged
to expense during the quarter ending September 30, 2000. Values assigned to in-
process research and development were determined with the assistance of an
independent appraiser using a discounted cash flow analysis which considered,
among other factors, the state of development of each project, the time and
cost needed to complete each project, expected income and associated risks.
The value allocated to the assembled workforce is attributable to the
Adaptive Telecom workforce in place after the acquisition which eliminates the
need to hire new replacement employees. The value was determined by estimating
the cost involved in assembling a new workforce including costs of salaries,
benefits, training and recruiting. The value of the assembled workforce will be
amortized on a straight-line basis over three years.
The acquired patents are developed through years of experience in designing
and developing embedded solutions for wireless network operators facing
capacity constraints. The value allocated to patents will be amortized on a
straight-line basis over the estimated remaining useful lives of three years.
Goodwill is determined based on the residual difference between the net
purchase price and the values assigned to identified tangible and intangible
assets. The goodwill will be amortized on a straight-line basis over five
years.
The value allocated to deferred stock compensation of $17,350,000 represents
the excess of the fair value over the exercise price for options and unvested
restricted stock which had been issued to employees of Adaptive Telecom and
were outstanding at September 21, 2000. The value of the deferred compensation
will be amortized over the related remaining vesting periods using a graded
vesting approach.
F-24
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Subsequent Event (Unaudited)--(continued)
Assuming the acquisition had taken place on January 1, 1999, unaudited pro
forma results of operations would have been as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000
------------ ----------------
(In thousands)
<S> <C> <C>
Revenues..................................... $ 26,146 $ 21,202
Net loss..................................... $(74,912) $(25,928)
Net loss per share........................... $ (10.61) $ (1.33)
</TABLE>
F-25
<PAGE>
REPORT OF MOHLER, NIXON & WILLIAMS ACCOUNTANCY CORPORATION
INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Adaptive Telecom, Inc.
We have audited the accompanying balance sheets of Adaptive Telecom, Inc. as
of December 31, 1998 and 1999, and the related statements of operations,
shareholders' equity and cash flows for the years then ended. 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 audits 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 Adaptive Telecom, Inc. as
of December 31, 1998 and 1999, and the results of its operations, shareholders'
equity and cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.
MOHLER, NIXON & WILLIAMS
Accountancy Corporation
/s/ Mohler, Nixon & Williams
Campbell, California
September 25, 2000
F-26
<PAGE>
ADAPTIVE TELECOM, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1998 1999 2000
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................ $2,883 $1,961 $ 579
Prepaid expenses and other....................... 40 35 66
------ ------ --------
Total current assets........................... 2,923 1,996 645
Property and equipment, net........................ 412 384 367
Other noncurrent assets, net....................... 109 78 55
------ ------ --------
Total assets................................... $3,444 $2,458 $ 1,067
====== ====== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................. 210 332 62
Accrued liabilities.............................. 7 11 --
Accrued compensation and benefits................ 127 229 147
Customer deposits................................ 1,329 161 166
Deferred revenues................................ 136 21 --
Shareholder loans................................ -- 59 59
------ ------ --------
Total current liabilities...................... 1,809 813 434
Shareholder loans.................................. 59 --
Commitments
Shareholders' equity:
Series A convertible preferred stock, $0.001 par
value:
Authorized shares--1,500,000 in 1998, 1999 and
at June 30, 2000; issued and outstanding
shares--1,500,000 in 1998, 1999 and at June 30,
2000 (liquidating value $1,500)................ 2 2 2
Common stock, no par value:
Authorized shares--13,500,000 in 1998, 1999 and
June 30, 2000; issued and outstanding shares--
5,349,065, 5,785,490, and 5,885,959 in 1998,
1999 and June 30, 2000, respectively........... 178 204 207
Additional paid-in capital....................... 1,465 1,465 15,070
Deferred stock compensation...................... -- -- (13,375)
Accumulated deficit.............................. (69) (26) (1,271)
------ ------ --------
Total shareholders' equity..................... 1,576 1,645 633
------ ------ --------
Total liabilities and shareholders' equity..... $3,444 $2,458 $ 1,067
====== ====== ========
</TABLE>
See accompanying notes.
F-27
<PAGE>
ADAPTIVE TELECOM, INC.
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
-------------- -----------------
1998 1999 1999 2000
------ ------ -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Revenues.................................... $2,651 $3,550 $ 1,604 $ 508
Cost of revenues............................ 2,348 2,595 1,136 390
------ ------ ------- --------
Gross profit................................ 303 955 468 118
Operating expenses:
Research and development.................. 155 321 106 940
Sales and marketing....................... 104 414 198 241
General and administrative................ 263 285 137 216
------ ------ ------- --------
Total operating expenses.................... 522 1,020 441 1,397
------ ------ ------- --------
Income (loss) from operations............... (219) (65) 27 (1,279)
Interest income............................. 170 115 58 37
Other expense............................... (6) (7) (3) (3)
------ ------ ------- --------
Other income, net........................... 164 108 55 34
------ ------ ------- --------
Net income (loss)........................... $ (55) $ 43 $ 82 $ (1,245)
====== ====== ======= ========
</TABLE>
See accompanying notes.
F-28
<PAGE>
ADAPTIVE TELECOM, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Series A
convertible
preferred stock Common stock Additional Deferred Total
---------------- ----------------- paid-in stock Accumulated shareholders'
Shares Amount Shares Amount capital compensation deficit equity
--------- ------ --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1998................... 1,400,000 $ 1 4,789,835 $159 $ 1,366 $ -- $ (14) $ 1,512
Issuance of common
stock at $0.033 per
share upon purchase of
restricted stock...... -- -- 555,000 19 -- -- -- 19
Issuance of common
stock at $0.067 per
share................. -- -- 4,230 -- -- -- -- --
Issuance of preferred
stock at $1.00 per
share upon exercise of
warrant............... 100,000 1 -- -- 99 -- -- 100
Net loss .............. -- -- -- -- -- -- (55) (55)
--------- --- --------- ---- ------- -------- ------- -------
Balance at December 31,
1998................... 1,500,000 2 5,349,065 178 1,465 -- (69) 1,576
Issuance of common
stock at $0.033 per
share upon exercise of
options............... -- -- 102,500 4 -- -- -- 4
Issuance of common
stock at $0.067 per
share upon exercise of
options............... -- -- 299,875 20 -- -- -- 20
Issuance of common
stock at $0.067 per
share................. -- -- 34,050 2 -- -- -- 2
Net income ............ -- -- -- -- -- -- 43 43
--------- --- --------- ---- ------- -------- ------- -------
Balance at December 31,
1999................... 1,500,000 2 5,785,490 204 1,465 -- (26) 1,645
Issuance of common
stock at $0.033 per
share upon exercise of
options (unaudited)... -- -- 143,594 5 -- -- -- 5
Repurchase of common
stock (unaudited)..... -- -- (43,125) (2) -- -- -- (2)
Deferred stock
compensation
(unaudited)........... -- -- -- -- 13,605 (13,605) -- --
Stock compensation
expense (unaudited)... -- -- -- -- -- 230 -- 230
Net loss (unaudited)... -- -- -- -- -- -- (1,245) (1,245)
--------- --- --------- ---- ------- -------- ------- -------
Balance at June 30, 2000
(unaudited)............ 1,500,000 $ 2 5,885,959 $207 $15,070 $(13,375) $(1,271) $ 633
========= === ========= ==== ======= ======== ======= =======
</TABLE>
See accompanying notes.
