<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 2000
REGISTRATION NO. 333-93069
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UTSTARCOM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 52-1782500
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1275 HARBOR BAY PARKWAY, SUITE 100
ALAMEDA, CA 94502
(510) 864-8800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
HONG L. LU
PRESIDENT AND CHIEF EXECUTIVE OFFICER
UTSTARCOM, INC.
1275 HARBOR BAY PARKWAY, SUITE 100
ALAMEDA, CA 94502
(510) 864-8800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN E. BOCHNER, ESQ. ALAN F. DENENBERG, ESQ.
STEVEN L. BERSON, ESQ. Shearman & Sterling
CARMEN C. CHANG, ESQ. 1550 El Camino Real
Wilson Sonsini Goodrich & Rosati Menlo Park, CA 94025-4100
Professional Corporation (650) 330-2200
650 Page Mill Road
Palo Alto, CA 94304-1050
(650) 493-9300
</TABLE>
--------------------------
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,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for same offering. / / __________
If the 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 MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $0.00125 par value............ 11,500,000 $14.00 $161,000,000 $42,504
</TABLE>
(1) Includes up to 1,500,000 shares of Common Stock which the underwriters have
the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act.
(3) $33,000 of the registration fee has previously been paid.
--------------------------
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 IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS 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.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 31, 2000
P_R_O_S_P_E_C_T_U_S
10,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
This is UTStarcom, Inc.'s initial public offering.
We expect the public offering price to be between $12 and $14 per share.
Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "UTSI."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
-----------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to UTStarcom, Inc. ............. $ $
</TABLE>
The underwriters may also purchase up to an additional 1,500,000 shares
from UTStarcom at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
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 shares will be ready for delivery on or about , 2000.
------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
U.S. BANCORP PIPER JAFFRAY
------------
The date of this prospectus is , 2000.
<PAGE>
[INSIDE FRONT COVER PAGE]
PHOTOGRAPHS, DESCRIPTIONS AND CAPTIONS
1. Top left: Caption: UTStarcom product line.
2. Top: Color photos of AN-2000 access node and OMUX optical multiplexor.
Caption: AN-2000 / OMUX. Our AN-2000 system and OMUX product allow service
providers to offer voice and high speed broadband data services over wireline
networks.
3. Middle: Color photos of radio port controller, indoor radio port,
outdoor radio port, remote subscriber terminal and handset.
Caption: Airstar City-Wide Wireless Mobile Phone System. Our Airstar
Personal Access System allows service providers that operate wireless networks
to provide cost-effective voice and data services for several hundred thousand
subscribers.
4. Bottom: Color photo of WACOS IP-based switching system.
Caption: WACOS IP-Based Multi-Service Switching System. Our WACOS system
provides IP-based switching services in multiple networks.
[INSIDE GATE-FOLD OF FRONT COVER PAGE]
IMAGES, DIAGRAM, DIAGRAM DESCRIPTIONS AND CAPTIONS.
1. Top left: UTStarcom logo.
2. Top caption: COMMUNICATIONS ACCESS NETWORK SOLUTIONS
3. Center: Diagram of a linked communications network depicting our
AN-2000, Airstar and WACOS systems.
4. Center left: Diagram of an AN-2000 deployment. Traditional voice service
connects to a central office switch over a standard digital interface. The
central office switch connects to a remotely located AN-2000 central office
terminal over a standard digital interface. Internet services connect to a data
switch, which connects to the same central office terminal over a standard
digital interface. The central office terminal connects to two AN-2000 remote
terminals. The connections are made through a high performance robust digital
transmission technology, known as SDH. A computer using our Netman software is
connected to the central office terminal and the remote terminals. The remote
terminals connect to subscribers to provide wireline telephone service, leased
line, ISDN and xDSL.
5. Center middle: Diagram of an Airstar deployment. Traditional voice
service connects to a central office switch over a standard digital interface.
Internet service connects to a data switch over a standard digital interface.
The central office and data switches each connect to two separate Airstar remote
terminals over a standard digital interface. An Airstar air traffic controller
connects to each of the Airstar remote terminals. A computer using our Netman
software is connected to an Airstar air traffic controller and the Airstar
remote terminals. The Airstar remote terminals connect to radio port controllers
over a standard digital interface. The radio port controllers provide wireless
city-wide mobile phone, wireless local loop and mobile data services.
6. Center right: Diagram of a WACOS deployment. A private backbone
connected to Internet service is connected to the local access network through a
backbone/Internet gateway. A wireless gateway and a V5/PSTN gateway are located
on the access network. The gateways connect with the Airstar and AN-2000
systems. The gateways also allow for large-scale wireless mobile phone service,
voice over IP and broadband access. An operational support system provides
customer care, billing and management capabilities.
<PAGE>
[INSIDE BACK COVER PAGE]
IMAGES, A MAP AND CAPTIONS
1. Top left: UTStarcom Logo
Caption: China Installations and Offices
2. Center: Map of Asia. Red flags depict the location of UTStarcom offices.
Green flags depict the location of UTStarcom installations. Colored shading on
the map depicts estimated telecommunications service provider revenues.
3. Bottom left: Small map of the United States. Red flags depict UTStarcom
offices.
Caption: United States of America Offices
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 23
Dividend Policy............................................. 23
Capitalization.............................................. 24
Dilution.................................................... 25
Selected Consolidated Financial Data........................ 27
Selected Pro Forma Combined Financial Data.................. 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Business.................................................... 40
Management.................................................. 57
Related Party Transactions.................................. 65
Principal Stockholders...................................... 68
Description of Capital Stock................................ 71
Material United States Federal Tax Consequences to
Non-United States Holders.................................
Shares Eligible for Future Sale............................. 74
Underwriting................................................ 76
Legal Matters............................................... 80
Experts..................................................... 80
Where You Can Find Additional Information................... 80
Index to Financial Statements and Financial Information..... F-1
</TABLE>
You should rely only on the information contained in this prospectus.
Neither we nor the underwriters have authorized any person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. Information contained on our Web site is
not part of this prospectus. We and the underwriters 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 as of the date on the front cover of this prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date. We will update any material changes to the information
in this prospectus in accordance with the rules and regulations of the
Securities and Exchange Commission.
UTStarcom is registered as a trademark in the United States. UTStarcom,
Airstar and WLL are registered as trademarks in China. This prospectus also
includes product names, trade names and trademarks of other companies. All other
product names, trade names and trademarks appearing in this prospectus are the
property of their respective holders.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK
FACTORS" AND THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT
DECISION.
UTSTARCOM, INC.
We provide communications equipment for service providers that operate
wireless and wireline networks in rapidly growing communications markets. To
date, substantially all of our sales have been to service providers in China.