F-29
<PAGE>
ADAPTIVE TELECOM, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
--------------- ---------------
1998 1999 1999 2000
------ ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net income (loss)........................... $ (55) $ 43 $ 82 $(1,245)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization expense..... 79 158 71 96
Stock compensation expense................ -- -- -- 230
Changes in operating assets and
liabilities:
Decrease (increase) in prepaid expenses
and other.............................. (40) 5 3 (31)
Decrease (increase) in other noncurrent
assets................................. (47) 14 -- 15
Increase (decrease) in accounts
payable................................ 170 122 (103) (270)
Increase (decrease) in accrued
liabilities............................ 4 4 (7) (11)
Increase (decrease) in accrued
compensation and benefits.............. 127 102 4 (82)
Increase (decrease) in customer
deposits............................... 1,314 (1,168) (283) 5
Increase (decrease) in deferred
revenue................................ 136 (115) (49) (21)
------ ------- ------ -------
Net cash provided by (used in) operations... 1,688 (835) (282) (1,314)
Investing activities
Purchases of equipment...................... (475) (113) (63) (71)
------ ------- ------ -------
Net cash used in investing activities....... (475) (113) (63) (71)
Financing activities
Net proceeds from issuance of common stock.. 19 26 1 5
Net proceeds from issuance of preferred
stock upon exercise of warrant............. 100 -- -- --
Repurchase of common stock.................. -- -- -- (2)
------ ------- ------ -------
Net cash provided by financing activities... 119 26 1 3
Net increase (decrease) in cash............. 1,332 (922) (344) (1,382)
Cash and cash equivalents at beginning of
period..................................... 1,551 2,883 2,883 1,961
------ ------- ------ -------
Cash and cash equivalents at end of period.. $2,883 $ 1,961 $2,539 $ 579
====== ======= ====== =======
Supplemental disclosures
Income taxes paid during the period......... $ 4 $ 1 $ -- $ --
Deferred stock compensation................. $ -- $ -- $ -- $13,605
</TABLE>
See accompanying notes.
F-30
<PAGE>
ADAPTIVE TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of Business
Adaptive Telecom, Inc. (the Company) was incorporated in California in 1997.
The Company develops, markets, produces and licenses spatial filtering
solutions for wireless telecommunication applications. The proprietary
technology reduces the infrastructure and operating costs of wireless Cellular
and Personal Communication System (PCS) networks by increasing the capacity and
performance of the network. The Company operates in one business segment and
currently markets their technology to wireless network infrastructure providers
and directly to network operators.
A customer's equipment and software must be customized prior to the use of
the Company's technology. Accordingly, the Company enters into an agreement
with a customer that identifies the customization specifications and provides
for milestones and payment for the customization. Upon successful completion of
the customization, the customer may then license the technology upon the
payment of the licensing fee, usually in the form of a royalty payment.
During 1998, 1999, and for the six months ended June 30, 2000 substantially
all revenues were derived from the customization portion of one such agreement
between the Company and NEC Corporation (NEC)). At the conclusion of the
customization phase in 2000, NEC elected not to license the technology.
Unaudited Interim Financial Information
The financial information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 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 those dates and of the
operations and cash flows for the periods then ended. Operating results for the
six months ended June 30, 2000 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 reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from the customization of an original equipment manufacturer (OEM)
telecommunications system are recognized using contract accounting over the
period that services are performed under the percentage-of-completion method.
For agreements accounted for using the percentage-of-completion method, the
Company determines progress-to-completion using input measures based on labor
hours incurred. Customer billing occurs in accordance with contract terms.
Amounts billed to customers in excess of revenue recognized are recorded as
deferred revenues and customer advances are recorded as customer deposits on
uncompleted contracts.
Upon completion of the customization of the Company's technology to the
OEM's telecommunications system, the Company's revenues would be derived from
licenses of its intellectual property. For each license arrangement, the
Company would determine whether persuasive evidence of an agreement exists,
delivery of the product has occurred, there are not significant remaining
Company obligations, the fee is fixed or determinable and collectibility is
probable. If any of these criteria are not met, revenue recognition would be
F-31
<PAGE>
ADAPTIVE TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
deferred until such time as the criteria are met. Through December 31, 1999,
the Company has not recorded any revenue from license fees.
Risks and Uncertainties
The Company is subject to a number of risks including the marketing of a new
technology, the need to maintain adequate financing, competition from
competitors with greater financial resources and dependence on key personnel.
The telecommunications industry is characterized by rapid technological
developments, frequent product introductions, evolving industry standards,
changes in customer requirements and short product life cycles. Significant
technological changes or the emergence of competitive products with new
capabilities could adversely affect the Company's operating results.
Major Customer
Substantially all revenues recorded by the Company in 1998, 1999, and for
the six months ended June 30, 2000 are from one agreement with NEC. Development
and testing in accordance with provisions of the agreement was completed in
2000, and NEC elected not to exercise its right to license the technology under
the agreement. The Company has not entered into any new contracts upon the
completion of this contract in 2000.
In connection with the completion of the agreement, the Company is obligated
to return certain equipment borrowed from NEC and unused parts acquired in
connection with the contract. In addition, any technology developed under the
contract that was not otherwise specified in the contract becomes the joint
property of NEC and the Company.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents are
invested in money market funds.
The Company has classified all investments as available-for-sale. Available-
for-sale securities are carried at fair market value based on quoted market
prices with unrealized gains and losses, net of tax, reported in shareholders'
equity, if material. Realized gains and losses and declines in value judged to
be other than temporary on available-for-sale securities are included in
interest income.
Unrealized holding gains and losses on available-for-sale securities at
December 31, 1998 and 1999 were not material.
Cash equivalents include the following as of December 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
Money market funds........................................... $2,883 $1,955
====== ======
</TABLE>
Property and Equipment
Property and equipment are stated at cost net of accumulated depreciation
and amortization. Depreciation and amortization are computed on the straight-
line method based on the estimated useful lives of three to five years of the
respective assets. Leasehold improvements are amortized over the shorter of
their estimated useful lives or the lease term.
F-32
<PAGE>
ADAPTIVE TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
Intangible assets principally consist of patent fees that are being
amortized on the straight-line method over five years.
Research and Development
In accordance with Statements of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," all costs incurred to establish the technological
feasibility of computer software products are expensed as research and
development costs. The Company determines technological feasibility based upon
coding and testing in accordance with detailed program designs. Costs incurred
subsequent to the establishment of technological feasibility and prior to the
general availability of the product to customers will be capitalized, if
significant. To date, no software development costs have been capitalized.
Income Taxes
The provision for income taxes is based on income reported in the financial
statements. Deferred income taxes are provided for temporary differences
between the financial reporting and tax basis of the Company's assets and
liabilities.
Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company has elected
to follow APB Opinion No. 25 and related interpretations in accounting for
stock-based awards to employees and to adopt the "disclosure only" alternative
described in SFAS 123. Under APB Opinion No. 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Stock options or warrants granted to non-employees are accounted for in
accordance with SFAS 123 and the Emerging Issues Task Force Consensus No. 96-
18, "Accounting for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services." The fair
value of such options or warrants is determined using the Black-Scholes model.
Other Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) released SFAS
No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 established
standards for the reporting and display of comprehensive income (loss) and its
components. The Company had no items, other than net income (loss), of other
comprehensive income (loss) to report in any of the years presented.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 (SFAS 133), Accounting for
Derivatives and Hedging Activities, which requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designed as
part of a hedge transaction and, if it is, the type of hedge transaction. SFAS
133 is effective for fiscal years beginning after June 15, 2000. The Company
does not
F-33
<PAGE>
ADAPTIVE jTELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--(continued)
anticipate that the adoption of this new standard will have a material effect
on earnings or the financial position of the Company, but continues to evaluate
the impact of SFAS 133.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 101 (SAB 101). This summarized certain areas of the
staff's views in applying generally accepted accounting principles as it
applies to revenue recognition. The Company believes that its revenue
recognition principles comply with SAB 101. The Company will continue to
evaluate interpretations of SAB 101.
2. Property and Equipment
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1998 1999 2000
------ ------ -----------
(unaudited)
(In thousands)
<S> <C> <C> <C>
Lab and test equipment........................ $ 229 $ 272 $ 273
Computers..................................... 207 271 339
Office equipment.............................. 37 42 43
Leasehold improvements........................ 1 3 3
------ ------ -----
474 588 658
Accumulated depreciation and amortization..... (62) (204) (291)
------ ------ -----
$ 412 $ 384 $ 367
====== ====== =====
</TABLE>
The Company issued 2,190,350 shares of common stock to a founder during May
1997 in exchange for a patent. The patent, which is recorded in other
noncurrent assets, is valued at approximately $73,000 and is being amortized
over five years. Annual amortization totaled approximately $17,000 in 1998 and
1999 and $8,500 for the six months ended June 30, 2000.
Depreciation and amortization expense for 1998 and 1999 and for the six
months ended June 30, 2000 was approximately $79,000, $158,000, and $96,000,
respectively.
3. Shareholder Notes
The Company has two unsecured notes payable to shareholders totaling $59,000
at December 31, 1998 and 1999, and at June 30, 2000. The notes bear interest at
8% per annum. The principal, together with accrued and unpaid interest, is due
July 10, 2000. Interest expense was approximately $5,000 in 1998 and 1999 and
$2,000 for the six months ended June 30, 2000.
4. Shareholders' Equity
Preferred Stock
In March 1997, the Company issued 1,400,000 shares of Series A preferred
stock in accordance with the provisions of a Securities Purchase Agreement
which also provided for the sale of a warrant to purchase an additional 100,000
Series A preferred shares at $1.00 per share, which was exercised in 1998.
F-34
<PAGE>
ADAPTIVE TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The rights, privileges and preferences of the preferred shareholders are as
follows:
. Dividends--Preferred shareholders are entitled to receive dividends of
$0.05 per share in preference and priority to payment of any dividend to
common shareholders, payable only if and when declared by
4. Shareholders' Equity--(continued)
the Company. Thereafter, preferred shareholders will share any shareholder
distributions equally on an as-converted basis with common shareholders.
. Liquidation--In the event of any liquidation, dissolution, sale, merger
or winding up of the Company, preferred shareholders will be entitled to
receive, in preference to common shareholders, an amount equal to the
original amount of investment ($1.00 per share) plus all declared but
unpaid dividends. All remaining assets will be distributed equally to the
holders of preferred and common shares until preferred shareholders have
received $2.00 per share, including the preferred liquidation preference.
Thereafter, preferred shareholders will share distributions equally on an
as-converted basis with common shareholders.
. Voting--Each preferred share is entitled to vote on an "as-converted"
basis along with common shareholders. Preferred shareholders, voting as a
separate class, are entitled to elect one member of the Company's Board
of Directors, and common shareholders, voting as a group, are entitled to
elect two members of the Board.
. Conversion--Preferred shares are convertible into common shares at any
time at the option of the holders at the conversion rate of one and one-
half common shares for each preferred share, subject to antidilution.
Preferred shares shall be automatically converted into common shares at
the then applicable conversion rate (a) upon the closing of a firm
commitment underwritten public offering at a price per share of not less
than $3.00 per share with aggregate proceeds to the Company of
$10,000,000 or greater, or (b) upon the approval of a majority of the
preferred shareholders. The Company has reserved sufficient unissued
common shares in the event of conversion.
Common Stock
The Company is authorized to issue 13,500,000 shares of common stock. As of
December 31, 1999, 5,785,490 shares of common stock were outstanding.
As of December 31, 1999, common stock was reserved for issuance as follows:
<TABLE>
<S> <C>
Conversion of outstanding preferred stock........................ 2,250,000
Exercise of stock options........................................ 797,625
</TABLE>
In 1998, the Company issued 4,230 shares of common stock to an employee at
$0.067 per share, and in 1999 the Company issued 34,050 shares of common stock
to employees and consultants at $0.067 per share. All other outstanding shares
of the Company's common stock issued in 1998 and 1999 have been issued under
provisions of the 1997 Stock Plan.
1997 Stock Plan
The Board of Directors adopted the 1997 Stock Plan (the Plan) that
authorizes the granting of stock options to purchase up to 1,200,000 shares of
common stock. The Plan provides for the granting of incentive stock options to
employees, non-statutory stock options to Company service providers, and the
issuance of Restricted Stock Purchase Agreements alone or in tandem with the
granting of stock options.
The Board of Directors determines the number of options granted, the
effective date of the grants, the vesting period, price and term of the
options. Option terms may not exceed ten years from the date of grant. Shares
purchased under Restricted Stock Purchase Agreements are subject to vesting
with certain limitations on transferability, including rights of first refusal
and repurchase options in favor of the Company at the original
F-35
<PAGE>
ADAPTIVE TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Shareholders' Equity--(continued)
share purchase price. The Company's right to repurchase shares of restricted
stock lapses over the vesting period. Options generally vest and repurchase
options generally lapse over four years from the initial grant or purchase
date.