Our integrated suite of network access systems, optical transmission products
and subscriber terminal products allows service providers to offer efficient and
expandable voice, data and Internet access services. Because our systems are
based on widely adopted international communications standards, service
providers can easily integrate our systems into their existing networks and
deploy our systems in new broadband, Internet Protocol and wireless network
rollouts. Internet Protocol, or IP, refers to a set of rules developed for
communicating information over the Internet. Systems that communicate using
Internet Protocol are known as IP-based systems.
China has one of the fastest growing communications markets in the world.
Growth in China's communications equipment and services markets is being driven
by the government's commitment to developing a communications infrastructure,
pent-up demand for communications services and robust economic growth. According
to 1998 statistics from the International Telecommunication Union, China has
only 7.0 phone lines per 100 people. In comparison, the United States has
approximately 66.1 phone lines per 100 people. China's low telephone penetration
rate combined with its population of 1.2 billion presents a significant market
opportunity for providers of voice and data communications services and
equipment. Furthermore, the number of Internet subscribers within China is
expected to dramatically increase, resulting in further infrastructure
development for data services and increased demand for communications equipment
capable of providing these services.
Service providers in China often require network solutions with a suite of
integrated products that address all of their access needs, including wireline
and wireless, voice and data. These comprehensive product offerings enable
service providers to quickly, and with minimal incremental investment, address
the changing communications demands of their subscribers. In addition, given the
rapid growth in China's emerging communications market, network solutions must
be efficient and expandable so that the same architecture can provide an
affordable entry level solution for hundreds of subscribers yet economically
extend to hundreds of thousands of subscribers. Additionally, service providers
in China often require vendors to continually develop products to meet evolving
market needs and to have an extensive local service, support and manufacturing
presence. Our wireless and wireline access and switching systems are designed to
deliver the following key benefits to service providers:
INTEGRATED, COMPREHENSIVE PRODUCT OFFERING. By offering communications
systems that link the backbone network, which is a communications network
linking access points, the access network and the subscribers' premises, we
supply service providers with solutions that enable them to quickly deploy
services to subscribers. Furthermore, as subscriber needs evolve from voice to
data, we offer solutions to meet these needs.
FLEXIBILITY FOR VOICE AND DATA SERVICES. We have designed our systems to
offer a high degree of flexibility in terms of the number of subscribers and
types of traffic delivered to those subscribers. This flexibility is
particularly important in China as the communications services market is
undergoing rapid change and growth. Our access systems allow service providers
to quickly and cost-effectively implement upgrades for new services, including
high-speed data services, compared to alternative solutions which may require
the purchase of an entirely new system to provide these services.
1
<PAGE>
LEADING PRICE AND PERFORMANCE SOLUTION. We have designed our systems so
that service providers in developing markets such as China can quickly deploy
multiple services in a cost-effective manner. Our systems are engineered to
allow service providers to purchase only the functionality and capacity needed
and to purchase additional functionality and capacity over time as subscriber
demand warrants. Furthermore, as demand for communications services in China
grows, our expandable systems will allow service providers to expand from a
small initial subscriber base to hundreds of thousands of subscribers in a
cost-effective and efficient manner.
ARCHITECTURE BASED ON WIDELY-ADOPTED INTERNATIONAL COMMUNICATIONS
STANDARDS. We have designed our systems to comply with widely-adopted
international communication standards for multi-vendor interoperability. Our
systems incorporate interfaces that allow service providers to connect our
products to equipment from multiple vendors and thus integrate multiple voice
and data services within one system. Our compliance with these standards lowers
costs by permitting service providers to shorten evaluation times and eases
integration of our products with other systems in the service providers'
networks.
LOCAL PRESENCE. We have established a strong local presence in China that
allows us to be responsive to the needs of service providers and their
subscribers. We manufacture the majority of our products at two facilities
located in the cities of Huizhou in Guangdong province and Hangzhou in Zhejiang
province that are owned by joint ventures between us and the affiliates of
corresponding provincial Posts and Telecommunications Administrations. By using
local facilities in China, we have helped create new jobs within the provinces
and have strengthened our relationships with the Posts and Telecommunications
Administrations in some of China's most modernized and rapidly growing
provinces. We also maintain nine sales and customer support sites in China that
allow us to deploy a customer support representative anywhere in China within
24 hours. Additionally, we have developed relationships at the national,
provincial and local levels which provide us with a continuous flow of
information on market changes and insight into unique service provider needs and
related opportunities.
Our objective is to be a leading provider of broadband, Internet Protocol,
or IP, and wireless network equipment to high growth communications markets. The
principal elements of our strategy are as follows:
- leverage our installed base of wireless and wireline access systems as
demand for broadband and high-speed data services grows in China;
- continue to develop products and technologies for market-driven solutions
and penetrate the emerging IP-based switching market;
- further capitalize on China's low penetration rate and increasing demand
for communications services by increasing our sales, support and
development staff and delivering new products and technologies; and
- leverage our success in China to address other high-growth markets.
Service providers have installed over 900,000 lines of our Airstar wireless
access system, which we believe is the most widely deployed wireless local
access system in China. Over 1.2 million lines of our wireline AN-2000 access
system have been deployed in China, including installations in the six largest
regional communications markets. Our OMUX product provides optical transmission
and is often bundled with our Airstar and AN-2000 systems. The OMUX is currently
installed as a stand-alone or bundled product at over 5,000 locations for over
200 communications service providers. Our newest product, WACOS, is targeted at
the emerging broadband, IP-based switching and wireless markets.
2
<PAGE>
We incorporated in Delaware as Unitech Industries Inc. in 1991. In 1994, we
changed our name to Unitech Telecom, Inc. In 1995, we acquired StarCom Network
Systems, Inc. and changed our name to UTStarcom, Inc. Our principal executive
offices are located at 1275 Harbor Bay Parkway, Alameda, California, and our
telephone number is (510) 864-8800.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by UTStarcom....... 10,000,000 shares
Shares outstanding after the offering... 89,307,159 shares
Use of proceeds......................... We intend to use the proceeds from this offering for
general corporate purposes, including research and
development, expansion of our sales and marketing
organization and working capital. We may also use a
portion of the proceeds from this offering to acquire
or invest in complementary businesses, technologies
or products.
Proposed Nasdaq National Market
symbol................................ UTSI
</TABLE>
- ------------------------
The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of December 31, 1999 and excludes:
- 16,831,090 shares of common stock authorized for issuance under our stock
option plans, under which options to purchase 14,405,714 shares were
outstanding and 172,243 shares were available for grant as of
December 31, 1999; and
- 532,000 shares of common stock reserved for issuance upon the exercise of
warrants outstanding as of December 31, 1999 at a weighted average
exercise price of $6.025 per share.
3
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data below should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, the unaudited pro forma combined
financial information and the related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTUAL PRO FORMA(5)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................... $10,006 $ 35,542 $ 75,597 $105,167 $187,516 $187,516
Gross profit................................... 5,717 13,220 26,802 39,921 75,929 75,929
Operating income (loss)........................ (8,979) 1,237 (3,390) 1,909 17,296 18,343
Net income (loss) applicable to common stock... (9,841) (310) 30 (300) (3,558) (2,644)
Earnings (loss) per share(1):
Basic........................................ $ (2.40) $ (0.04) $ 0.05 $ 0.06 $ (0.41) (0.30)
Diluted...................................... $ (2.40) $ (0.04) $ 0.00 $ 0.00 $ (0.41) (0.30)
Shares used in per share calculations(1):
Basic........................................ 4,108 8,344 7,320 7,582 8,678 8,678
Diluted...................................... 4,108 8,344 7,320 77,050 8,678 8,678
Unaudited pro forma net loss per share(2):
Basic........................................ (0.05)
Diluted...................................... (0.05)
Weighted average shares--basic............... 68,646
Weighted average shares--diluted............. 68,646
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents(4)................................ $ 87,364 $206,264
Working capital............................................. 127,509 246,409
Total assets................................................ 265,438 384,338
Total short-term debt....................................... 43,338 43,338
Total stockholders' equity.................................. 160,242 279,142
</TABLE>
- -------------
(1) Based on the number of shares outstanding as of December 31, 1999. Excludes
(i) 16,831,090 shares of common stock authorized for issuance under our
stock option plans, under which options to purchase 14,405,714 shares were
outstanding as of December 31, 1999 with a weighted average exercise price
of $3.25 per share and 172,243 shares were available for grant and
(ii) 532,000 shares of common stock reserved for issuance upon the exercise
of warrants outstanding as of December 31, 1999 with a weighted average
exercise price of $6.025 per share.
(2) To give effect to the conversion of all outstanding shares of preferred
stock into common stock upon the completion of this offering.
(3) Adjusted to reflect the receipt of the estimated net proceeds from the sale
of 10,000,000 shares of common stock offered by this prospectus at an
assumed initial public offering price of $13 per share, after deducting the
estimated underwriting discount and estimated offering expenses.
(4) Includes restricted cash of $4,550 as of December 31, 1999.
(5) The pro forma combined statement of operations data presents our results of
operations as if our acquisition of Wacos had occurred as of January 1,
1999. The pro forma information is not necessarily indicative of what would
have occurred had the acquisition been made as of such period, nor is it
indicative of future results of operations. Non-recurring charges related to
in-process research and development are not included within the pro forma
statement of operations.
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING A
DECISION TO BUY OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO COULD HARM OUR
BUSINESS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE
HARMED, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL
OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS AND RELATED
NOTES.
RISKS RELATING TO OUR COMPANY
OUR FUTURE SALES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate in the future due to a variety of factors, some of which
are outside of our control. As a result, period to period comparisons of our
operating results are not necessarily meaningful or indicative of future
performance. Furthermore, it is likely that in some future quarters our
operating results will fall below the expectations of public market analysts or
investors. If this occurs, the trading price of our common stock could decline.
Factors that may affect our future operating results include:
- the timing, number and size of orders for our products, as well as the
relative mix of orders for each of our products, particularly the volume
of lower margin telephone handsets;
- the evolving and unpredictable nature of the economic, regulatory and
political environments in China and other countries in which we market or
plan to market our products;
- aggressive price reductions by our competitors;
- currency fluctuations;
- market acceptance of our products and product enhancements;
- the lengthy and unpredictable sales cycles associated with sales of our
products combined with the impact of this variability on our suppliers'
ability to provide us with components on a timely basis; and
- longer collection periods of accounts receivable in China and other
countries.
The limited performance history of some of our products, our limited
forecasting experience and processes and the emerging nature of our target
markets make forecasting our future sales and operating results difficult. Our
expense levels are based, in part, on our expectations regarding future sales,
and these expenses are largely fixed, particularly in the short term. In
addition, to enable us to promptly fill orders, we maintain inventories of
finished goods, components and raw materials. As a result, we commit to
considerable costs in advance of anticipated sales. In the past, a substantial
portion of our sales in each quarter resulted from orders received and shipped
in that quarter, and we have operated with a limited backlog of unfilled orders.
Accordingly, we may not be able to reduce our costs in a timely manner to
compensate for any unexpected shortfall between forecasted and actual sales. Any
significant shortfall of sales may require us to maintain higher levels of
inventories of finished goods, components and raw materials than we require,
thereby increasing our risk of inventory obsolescence and corresponding
inventory write-downs and write-offs. Although we have reserved against
inventory obsolescence, we cannot guarantee that these reserves will be adequate
to offset all write-downs or write-offs.
5
<PAGE>
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT
As of December 31, 1999, we had an accumulated deficit of approximately
$19.9 million. We anticipate continuing to incur significant sales and
marketing, research and development and general and administrative expenses and,
as a result, we will need to continue to generate higher revenues to sustain
profitability. Numerous factors could negatively impact our results of
operations, including a decrease in sales, price pressures and a fixed cost
structure which could limit our ability to respond to declining revenues.
Although our sales have grown in recent quarters, our past results should not be
relied on as indications of our future performance. We cannot assure you that we
will be able to remain profitable in future periods.
COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED PRICES, REVENUES AND MARKET SHARE
We face intense competition in our target markets and expect competition to
increase. Increased competition in our target markets may result in price
reductions, reduced gross profit as a percentage of net sales and loss of market
share. Our principal competitors for our different product lines include the
following:
- AIRSTAR SYSTEM: Alcatel Alsthom CGE, S.A.; Ericsson LM Telephone Co.;
Huawei Technology Co., Ltd.; Lucent Technologies, Inc.; Motorola, Inc.;
NEC Corporation; Siemens AG; and Zhongxing Telecommunications Equipment.
- AN-2000 AND OMUX: Advanced Fibre Communications, Inc.; Alcatel; Bosch
Telecom GmbH; ECI Telecom Ltd.; Ericsson; Fujitsu Limited; Huawei; Lucent;
NEC; Nokia Corporation; Shanghai Bell Alcatel Mobile Communication;
Siemens; and Zhongxing.
- WACOS SYSTEM: Alcatel; Cisco Systems, Inc.; Clarent Corporation; Ericsson;
Huawei; Lucent; Motorola; Nokia; Nortel Networks Corporation; Nuera
Communications, Inc.; Siemens; Tachion Networks, Inc.; and Vienna Systems
Corp.