Restricted Common Stock
During 1997, the Board of Directors issued 4,548,071 shares of restricted
common stock for cash at $0.033 per share to employees subject to restricted
stock purchase agreements. In 1998, the Board of Directors issued 555,000
restricted shares for cash at $0.033 per share to employees, Board members and
a consultant. Under the initial terms of the related Restricted Stock Purchase
Agreement, the Company's repurchase rights lapse ratably over 48 months.
The Board of Directors amended the consultant's Restricted Stock Purchase
Agreement in May 1999 to provide for the immediate vesting of 92,813 shares and
the vesting of the remaining shares based on hours worked thereafter. In
addition to the shares of restricted stock, the consultant was paid cash
consideration for his services. The Company determined that the compensation
cost associated with the vested restricted stock was not material.
As of December 31, 1998 and 1999, unvested shares of restricted stock
totaled 2,289,363 and 1,035,521, respectively.
Stock Options
Information with respect to stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Number of average
Available options price
for grant outstanding per share
--------- ----------- ---------
<S> <C> <C> <C>
Balance at December 31, 1997................ 1,200,000 -- --
Options granted........................... (607,500) 607,500 $0.033
--------- --------
Balance at December 31, 1998................ 592,500 607,500 $0.033
Options granted........................... (241,750) 241,750 $0.067
Options exercised......................... -- (402,375) $0.058
Options cancelled......................... 46,875 (46,875) $0.067
--------- --------
Balance at December 31, 1999................ 397,625 400,000 $0.041
========= ========
</TABLE>
Options for a total of 135,156 shares were exercisable at December 31, 1999.
No options were exercisable at December 31, 1998.
F-36
<PAGE>
ADAPTIVE TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Shareholders' Equity--(continued)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
average
remaining
Options Options contractual Exercise
outstanding exercisable life price
----------- ----------- ----------- --------
<S> <C> <C> <C>
310,000 135,156 8.49 $0.033
90,000 -- 8.64 $0.067
------- -------
400,000 135,156 8.52 $0.041
======= =======
</TABLE>
Pro forma information regarding net income (loss) is required by SFAS 123,
and is determined as if the Company had accounted for its employee stock
options granted under the fair value method of SFAS 123. The fair value for
options and unvested restricted stock was estimated at the grant/sale date
using the minimum value method with the following weighted average assumptions:
a risk-free rate of 5.04% for 1998 and 5.5% for 1999, no dividend yield for all
years and a weighted average expected option life of three years. The
difference between the reported net income (loss) and the pro forma net income
(loss) for the years ended December 31, 1998 and 1999 was an increase in the
net loss of $18,000 and a reduction in the net income of $11,000, respectively.
The options' weighted average grant-date fair value, which is the value
assigned to the options under SFAS 123, was $0.005 and $0.009 for options
granted in 1998 and 1999, respectively.
Deferred Stock Compensation
During the six months ended June 30, 2000, the Company issued stock options
to employees with exercise prices that it believed represented the fair value
of the options. Subsequent to the Company's acquisition, the Company
reevaluated the fair value of its common stock options as of June 30, 2000.
Accordingly, in connection with such stock option grants, the Company recorded
deferred stock-based compensation of $13.6 million. This deferred stock
compensation represents the excess of the estimated fair value of the common
stock on the date of the grant over the exercise price. Deferred amortization
was determined over the vesting period of the respective options, generally
four years, beginning with the exercise date, which for the majority of the
options was June 16, 2000.
5. Income Taxes
Due to operating losses and tax credits and the inability to recognize the
benefits therefrom in 1998 and the utilization of net operating losses and tax
credits in 1999, there is no provision for income taxes for the years ended
December 31, 1998 and 1999.
F-37
<PAGE>
ADAPTIVE TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Income Taxes--(continued)
The income tax expense differed from the amounts computed by applying the
U.S. statutory federal income tax rate (34%) to pretax income as a result of
the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Computed expected tax expense (benefit).................. $ (18) $ 14
Net operating losses or temporary differences for which
no tax benefit is recognized............................ 18 --
Utilization of net operating loss and tax credits
previously reserved..................................... -- (14)
------- -------
Total income tax provision............................. $ -- $ --
======= =======
</TABLE>
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating losses and tax credits..................... $ 31 $ 17
Accruals................................................. 6 16
------- -------
Total deferred tax assets.................................. 37 33
Deferred tax liabilities:
Depreciation............................................. -- (11)
Valuation allowance...................................... (37) (22)
------- -------
Net deferred tax assets.................................... $ -- $ --
======= =======
</TABLE>
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109), provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Because of the uncertainty of future earnings, a full valuation
allowance was provided at December 31, 1998 and 1999. Although the Company
generated net income in 1999, management has determined that the valuation
allowance continues to be necessary. The net valuation allowance decreased by
$15,000 for the year ended December 31, 1999.
Utilization of net operating loss and tax credit carryforwards may be
subject to substantial annual limitation provided by the Internal Revenue Code
and similar state provisions. The annual limitation may result in the
expiration of net operating loss and tax credit carryforwards before
utilization.
6. Commitments
The Company occupies facilities under an operating lease that expires in
January 2001. Pursuant to the lease agreement, certain operating expenses are
allocated to the Company in addition to base rents. Total rent expense for all
operating leases was approximately $154,000 in 1998, $179,000 in 1999 and
$88,000 for the six months ended June 30, 2000.
Future annual minimum lease payments under all operating leases are
approximately $187,000 in 2000 and $9,000 in 2001.
F-38
<PAGE>
ADAPTIVE TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Employee Benefit Plans
The Company sponsors an employee savings plan for all eligible employees. No
Company contributions were made to the plan in 1998 or 1999.
8. Subsequent Event
On September 21, 2000, the Company was acquired by Metawave Communications
Corporation (Metawave). Under the terms of the acquisition agreement, the
common stock of Metawave was exchanged for all of the issued and outstanding
common stock of the Company, which includes the conversion of the Series A
preferred stock to common stock. All of the Company stock options and
outstanding unvested restricted stock was assumed by Metawave with the same
terms and conditions that currently exist, except that stock grants and stock
subject to vesting will be for Metawave common stock, adjusted for the
acquisition exchange ratio.
F-39
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The following unaudited pro forma combined condensed financial statements
for Metawave Communications Corporation consist of the Unaudited Pro Forma
Combined Condensed Statement of Operations for the year ended December 31, 1999
and the six months ended June 30, 2000, and the Unaudited Pro Forma Combined
Condensed Balance Sheet as of June 30, 2000. These pro forma financial
statements give effect to Metawave Communications Corporation's acquisition of
Adaptive Telecom, Inc. (Adaptive Telecom) in a business combination accounted
for as a purchase, which closed on September 21, 2000. In exchange for the
acquisition of all of Adaptive Telecom's outstanding capital stock and stock
options, Metawave issued Adaptive Telecom shareholders 5,361,803 shares of its
common stock and stock options for 138,166 shares of Metawave common stock.