We are increasingly facing competition from domestic companies in China and
believe that our strongest competition in the future may come from these
companies, many of which operate under lower cost structures and more favorable
governmental policies and with much larger sales forces than we do. Furthermore,
other companies not presently offering competing products may also enter our
target markets. Many of our competitors have significantly greater financial,
technical, product development, sales, marketing and other resources than we do.
Additionally, some competitors may be able to offer significant financing
arrangements to service providers, in some cases facilitated by favorable
government policies. Moreover, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties, including our current customers, to increase their ability to
produce products that address the needs of service providers in our target
markets.
THE SUCCESS OF OUR BUSINESS DEPENDS ON A RELATIVELY SMALL NUMBER OF LARGE SYSTEM
DEPLOYMENTS, AND ANY CANCELLATION, REDUCTION OR DELAY IN THESE DEPLOYMENTS COULD
HARM OUR BUSINESS
Our business is characterized by large system deployments for a relatively
small number of service providers. In the twelve months ended December 31, 1999,
two customers accounted for 30% and 11%, respectively, of our net sales. Our
dependence on large system deployments makes our ability to provide systems in a
timely and cost-effective manner critically important to our business. We have
in the past experienced delays and encountered other difficulties in the
installation and implementation of our systems. Various factors could cause
future delays, including technical problems and the shortage of qualified
technicians. Any delays or difficulties in deploying our systems, or the
cancellation of any orders by service providers, could significantly harm our
business.
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WE DO NOT HAVE SOME OF THE LICENSES WE REQUIRE TO SELL OUR NETWORK ACCESS
PRODUCTS IN CHINA
Beginning January 1, 1999, China's government required that all
telecommunications equipment connected to public or private telecommunications
networks within China be approved by the Ministry of Information Industry and
the manufacturer of the equipment obtain a network access license for each of
its products. Sellers are prohibited from selling or advertising for sale
equipment for which its manufacturer has not obtained a network access license
and may be liable for penalties in an amount up to three times earnings from the
sale of any equipment sold beginning January 1, 1999 without a license. In
addition, any unlicensed equipment may be required to be removed from the
network. Failure to obtain the required licenses could require us to remove
previously installed equipment and would prohibit us from making further sales
of the unlicensed products in China, which would substantially harm our
business.
The regulations implementing these requirements are not very detailed, have
not been applied by a court and may be interpreted and enforced by regulatory
authorities in a number of different ways. Accordingly, we have obtained an
opinion from our counsel in China as to which licenses we are required to
obtain. Based upon this counsel's advice, we believe that we have obtained the
required network access licenses for our AN-2000 system and bundled OMUX
product. We have applied for but do not yet have a network access license for
our Airstar system. We have also applied for network access licenses for our
stand-alone OMUX product and for other products which we are no longer
manufacturing but had previously sold to service providers in China. Network
access licenses will be required for any additional products that we may develop
for sale in China, including our WACOS system. Based upon verbal inquiries made
by our counsel in China to the Ministry of Information Industry, we believe that
for products which we sold before January 1, 1999, such as the Airstar system,
no penalties will be imposed by the MII for sales we have made or will make
during the period an application is pending. Our counsel in China has advised us
that China's governmental authorities may interpret or apply the regulations
with respect to which licenses are required and the ability to sell a product
while an application for the product license is pending differently.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO COLLECT PAYMENTS FROM OUR CUSTOMERS
ON A TIMELY BASIS
Our customers often must make a significant commitment of capital to
purchase our products. As a result, any downturn in a customer's business that
affected the customer's ability to pay us could harm our financial condition.
Moreover, accounts receivable collection cycles historically tend to be much
longer in China than in other markets. The failure of any of our customers to
make timely payments could require us to write-off accounts receivable or
increase our accounts receivable reserves, either of which could adversely
affect our financial condition.
A DECLINE IN BUSINESS ACTIVITY DURING CHINA'S LUNAR NEW YEAR MAY RESULT IN
DECREASED SALES DURING OUR FIRST QUARTER
Business activity in China declines considerably during the first quarter of
each year in observance of the Lunar New Year. As a result, sales during the
first quarter of our fiscal year have in the past typically been lower than
sales during the fourth quarter of the preceding year and we expect this trend
to continue in the future. We will continue to face this seasonality in the
future and do not have the ability to forecast with any degree of certainty the
impact of the decreased business activity during the Lunar New Year on our sales
and operating results.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE EFFECTIVELY,
WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE
The emerging market for communications equipment in developing countries is
characterized by rapid technological developments, frequent new product
introductions and evolving industry and regulatory standards. Our success will
depend in large part on our ability to enhance our network
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access and switching technologies and develop and introduce new products and
product enhancements that anticipate changing service provider requirements and
technological developments. We may need to make substantial capital expenditures
and incur significant research and development costs to develop and introduce
new products and enhancements. If we fail to timely develop and introduce new
products or enhancements to existing products that effectively respond to
technological change, our business, financial condition and results of
operations could be materially adversely affected.
From time to time, we or our competitors may announce new products or
product enhancements, services or technologies that have the potential to
replace or shorten the life cycles of our products and that may cause customers
to defer purchasing our existing products, resulting in inventory obsolescence.
Future technological advances in the communications industry may diminish or
inhibit market acceptance of our existing or future products or render our
products obsolete.
Even if we are able to develop and introduce new products, we cannot assure
you that they will gain market acceptance. Market acceptance of our products
will depend on various factors including:
- our ability to obtain necessary approvals from regulatory organizations;
- the perceived advantages of the new products over competing products;
- our ability to attract customers who have existing relationships with our
competitors;
- product cost relative to performance; and
- the level of customer service available to support new products.
Specifically, sales of our AN-2000 system outside of China depend, in part,
on the adoption of the V5.2 standard in these markets. Additionally, sales of
our Personal Access System, or PAS, the mobile component of our Airstar wireless
system, will depend in part upon consumer acceptance of the mobility limitations
of this service. The introduction of inexpensive wireless telephone service or
other competitive services in China may have a material adverse effect on sales
of our Airstar systems in China. If our existing or new products fail to achieve
market acceptance for any reason, our business could be seriously harmed.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO DELIVER QUALITY PRODUCTS ON A
TIMELY AND COST EFFECTIVE BASIS
Our operating results depend on our ability to manufacture products on a
timely and cost effective basis. In the past, we have experienced reductions in
yields as a result of various factors, including defects in component parts and
human error in assembly. If we experience a deterioration in manufacturing
performance or a delay in production of any of our products, we could experience
delays in shipments and cancellations of orders. Moreover, networking products
frequently contain undetected software or hardware defects when first introduced
or as new versions are released. In addition, our products are often embedded in
or deployed in conjunction with service providers' products which incorporate a
variety of components produced by third parties. As a result, when problems
occur, it may be difficult to identify the source of the problem. These problems
may cause us to incur significant warranty and repair costs, divert the
attention of our engineering personnel from our product development efforts and
cause significant customer relation problems or loss of customers, any one of
which could harm our business.