The Unaudited Pro Forma Combined Condensed Statement of Operations combine
Metawave's historical results of operations for the year ended December 31,
1999 with Adaptive Telecom's historical results of operations for the year
ended December 31, 1999 and Metawave's historical results of operations for the
six months ended June 30, 2000 with Adaptive Telecom's historical results of
operations for the six months ended June 30, 2000. These Unaudited Pro Forma
Combined Condensed Statements present the pro forma operating results as if
Adaptive Telecom had been acquired on January 1, 1999. The Unaudited Pro Forma
Combined Condensed Balance Sheet combines Metawave's historical balance sheet
at June 30, 2000 and Adaptive Telecom's historical balance sheet at June 30,
2000 as if Adaptive Telecom had been acquired on June 30, 2000. The pro forma
financial statements are not necessarily indicative of what the actual
operating results or financial position would have been for the combined
company had the transaction taken place on the dates indicated, nor is it
necessarily indicative of the future operating results or financial position of
the combined company.
Basis of Presentation
The unaudited pro forma combined condensed financial statements reflect the
Adaptive Telecom acquisition which was consummated on September 21, 2000 and
will be accounted for using the purchase method of accounting in accordance
with APB Opinion No. 16 as described in the notes herein. Under the purchase
method of accounting, the purchase price is allocated to the assets acquired
and liabilities assumed based on their estimated fair market values. The
estimated fair market values contained herein are based on assessment performed
by an independent appraiser. Metawave expects to record a charge of $10.4
million to operations related to in-process research and development. The
Unaudited Pro Forma Combined Condensed Balance Sheet includes the effect of
this charge but the Unaudited Pro Forma Combined Condensed Statement of
Operations does not reflect this charge because of its nonrecurring nature. The
charge related to in-process research and development will be reflected in
Metawave's consolidated financial statements for the quarter ended September
30, 2000.
The pro forma combined condensed financial statements should be read in
conjunction with the related notes thereto and the audited consolidated
financial statements and notes of Metawave and the audited financial statements
and notes of Adaptive Telecom included elsewhere in this registration
statement. Pro forma basic and diluted earnings per share reflects the pro
forma effect of Metawave convertible and redeemable preferred stock as if such
shares were converted to Metawave common stock at the time of issuance.
F-40
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 2000
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Historical
--------------------
Adaptive Pro Forma Pro Forma
Metawave Telecom Adjustments Combined
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues....................... $ 20,694 $ 508 $ -- $ 21,202
Cost of revenues............... 15,193 390 -- 15,583
---------- ------- --------- ----------
Gross profit................... 5,501 118 -- 5,619
Operating expenses:
Research and development..... 12,687 940 (230) (J) 14,549
1,152 (K)
Sales and marketing.......... 4,876 241 176 (K) 5,293
General and administrative... 2,945 216 243 (K) 3,404
Amortization of intangibles
and goodwill................ -- -- 9,061 (L) 9,061
---------- ------- --------- ----------
Total operating expenses... 20,508 1,397 10,402 32,307
---------- ------- --------- ----------
Loss from operations........... (15,007) (1,279) (10,402) (26,688)
Other income (expense), net.... 726 34 -- 760
---------- ------- --------- ----------
Net loss....................... $ (14,281) $(1,245) $ (10,402) $ (25,928)
========== ======= ========= ==========
Basic and diluted net loss per
share......................... $ (0.99) $ (1.33)
========== ==========
Weighted average shares used in
computation of basic and
diluted net loss per share.... 14,378,271 5,159,097 (M) 19,537,368
========== ========= ==========
Pro forma basic and diluted net
loss per share................ $ (0.43) $ (0.68)
========== ==========
Weighted average shares used in
computation of pro forma net
loss per share................ 33,129,366 5,159,097 (M) 38,288,463
========== ========= ==========
</TABLE>
See accompanying notes.
F-41
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Historical
--------------------
Adaptive Pro Forma Pro Forma
Metawave Telecom Adjustments Combined
---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 22,596 $3,550 $ -- $ 26,146
Cost of revenues............. 22,236 2,595 -- 24,831
---------- ------ --------- ----------
Gross profit................. 360 955 -- 1,315
Operating expenses:
Research and development... 22,787 321 7,827 (K) 30,935
Sales and marketing........ 11,080 414 766 (K) 12,260
General and
administrative............ 5,732 285 5,827 (K) 11,844
Amortization of intangibles
and goodwill.............. -- -- 18,122 (L) 18,122
---------- ------ --------- ----------
Total operating expenses..... 39,599 1,020 32,542 73,161
---------- ------ --------- ----------
Loss from operations......... (39,239) (65) (32,542) (71,846)
Other income (expense), net.. (3,174) 108 -- (3,066)
---------- ------ --------- ----------
Net loss..................... $ (42,413) $ 43 $ (32,542) $ (74,912)
========== ====== ========= ==========
Basic and diluted net loss
per share................... $ (18.98) $ (10.61)
========== ==========
Weighted average shares used
in computation of basic and
diluted net loss per share... 2,234,798 4,824,765 (M) 7,059,563
========== ========= ==========
Pro forma basic and diluted
net loss per share.......... $ (1.77) $ (2.61)
========== ==========
Weighted average shares used
in computation of pro forma
net loss per share........... 23,931,291 4,824,765 (M) 28,756,056
========== ========= ==========
</TABLE>
See accompanying notes
F-42
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
June 30, 2000
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Historical
-------------------
Adaptive Pro Forma Pro Forma
Metawave Telecom Adjustments Combined
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.... $ 61,356 $ 579 $ -- $ 61,935
Accounts receivable, net..... 14,142 -- -- 14,142
Inventories.................. 6,566 -- -- 6,566
Prepaid expenses and other
assets...................... 947 66 -- 1,013
--------- -------- ------- ---------
Total current assets....... 83,011 645 -- 83,656
Property and equipment, net.... 5,892 367 (17)(A) 6,242
Purchased technology, goodwill
and other intangibles, net.... -- -- 85,979 (B) 85,979
Other noncurrent assets........ 185 55 (37)(C) 203
--------- -------- ------- ---------
Total assets............... $ 89,088 $ 1,067 $85,925 $ 176,080
========= ======== ======= =========
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
-----------------------------
Current liabilities:
Accounts payable............. 6,547 62 -- 6,609
Accrued liabilities.......... 2,489 -- 2,500 (D) 4,989
Accrued compensation......... 1,910 147 -- 2,057
Current portion of notes
payable..................... 8 -- -- 8
Current portion of capital
lease obligations........... 2,709 -- -- 2,709
Customer deposits............ -- 166 -- 166
Deferred revenues............ 355 -- -- 355
Shareholder loans............ -- 59 -- 59
--------- -------- ------- ---------
Total current liabilities.. 14,018 434 2,500 16,952
Notes payable, less current
portion....................... 23 -- -- 23
Capital lease obligations, less
current portion............... 2,651 -- -- 2,651
Other long-term liabilities.... 16 -- -- 16
Stockholder's equity:
Capital stock................ 209,541 15,279 96,529 (E) 321,349
Deferred stock compensation.. (2,181) (13,375) 13,375 (F) (19,531)
(17,350) (G)
Accumulated other
comprehensive income........ (59) -- -- (59)
Accumulated deficit.......... (134,921) (1,271) 1,271 (H) (145,321)
(10,400) (I)
--------- -------- ------- ---------
Total stockholders'
equity.................... 72,380 633 83,425 156,438
--------- -------- ------- ---------
Total liabilities and
stockholders' equity...... $ 89,088 $ 1,067 $85,925 $ 176,080
========= ======== ======= =========
</TABLE>
See accompanying notes
F-43
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. Basis of Pro forma Presentation
The pro forma combined financial statements give effect to Metawave's
acquisition of Adaptive Telecom, in a business combination accounted for as a
purchase, which was consummated on September 21, 2000. Upon the effective date
of the acquisition, all outstanding common stock of Adaptive Telecom were
converted into shares of Metawave common stock based on the applicable exchange
ratio as specified in the merger agreement. All outstanding stock options to
purchase shares of Adaptive Telecom common stock were converted into options to
purchase shares of Metawave stock based on the exchange ratio.