If future demand for our products requires additional manufacturing
capacity, we may invest in and build additional manufacturing facilities, most
likely in China. However, we cannot assure you that the new manufacturing
facilities will attain the same quality or level of efficiencies as our existing
facilities. Alternatively, or in addition, we may contract with third party
manufacturing facilities over which we may be unable to exercise the same degree
of quality control as we can over our own facilities. We currently have no
arrangements with any independent manufacturing facility, and we may
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not be able to obtain independent manufacturing sources on commercially
attractive terms if and when needed.
WE DEPEND ON SOME SOLE SOURCE AND OTHER KEY SUPPLIERS FOR HANDSETS, COMPONENTS
AND MATERIALS USED IN OUR PRODUCTS, AND IF THESE SUPPLIERS FAIL TO PROVIDE US
WITH ADEQUATE SUPPLIES OF HIGH QUALITY PRODUCTS, OUR COMPETITIVE POSITION,
REPUTATION AND BUSINESS COULD BE HARMED
Some handsets, components and materials used in our products are purchased
from a single supplier or a limited group of suppliers. If any supplier is
unwilling or unable to provide us with these components and materials, we may
not be able to find alternative sources on favorable terms, in a timely manner,
or at all. Our inability to obtain or to develop alternative sources if and as
required could result in delays or reductions in manufacturing or product
shipments. Moreover, these suppliers may delay product shipments or supply us
with inferior quality products. If any of these events occur, our competitive
position, reputation and business could suffer.
OUR ABILITY TO SOURCE A SUFFICIENT QUANTITY OF HIGH QUALITY HANDSETS AND OTHER
COMPONENTS USED IN OUR PRODUCTS MAY BE LIMITED BY CHINA'S IMPORT RESTRICTIONS AS
WELL AS OUR ABILITY TO OBTAIN SUFFICIENT DOMESTIC MANUFACTURING CAPACITY
We require a significant number of imported components to manufacture our
products in China. Imported electronic components are subject to a variety of
permit requirements, approval procedures and import duties. Failure to obtain
necessary permits or approvals or administrative actions by China's government
to limit imports of certain components could adversely affect our ability to
manufacture and sell our products in China. In addition, import duties increase
the cost of our products and may make them less competitive.
In particular, an integral component of our Airstar PAS system is the
handset used by subscribers to make and receive mobile telephone calls. Our
inability to obtain a sufficient number of high quality handsets could severely
harm our business. Currently, a worldwide shortage of handsets exists. Although
we have contracted with Japanese vendors to manufacture handsets under the
UTStarcom label, we cannot assure you that they will be able to supply adequate
quantities of handsets. Moreover, we must pay an import duty on each handset
that we import into China, which may result in a competitive cost advantage for
our competitors who produce handsets in China. As a result, we are evaluating
various manufacturing alternatives within China. Currently, we are in the early
stages of negotiations with third parties to manufacture handsets for us in
China. We may be unable to enter into arrangements with third parties who are
capable of producing adequate quantities of high-quality handsets. We also
intend to develop the capacity to manufacture our own handsets. However, we may
be unsuccessful in our efforts to do so. Additionally, to comply with
manufacturing regulations in China we will need to obtain components for our
handsets from local sources. These sources may not be able to produce adequate
quantities of components that meet our quality standards.
IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES OPERATION IN CHINA AND INDIRECT
DISTRIBUTION CHANNELS ELSEWHERE OR SUCCESSFULLY MANAGE OUR EXPANDED SALES
ORGANIZATION, OUR OPERATING RESULTS MAY SUFFER
Our distribution strategy focuses primarily on developing and expanding our
direct sales organization in China and our indirect distribution channels
outside of China. We may not be able to successfully expand our direct sales
organization in China and the cost of any expansion may exceed the revenue
generated from these efforts. Even if we are successful in expanding our direct
sales organization in China, we may not be able to compete successfully against
the significantly larger and better-funded sales and marketing operations of
current or potential competitors. In addition, if we fail to develop
relationships with significant international resellers or manufacturers'
representatives, or if these resellers or representatives are not successful in
their sales or marketing efforts, we may be unsuccessful in our expansion
efforts outside China.
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WE EXPECT AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE WHICH MAY REDUCE
OUR REVENUES, AND, AS A RESULT, WE MUST INTRODUCE NEW PRODUCTS AND REDUCE OUR
COSTS IN ORDER TO MAINTAIN PROFITABILITY
The average selling prices for communications access and switching systems
and subscriber terminal products, such as handsets, in China have been declining
as a result of a number of factors, including:
- increased competition;
- aggressive price reductions by competitors;
- rapid technological change; and
- price and performance enhancements.
We have in the past experienced and expect in the future to experience
substantial period-to-period fluctuations in operating results due to declining
average selling prices. We anticipate that average selling prices of our
products will decrease in the future in response to product introductions by us
or our competitors or other factors, including price pressures from customers.
Therefore, we must continue to develop and introduce new products and
enhancements to existing products that incorporate features that can be sold at
higher average selling prices. Failure to do so could cause our revenues and
gross profit, as a percentage of net sales, to decline.
Our cost reduction efforts may not allow us to keep pace with competitive
pricing pressures or lead to improved gross profit, as a percentage of net
sales. In order to be competitive, we must continually reduce the cost of
manufacturing our products through design and engineering changes. We may not be
successful in redesigning our products or delivering our products to market in a
timely manner. We cannot assure you that any redesign will result in sufficient
cost reductions to allow us to reduce the prices of our products to remain
competitive or to improve or maintain our gross profit, as a percentage of net
sales.
SERVICE PROVIDERS SOMETIMES EVALUATE OUR PRODUCTS FOR LONG AND UNPREDICTABLE
PERIODS WHICH CAUSES THE TIMING OF PURCHASES AND OUR RESULTS OF OPERATIONS TO BE
UNPREDICTABLE
The period of time between our initial contact with a service provider and
the receipt of an actual purchase order may span a year or more. During this
time, service providers may subject our products to an extensive and lengthy
evaluation process before making a purchase. The length of these qualification
processes may vary substantially by product and service provider, making our
results of operations unpredictable. We may incur substantial sales and
marketing expenses and expend significant management effort during this process,
which ultimately may not result in a sale. These qualification processes often
make it difficult to obtain new customers, as service providers are reluctant to
expend the resources necessary to qualify a new supplier if they have one or
more existing qualified sources.
OUR INABILITY TO EXERCISE COMPLETE CONTROL OVER OUR SUBSIDIARIES MAY BE
DETRIMENTAL TO OUR BUSINESS
A considerable portion of our operations is and will continue to be
conducted through direct and indirect subsidiaries. For example, we own an 88%
interest in a joint venture which operates the Zhejiang manufacturing facility
and a 51% interest in a joint venture which operates the Guangdong manufacturing
facility. Even though we may own a majority interest in these joint ventures, we
do not have sole power to control all of the policies and decisions of these
jointly-owned subsidiaries.
Under China law governing Sino-foreign joint ventures, equity holders
exercise rights primarily through the board of directors, which constitutes the
highest authority of the joint venture. Although we own a majority of the
Guangdong joint venture, we are only entitled to appoint a minority of the
directors to the joint venture's board of directors, which prevents us from
controlling the actions of the board. Moreover, even though we hold a majority
of the board seats in the Zhejiang joint venture,
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China law requires unanimous approval of the board of directors for some
significant corporate actions, including:
- amendment of the Articles of Association of the joint venture;
- liquidation or dissolution of the joint venture;
- any increase, decrease or transfer of equity interests of any party to the
joint venture; and
- a merger of the joint venture with another economic entity.
Our operating results and cash flow depend on the operating results and cash
flow of our subsidiaries and the payment of funds by those subsidiaries to us.
These subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay dividends or otherwise provide
financial benefits to us. Moreover, with respect to our Guangdong manufacturing
joint venture, any payment of dividends to us must be agreed to by our joint
venture partner, whose interests in receiving dividend distributions may not
coincide with ours. In addition, applicable law in some countries including
China limits the ability of a subsidiary to pay dividends for various reasons
including the absence of sufficient distributable reserves. In the event of any
insolvency, bankruptcy or similar proceedings, creditors of the subsidiaries
would generally be entitled to priority over us with respect to assets of the
affected subsidiary. In addition, because our joint venture partners in both
Zhejiang and Guangdong provinces are affiliated with the provincial Posts and
Telecommunications Administrations that operate the telecommunication networks
in these areas, if we fail to maintain these joint ventures, sales to our
customers located in these areas may decrease.
OUR MULTI-NATIONAL OPERATIONS SUBJECT US TO VARIOUS ECONOMIC, POLITICAL,
REGULATORY AND LEGAL RISKS
We market and sell our products in China and other markets. The expansion of
our existing multi-national operations and entry into additional international
markets will require significant management attention and financial resources.
Multi-national operations are subject to inherent risks, including:
- difficulties in designing products that are compatible with varying
international communications standards;
- longer accounts receivable collection periods and greater difficulty in
accounts receivable collection;
- unexpected changes in regulatory requirements;
- changes to import and export regulations, including quotas, tariffs and
other trade barriers;
- delays or difficulties in obtaining export and import licenses;
- potential foreign exchange controls and repatriation controls on foreign
earnings;
- exchange rate fluctuations and currency conversion restrictions;
- the burdens of complying with a variety of foreign laws and regulations;
- difficulties and costs of staffing and managing multi-national operations;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences; and
- political and economic instability.
In markets outside of China, we rely on a number of original equipment
manufacturers, or OEMs, and third-party distributors and agents to market and
sell our network access products. If these OEMs, distributors or agents fail to
provide the support and effort necessary to service developing markets
effectively, our ability to maintain or expand our operations outside of China
will be negatively
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impacted. We cannot assure you that we will successfully compete in these
markets, that our products will be accepted or that we will successfully
overcome the risks associated with international operations.
Our international sales are generally denominated in local currencies. Due
to the limitations on converting Renminbi, we are limited in our ability to
engage in currency hedging activities in China. We do not currently engage in
currency hedging activities with respect to any other currencies. Although the
impact of currency fluctuations to date has been insignificant, fluctuations in
currency exchange rates in the future may have a material adverse effect on
revenues from international sales.
OUR FAILURE TO MEET INTERNATIONAL AND GOVERNMENTAL PRODUCT STANDARDS COULD BE
DETRIMENTAL TO OUR BUSINESS
Many of our products are required to comply with numerous government
regulations and standards, which vary by market. As standards for products
continue to evolve, we will need to modify our products or develop and support
new versions of our products to meet emerging industry standards, comply with
government regulations and satisfy the requirements necessary to obtain
approvals. Our inability to obtain regulatory approval and meet established
standards could delay or prevent our entrance into or force our departure from
markets.
OUR RECENT GROWTH HAS STRAINED OUR RESOURCES, AND IF WE ARE UNABLE TO MANAGE AND
SUSTAIN OUR GROWTH, OUR OPERATING RESULTS WILL BE NEGATIVELY AFFECTED
We have recently experienced a period of rapid growth and anticipate that we
must continue to expand our operations to address potential market
opportunities. If we fail to implement or improve systems or controls or to
manage any future growth and expansion effectively, our business could suffer.
Our expansion has placed and will continue to place a significant strain on
our management, operational, financial and other resources. Many of the members
of our management team have limited experience in the management of rapidly
growing companies. To manage our growth effectively, we will need to take
various actions, including:
- enhancing management information systems and forecasting procedures;
- further developing our operating, administrative, financial and accounting
systems and controls;
- maintaining close coordination among our engineering, accounting, finance,
marketing, sales and operations organizations;
- expanding, training and managing our employee base; and
- expanding our finance, administrative and operations staff.
OUR SUCCESS IS DEPENDENT ON CONTINUING TO HIRE AND RETAIN QUALIFIED PERSONNEL,
AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL, OUR
BUSINESS WOULD BE HARMED
The success of our business depends in significant part upon the continued
contributions of key technical and senior management personnel, many of whom
would be difficult to replace. In particular, our success depends in large part
on the knowledge, expertise and services of Hong Liang Lu, our President and
Chief Executive Officer, and Ying Wu, our Executive Vice President and Chief
Executive Officer of China Operations. The loss of any key employee, the failure
of any key employee to perform satisfactorily in his or her current position or
our failure to attract and retain other key technical and senior management
employees could have a significant negative impact on our operations.
To effectively manage our recent growth as well as any future growth, we
will need to recruit, train, assimilate, motivate and retain qualified
employees. Competition for qualified employees is intense, and the process of
recruiting personnel with the combination of skills and attributes required to
execute our business strategy can be difficult, time-consuming and expensive. We
are actively searching for research
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and development engineers and sales and marketing personnel, who are in short
supply. Additionally, we have a need for and have experienced difficulty in
finding qualified accounting personnel knowledgeable in U.S. and China
accounting standards. If we fail to attract, hire, assimilate or retain
qualified personnel, our business would be harmed.