The pro forma combined financial statements have been prepared based on the
assessment by the independent appraiser of the estimated fair market value of
the assets and liabilities of Adaptive Telecom. In the opinion of Metawave's
management, all adjustments necessary to present fairly such pro forma combined
financial statements have been made based on the terms and structure of the
Adaptive Telecom acquisition. The Unaudited Pro Forma Combined Condensed
Statements of Operations for the year ended December 31, 1999 and the six
months ended June 30, 2000 give effect to these transactions as if they had
taken place on January 1, 1999, and these statements omit non-recurring
charges. The Unaudited Pro Forma Combined Condensed Balance Sheet as of June
30, 2000 gives effect to the transaction as if it had taken place on June 30,
2000.
Metawave issued 5,361,803 shares of its common stock, valued at $20.37 per
share, the average market price per share of Metawave common stock in a range
three trading days before and after the announcement date (September 5, 2000)
of the acquisition. Additionally, Metawave issued 138,166 options to purchase
shares of its common stock in exchange for all options and grants to purchase
shares of Adaptive Telecom common stock. The value of options and grants to be
issued by Metawave was determined by estimating their fair market value as of
September 5, 2000 using the Black-Scholes option pricing model. The total
estimated fair value of all consideration, including acquisition related costs,
is $114,308,000, of which $17,350,000 has been recorded as deferred stock
compensation.
Below is a table of the estimated purchase price allocation and annual
amortization of the intangible assets and goodwill acquired:
<TABLE>
<CAPTION>
Annual
Purchase Price Amortization Amortization
Allocation Life of Intangibles
-------------- ------------ --------------
(In thousands) (In thousands)
<S> <C> <C> <C>
Purchase price allocation:
Tangible net assets acquired.. $ 579 -- $ --
Intangible net assets acquired:
In-process research and
development.................. 10,400 -- --
Assembled workforce........... 1,380 3 460
Patents....................... 5,570 3 1,856
Goodwill...................... 79,029 5 15,806
------- -------
Total....................... $96,958 $18,122
======= =======
</TABLE>
Tangible net assets acquired includes cash and cash equivalents, prepaid
expenses, and property and equipment. Liabilities assumed principally include
accounts payable, accrued compensation, customer deposits and shareholder
loans.
The value allocated to in-process research and development will be charged
to expense during the quarter ending September 30, 2000 but has not been
reflected in the Metawave Unaudited Pro forma Combined Condensed Statements of
Operations as it is non-recurring in nature.
F-44
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
1. Basis of Pro forma Presentation--(continued)
The value allocated to the assembled workforce is attributable to the
Adaptive Telecom workforce in place after the acquisition which eliminates the
need to hire new replacement employees. The value was determined by estimating
the cost involved in assembling a new workforce including costs of salaries,
benefits, training and recruiting. The value of the assembled workforce will be
amortized on a straight-line basis over three years.
The acquired patents are developed through years of experience in designing
and developing embedded solutions for wireless network operators facing
capacity constraints. Our smart antenna systems and Adaptive Telecom's embedded
solutions will enable network operators to increase network capacity and
improve network quality. The value allocated to patents will be amortized on a
straight-line basis over three years.
Goodwill is determined based on the residual difference between the amount
of consideration paid and the values assigned to identified tangible and
intangible assets. The goodwill will be amortized on a straight-line basis over
five years.
The value allocated to deferred stock compensation of $17,350,000 represents
the excess of the fair value over the exercise price for options and unvested
restricted stock which had been issued to employees of Adaptive Telecom and
were outstanding at September 21, 2000. The value of the deferred stock
compensation will be amortized over the related remaining vesting periods using
a graded vesting approach. Such amortization amounts assume that all vesting
periods are completed by all employees, to the extent that unvested options are
forfeited by an employee, previously recorded amortization related to the
unvested options will be credited to stock-based compensation expense.
2. Pro Forma Adjustments
A. To reflect the write-down of acquired property and equipment to
estimated fair market value.
B. To record acquired intangible assets of $6,950,000 and goodwill of
$79,029,000.
C. To reflect the write-off of patents recorded on Adaptive Telecom's
financial statements which is included in the allocation of intangibles
in connection with the acquisition.
D. To reflect the accrual of direct acquisition costs arising from the
Adaptive Telecom acquisition, including legal, consulting, and
accounting fees.
E. To eliminate Adaptive Telecom's outstanding capital stock of $15,279,000
and record the aggregate value of $111,808,000 for the issuance of
5,361,803 shares of Metawave's common stock and 138,166 shares of stock
options to purchase Metawave's common stock in connection with the
acquisition.
F. To eliminate deferred stock compensation recorded on Adaptive Telecom's
financial statements of $13,375,000.
G. To record deferred stock compensation in connection with the acquisition
of $17,350,000.
H. To eliminate accumulated deficit of $1,271,000 recorded on Adaptive
Telecom's financial statements.
I. To record the in-process research and development charge of $10,400,000.
J. To eliminate the amortization of deferred stock compensation recorded on
Adaptive Telecom's financial statements during the six months ended June
30, 2000 of $230,000.