Competitors and others have in the past and may in the future attempt to
recruit our employees. In addition, companies in the communications industry
whose employees accept positions with competitors frequently claim that the
competitors have engaged in unfair hiring practices. We may be the subject of
these types of claims in the future as we seek to hire qualified personnel. Some
of these claims may result in material litigation and disruption to our
operations. We could incur substantial costs in defending ourselves against
these claims, regardless of their merits.
ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE OUR STOCKHOLDERS AND HARM OUR OPERATING RESULTS
We recently acquired Wacos, Inc., a research and development subsidiary,
through a merger. We continually evaluate additional acquisition prospects that
would complement our existing product offerings, augment our market coverage,
enhance our technological capabilities, or that may otherwise offer growth
opportunities. Acquisitions of other companies may result in dilutive issuances
of equity securities, the incurrence of debt and the amortization of expenses
related to goodwill and other intangible assets. In addition, acquisitions
involve numerous risks, including difficulties in the assimilation of
operations, technologies, products and personnel of the acquired company,
diversion of management's attention from other business concerns, risks of
entering markets in which we have no direct or limited prior experience, and the
potential loss of key employees of ours and the acquired company.
WE MAY EXPERIENCE DIFFICULTY IN IDENTIFYING, FORMING AND MAINTAINING NEW
BUSINESS VENTURES THAT ARE IMPORTANT TO THE DEVELOPMENT OF OUR BUSINESS
We have invested, and expect to continue to invest, significant capital in
new business ventures. We cannot assure you that we will be able to continue to
identify suitable parties for new ventures in the future. The failure to form or
maintain new ventures could significantly limit our ability to expand our
operations. Moreover, these new ventures or investments require significant
management time, involve a high degree of risk and will present significant
challenges. We cannot assure you that these activities will be successful or
that we will realize appropriate returns on these activities. Additionally, if
any venture or investment fails, our business could be negatively impacted.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND MAY BE
SUBJECT TO CLAIMS THAT WE INFRINGE THE INTELLECTUAL PROPERTY OF OTHERS, EITHER
OF WHICH COULD SUBSTANTIALLY HARM OUR BUSINESS
We rely on a combination of patents, copyrights, trade secret laws and
contractual obligations to protect our technology. Although we have applied for
several patents in the United States, one of which has issued, as well as in
other countries, we cannot assure you that any additional patents will issue as
a result of pending patent applications or that our issued patents will be
upheld. Moreover, we have not yet obtained patents in China. We can give no
assurance that we will be able to obtain patents in China on our products or the
technology that we use to manufacture our products. Our joint ventures in China
rely upon our trademarks, technology and know-how to manufacture and sell our
products. We cannot guarantee that these and other intellectual property
protection measures will be sufficient to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are substantially equivalent or superior to ours. In addition, the legal
systems of many foreign countries, including China, do not protect intellectual
property rights to the same extent as the legal system of the United States. If
we are unable to adequately protect our proprietary information, our business,
financial condition and results of operations could be materially adversely
affected.
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The increasing dependence of the communications industry on proprietary
technology has resulted in frequent litigation based on allegations of the
infringement of patents and other intellectual property. In the future we may be
subject to litigation to defend against claimed infringements of the rights of
others or to determine the scope and validity of the proprietary rights of
others. Future litigation also may be necessary to enforce and protect our trade
secrets and other intellectual property rights. Any intellectual property
litigation could be costly and could cause diversion of management's attention
from the operation of our business. Adverse determinations in any litigation
could result in the loss of our proprietary rights, subject us to significant
liabilities or require us to seek licenses from third parties which may not be
available on commercially reasonable terms, if at all. We could also be subject
to court orders preventing us from manufacturing or selling our products.
PROBLEMS RELATED TO YEAR 2000 ISSUE COULD HARM OUR BUSINESS
The potential for software failures due to processing errors from
calculations using the year 2000 date is a known risk. We recognize the need to
ensure that our operations and products will not be adversely impacted by year
2000 software failures. We have established procedures for evaluating and
managing the risks and costs associated with this problem and believe that our
internal computer systems, including our accounting, sales and technical support
automation systems, are currently year 2000 compliant. Even though our
operations have not been materially affected by the year 2000 issue, our systems
and those of other companies on which our systems and operations rely could
still experience year 2000 problems.
RISKS RELATING TO CHINA
Sales in China account for substantially all of our sales. Approximately
$102.9 million, or 97.9%, of our sales in 1998, and $186.1 million, or 99.3% of
our sales in 1999, occurred in China. Additionally, a substantial portion of our
fixed assets are located in China. Of our total fixed assets, approximately
46.4% as of December 31, 1998 and 53.7% as of December 31, 1999 were in China.
We expect to make further investments in China in the future. Therefore, our
business, financial condition and results of operations are to a significant
degree subject to economic, political and social events in China.
DEVALUATION IN THE VALUE OF THE RENMINBI AND FLUCTUATIONS IN EXCHANGE RATES
COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Exchange rate fluctuations could have a substantial negative impact on our
financial condition. We purchase substantially all of our materials in the
United States and Japan and a significant portion of our cost of goods sold is
incurred in U.S. dollars and Japanese yen. A significant portion of our
operating expenses are incurred in U.S. dollars. At the same time, most of our
sales are denominated in Renminbi. The value of the Renminbi is subject to
changes in China's governmental policies and to international economic and
political developments. Although the official exchange rate for the conversion
of Renminbi to U.S. dollars has remained stable, with the Renminbi appreciating
slightly against the U.S. dollar since 1994, the exchange rate experienced
significant volatility prior to 1994 including periods of sharp devaluation.
There can be no assurance that exchange rates will not become volatile or that
the Renminbi will not devalue again against the U.S. dollar.
In the past, financial markets in many Asian countries have experienced
severe volatility and, as a result, some Asian currencies have experienced
significant devaluation from time to time. The devaluation of some Asian
currencies may have the effect of rendering exports from China more expensive
and less competitive and therefore place pressure on China's government to
devalue the Renminbi. Any devaluation of the Renminbi could result in an
increase in volatility of Asian currency and capital markets. Future volatility
of Asian financial markets could have an adverse impact on our ability to expand
our product sales into Asian markets outside of China. Moreover, due to the
limitations on the convertibility of Renminbi, we are limited in our ability to
engage in currency
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hedging activities in China and do not currently engage in currency hedging
activities with respect to international sales outside of China.