K. To record by its functional department, the amortization of deferred
stock compensation of $14,420,000 for the twelve months ended December
31, 1999 and $1,571,000 for the six months ended June 30, 2000,
resulting from the acquisition of Adaptive Telecom, Inc.
F-45
<PAGE>
METAWAVE COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
2. Pro Forma Adjustments--(continued)
L. To record the amortization of intangible assets and goodwill of
$18,122,000 for the twelve months ended December 31, 1999 and $9,061,000
for the six months ended June 30, 2000.
M. Reflects the impact of 5,361,803 weighted average shares of common stock
issued in connection with the purchase of Adaptive Telecom less common
stock which is subject to restrictions which lapse upon continuing
employment.
F-46
<PAGE>
---------------------------------------------------------------------------
---------------------------------------------------------------------------
------------------
PROSPECTUS
------------------
5,361,803 Shares
[LOGO OF METAWAVE COMMUNICATIONS CORPORATION]
Common Stock
, 2000
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<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, payable by us in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee.
<TABLE>
<CAPTION>
Amount
To Be Paid
----------
<S> <C>
SEC Registration Fee.............................................. $ 13,985
Printing Fees and Expenses........................................ 75,000
Legal Fees and Expenses........................................... 50,000
Accounting Fees and Expenses...................................... 100,000
Transfer Agent and Registrar Fees................................. 1,000
Miscellaneous..................................................... 10,015
--------
Total........................................................... $250,000
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article IX of
Metawave's certificate of incorporation and sections 6.1 and 6.2 of Article VI
of Metawave's bylaws provide for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. In addition, Metawave has entered into indemnification
agreements with its directors and officers. The indemnification agreements may
require Metawave, among other things, to indemnify its directors against
certain liabilities that may arise by reason of their status or service as
directors (other than liabilities arising from willful misconduct of culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors'
insurance if available on reasonable terms.
Item 15. Recent Sales of Unregistered Securities
(a) Since January 1, 1997, we have issued and sold (without payment of any
selling commission to any person except as noted below) the following
unregistered securities (as adjusted to reflect the automatic conversion of our
outstanding preferred stock into common stock upon completion of this
offering):
(1) In August 1997, we issued and sold shares of Series D preferred
stock convertible into an aggregate of 2,304,120 shares of common stock to
22 investors for an aggregate purchase price of $19,181,865.
(2) In December 1998 and April and June 1999, we issued and sold shares
of Series E Preferred Stock convertible into an aggregate of 17,405,832
shares of common stock to 25 investors for an aggregate purchase price of
$91,380,781. We paid an aggregate of $1,650,322 in commissions in
connection with the sale of Series E preferred stock.
(3) We issued to an equipment lease provider in June 1997, a warrant to
purchase shares of Series C preferred stock convertible into 29,722 shares
of common stock for an aggregate purchase price of $209,994.
(4) In April 1998, we issued an aggregate principal amount of $29.0
million 13.75% Senior Secured Bridge Notes due April 28, 2000 to certain
institutional investors. In connection with the issuance of such
II-1
<PAGE>
notes, we issued warrants to purchase shares of Series D preferred stock
convertible into 596,470 shares of common stock for an aggregate purchase
price of $5,375. We paid an aggregate of $1,450,000 in commissions in
connection with the issuance of the Senior Secured Bridge Notes.
(5) In May 1998, we issued to an equipment lease provider a warrant to
purchase shares of Series D preferred stock convertible into 4,204 shares
of common stock for an aggregate purchase price of $35,000.
(6) In June 1998, in connection with certain patent licenses, we issued
the licensor a warrant to purchase 7,333 shares of common stock for an
aggregate purchase price of $110. Such licensor subsequently exercised the
warrant and purchased 7,333 shares of common stock for an aggregate
purchase price of $110.
(7) In May 1999, we issued to an equipment lease provider a warrant to
purchase 20,833 shares of common stock for an aggregate purchase price of
$140,625.
(8) In September 2000, we issued to the selling stockholders 5,361,803
shares of common stock pursuant to the Agreement and Plan of Merger dated
September 20, 2000.
(9) As of September 30, 2000, an aggregate of 995,442 shares of common
stock had been issued upon exercise of options under our stock option
plans.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1) through 15(a)(8) were deemed to be
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends where
affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about the
Registrant. The issuances described in Item 15(a)(9) were deemed to be exempt
from registration under the Securities Act in reliance upon Rule 701
promulgated thereunder in that they were offered and sold either pursuant to
written compensatory benefit plans or pursuant to a written contract relating
to compensation, as provided by Rule 701. In addition, such issuances were
deemed to be exempt from registration under Section 4(2) of the Securities Act
as transactions by an issuer not involving any public offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
2.1* Amended and Restated Agreement and Plan of Merger between the
Registrant and Adaptive Telecom, Inc. dated as of September 20, 2000.
3.1** Certificate of Incorporation of the Registrant.
3.2** Bylaws of the Registrant.
3.3** Seventh Amended and Restated Certificate of Incorporation of the
Registrant.
4.1** Form of Stock Certificate.
5.1 Opinion of Venture Law Group, A Professional Corporation.
10.1** Form of Indemnification Agreement.
10.2** 1995 Stock Option Plan, as amended.
10.3** 1998 Stock Option Plan, as amended.
10.4** 2000 Employee Stock Purchase Plan.
10.5** 1998 Amended and Restated Directors' Stock Option Plan.
10.6** Series E Preferred Stock Purchase Agreement dated April 28, 1999.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.7** Fifth Amended and Restated Investors Rights Agreement dated April 28,
1999 by and among the Registrant and certain holders of the
Registrant's capital stock.
10.8** Lease for Willow Creek Corporate Center dated September 29, 1997 by
and between the Registrant and Carr America Realty Corporation.
10.9+** Purchase Agreement dated March 4, 1998 by and between the Registrant
and ALLTEL Supply Inc.
10.10** Loan Agreement dated October 14, 1997 by and between Registrant and
Imperial Bank, and amendments thereto.
10.11+** Manufacturing Agreement between the Registrant and Powerwave
Technologies, Inc. dated as of September 3, 1998.
10.12+** Purchase Agreement between the Registrant and GTE Wireless
Incorporated dated as of September 8, 1998.
10.13+** Technical Cooperation Agreement between the Registrant and Shanghai
Telecom dated as of December 17, 1998.
10.14+** Purchase Agreement between the Registrant and Southwestco Wireless,
L.P. dated as of February 24, 1999.
10.15+** Value Added Reseller Agreement between the Registrant and CommVerge
Solutions (Asia), Inc. dated as of December 4, 1999.
10.16+** Distribution Agreement between the Registrant and SeeNode Co., Ltd.
dated as of February 10, 2000.
10.17+** Purchase Agreement between the Registrant and AirTouch Support
Services, Inc. dated as of January 1, 2000.
10.18+** Purchase Agreement between the Registrant and Grupo IUSACELL S.A., de
C.V. dated as of December 17, 1999.
10.19+** Purchase Agreement between the Registrant and Cellco, L.P., dba Bell
Atlantic dated as of December 20, 1999.
10.20** 2000 Stock Plan.
10.21++ Amendment No.1 dated August 14, 2002 to Supply Agreement between the
Registrant and Grupo IUSACELL S.A.
10.22 Registration Rights Agreement dated September 21, 2000 by and between
the Registrant and the Shareholders of Adaptive Telecom, Inc.
10.23 Adaptive Telecom, Inc. 1997 Stock Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Mohler, Nixon & Williams Accountancy Corporation,
Independent Accountants.
23.3 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
99.1 Report of Ernst & Young LLP, Independent Auditors on Financial
Statement Schedule.
99.2 Financial Statement Schedule.
</TABLE>
--------
* Previously filed as an exhibit to the Form 8-K filed with the Commission by
the Registrant on October 5, 2000, and incorporated herein by reference.
** Previously filed as an exhibit to Registrant's registration statement on
Form S-1, File No. 333-30568, originally filed with the Commission on
February 17, 2000, as subsequently amended, and incorporated herein by
reference.
+ Confidential treatment has been granted with respect to certain portions of
this Exhibit which has been filed separately with the Commission.
II-3
<PAGE>
++ 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 schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Redmond, State of
Washington on October 31, 2000.
METAWAVE COMMUNICATIONS CORPORATION
/s/ Robert H. Hunsberger
By: ______________________________________
Robert H. Hunsberger
Chief Executive Officer and Chairman
of the Board
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Robert H.
Hunsberger and Stuart W. Fuhlendorf, and each of them, as his attorney-in-fact,
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Registration Statement (including post-effective
amendments), and any and all Registration Statements filed pursuant to Rule 462
under the Securities Act of 1933, as amended, in connection with or related to
the offering contemplated by this Registration Statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert H. Hunsberger President, Chief Executive October 31,
_________________________________ Officer and Chairman of the 2000
Robert H. Hunsberger Board (Principal Executive
Officer)
/s/ Stuart W. Fuhlendorf Senior Vice President and October 31,
_________________________________ Chief Financial Officer 2000
Stuart W. Fuhlendorf (Principal Financial and
Accounting Officer)
/s/ Douglas O. Reudink Director October 31,
_________________________________ 2000
Douglas O. Reudink
/s/ Bandel L. Carano Director October 31,
_________________________________ 2000
Bandel L. Carano
/s/ Bruce C. Edwards Director October 31,
_________________________________ 2000
Bruce C. Edwards
/s/ David R. Hathaway Director October 31,
_________________________________ 2000
David R. Hathaway
/s/ Scot B. Jarvis Director October 31,
_________________________________ 2000
Scot B. Jarvis
/s/ Jennifer Gill Roberts Director October 31,
_________________________________ 2000
Jennifer Gill Roberts
/s/ David A. Twyver Director October 31,
_________________________________ 2000
David A. Twyver
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No Description
-------- -----------
<C> <S>
2.1* Amended and Restated Agreement and Plan of Merger between the
Registrant and Adaptive Telecom, Inc. dated as of September 20, 2000.
3.1** Certificate of Incorporation of the Registrant.
3.2** Bylaws of the Registrant.
3.3** Seventh Amended and Restated Certificate of Incorporation of the
Registrant, to be filed and effective upon completion of this
offering.
4.1** Form of Stock Certificate.
5.1 Opinion of Venture Law Group, A Professional Corporation.
10.1** Form of Indemnification Agreement.
10.2** 1995 Stock Option Plan, as amended.
10.3** 1998 Stock Option Plan, as amended.
10.4** 2000 Employee Stock Purchase Plan.
10.5** 1998 Amended and Restated Directors' Stock Option Plan.
10.6** Series E Preferred Stock Purchase Agreement dated April 28, 1999.
10.7** Fifth Amended and Restated Investors Rights Agreement dated April 28,
1999 by and among the Registrant and certain holders of the
Registrant's capital stock.
10.8** Lease for Willow Creek Corporate Center dated September 29, 1997 by
and between the Registrant and Carr America Realty Corporation.
10.9+** Purchase Agreement dated March 4, 1998 by and between the Registrant
and ALLTEL Supply Inc.
10.10** Loan Agreement dated October 14, 1997 by and between Registrant and
Imperial Bank, and amendments thereto.
10.11+** Manufacturing Agreement between the Registrant and Powerwave
Technologies, Inc. dated as of September 3, 1998.
10.12+** Purchase Agreement between the Registrant and GTE Wireless
Incorporated dated as of September 8, 1998.
10.13+** Technical Cooperation Agreement between the Registrant and Shanghai
Telecom dated as of December 17, 1998.
10.14+** Purchase Agreement between the Registrant and Southwestco Wireless,
L.P. dated as of February 24, 1999.
10.15+** Value Added Reseller Agreement between the Registrant and CommVerge
Solutions (Asia), Inc. dated as of December 4, 1999.
10.16+** Distribution Agreement between the Registrant and SeeNode Co., Ltd.
dated as of February 10, 2000.
10.17+** Purchase Agreement between the Registrant and AirTouch Support
Services, Inc. dated as of January 1, 2000.
10.18+** Purchase Agreement between the Registrant and Grupo IUSACELL S.A., de
C.V. dated as of December 17, 1999.
10.19+** Purchase Agreement between the Registrant and Cellco, L.P., dba Bell
Atlantic dated as of December 20, 1999.
10.20** 2000 Stock Plan.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No Description
------- -----------
<C> <S>
10.21++ Amendment No.1 dated August 16, 2000 to Supply Agreement between the
Registrant and Grupo IUSACELL S.A.
10.22 Registration Rights Agreement dated September 21, 2000 by and between
the Registrant and the Shareholders of Adaptive Telecom, Inc.
10.23 Adaptive Telecom, Inc. 1997 Stock Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Mohler, Nixon & Williams Accountancy Corporation,
Independent Accountants.
23.3 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-6).
27.1 Financial Data Schedule.
99.1 Report of Ernst & Young LLP, Independent Auditors on Financial
Statement Schedule.
99.2 Financial Statement Schedule.
</TABLE>
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* Previously filed as an exhibit to the Form 8-K filed with the Commission by
the Registrant on October 5, 2000, and incorporated herein by reference.
** Previously filed as an exhibit to Registrant's registration statement on
Form S-1, File No. 333-30568, originally filed with the Commission on
February 17, 2000, as subsequently amended, and incorporated herein by
reference.
+ Confidential treatment has been granted with respect to certain portions of
this Exhibit which has been filed separately with the Commission.
++ 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.