CURRENCY RESTRICTIONS IN CHINA MAY LIMIT THE ABILITY OF OUR SUBSIDIARIES AND
JOINT VENTURES IN CHINA TO OBTAIN FOREIGN CURRENCY NECESSARY FOR THE PURCHASE OF
IMPORTED COMPONENTS AND MAY LIMIT OUR ABILITY TO OBTAIN FOREIGN CURRENCY IN
EXCHANGE FOR RENMINBI EARNINGS
China's government imposes controls on the convertibility of Renminbi into
foreign currencies. Under the current foreign exchange control system,
sufficient foreign currency may not be available to satisfy our currency needs.
Shortages in the availability of foreign currency may restrict the ability of
our Chinese subsidiaries to obtain sufficient foreign currency to pay dividends
to us, or otherwise satisfy their foreign currency denominated obligations such
as payments to us for components which we export to them and for technology
licensing fees. We may also experience difficulties in completing the
administrative procedures necessary to obtain needed foreign currency. Moreover,
we cannot assure you that China's government will continue the policy of making
the Renminbi convertible under current accounts. Our inability to convert and
remit our sales received in Renminbi into U.S. dollars could have a material
adverse effect on our business, financial condition and results of operations.
Our business could be substantially harmed if we are unable to convert our
sales received in Renminbi into U.S. dollars. Under existing foreign exchange
laws, Renminbi held by our China subsidiaries can be converted into foreign
currencies to pay current account items such as payments to suppliers for
imports, labor services, payment of interest on foreign exchange loans and
distributions of dividends so long as the subsidiaries have adequate amounts of
Renminbi to purchase the foreign currency. Expenses of a capital nature such as
the repayment of bank loans denominated in foreign currencies, however, require
approval from appropriate governmental authorities before Renminbi can be used
to purchase foreign currency. This system could be changed at any time by
executive decision of the State Council to impose limits on current account
convertibility of the Renminbi or other similar restrictions. Moreover, even
though the Renminbi is intended to be freely convertible under the current
account, the State Administration of Foreign Exchange, which is responsible for
administering China's foreign currency market, has a significant degree of
administrative discretion in implementing the laws. From time to time, the State
Administration of Foreign Exchange has used this discretion in ways which
effectively limit the convertibility of current account payments. Furthermore,
in many circumstances the State Administration of Foreign Exchange must approve
foreign currency conversions. Under the current foreign exchange control system,
sufficient foreign currency may not be available at a given exchange rate to
satisfy our currency demands.
CHANGES WITHIN CHINA'S COMMUNICATIONS MARKET COULD HARM OUR BUSINESS
We derive substantially all of our sales from local telecommunications
service providers in China which utilize network access equipment in the
continued expansion and upgrading of China's communications infrastructure. The
continued development of the communications infrastructure in China
correspondingly depends, in part, on the demand for voice and data services in
China and China's governmental policy. Although this industry has grown rapidly
in the past, we cannot assure you that it will continue to grow in the future.
Any reduced demand for voice and data services, any other downturn or other
adverse changes in the China communications industry or the adoption or
enforcement of government policies that limit or prohibit our ability to
manufacture, market or sell our products could severely harm our business.
CHINA'S TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION AND HAS RECENTLY BEEN RESTRUCTURED, WHICH HAS LED TO UNCERTAINTY
China's telecommunications industry is heavily regulated by the Ministry of
Information Industry. The Ministry of Information Industry controls the 33
provincial Posts and Telecommunications Administrations that exercise regulatory
responsibility over the telecommunications industries in their
15
<PAGE>
respective provinces. The Ministry of Information Industry has broad discretion
and authority to regulate all aspects of the telecommunications and information
technology industry in China including managing spectrum bandwidths, setting
network equipment specifications and standards and drafting laws and regulations
related to the electronics and telecommunications industries.
As part of the Chinese government's industry restructuring initiatives, the
regulatory functions of the Ministry of Information Industry and the Posts and
Telecommunications Administrations will be separated from the operational
functions of the state-owned companies under their control. Following this
separation, it is expected that the Ministry of Information Industry will act
exclusively as the industry regulator and will no longer manage the day-to-day
operations of telecommunications service providers in China. The separation of
the regulatory and operational functions of the Ministry of Information Industry
and the Posts and Telecommunications Administrations has not been completed. As
a result, the Ministry of Information Industry continues to exercise
administrative control over the operational goals and policies of
telecommunications service providers formerly under the control of the China
Telecom system. In addition, the provincial Posts and Telecommunications
Administrations continue to operate the fixed line telephone systems in their
respective provinces. We cannot predict when complete separation of the
regulatory and operational functions of the Ministry of Information Industry and
the provincial Posts and Telecommunications Administrations will be achieved.
China does not yet have a national telecommunications law. The Ministry of
Information Industry, under the direction of the State Council, is currently
preparing a draft of the Telecommunications Law of the People's Republic of
China for ultimate submission to the National People's Congress for review and
adoption. It is unclear if and when the Telecommunications Law will be adopted.
If the Telecommunications Law is adopted, we expect it to become the basic
telecommunications statute and the source of telecommunications regulations in
China. Although we expect that a Telecommunications Law would have a positive
effect on the overall development of the telecommunications industry in China,
we do not know the nature and scope of regulation that it would create.
Accordingly, we cannot predict whether it will have a positive or negative
effect on us or on some or all aspects of our business.
The Ministry of Information Industry has broad discretion to apply standards
in deciding what types of equipment may be connected to the national
telecommunications networks, the forms and types of services that may be offered
to the public and the content of material available in China over the Internet.
If the Ministry of Information Industry sets standards with which we are unable
to comply, our ability to sell product in China may be limited, resulting in
substantial harm to our operations.
CHINA CLOSELY RESTRICTS ACTIVITIES OF FOREIGN INVESTORS IN THE
TELECOMMUNICATIONS INDUSTRY
China's government and its agencies, including the Ministry of Information
Industry and the State Council, regulate foreign investment in the
telecommunications industry through the promulgation of various laws and
regulations and the issuance of various administrative orders and decisions.
Foreign investment enterprises, companies and individuals are prohibited from
investing and participating in the operation and management of
telecommunications networks without special approval by the State Council. In
addition, they are restricted from manufacturing analog mobile communications
systems, including wireless telephones. We cannot assure you that China will not
promulgate new laws or regulations, or issue administrative or judicial
decisions or interpretations, which would further restrict or bar foreigners
from engaging in telecommunications-related activities. The promulgation of laws
or regulations or the issuance of administrative orders or judicial decisions or
interpretations restricting or prohibiting telecommunications activities by
foreigners could have a substantial impact on our ongoing operations.
16
<PAGE>
OUR CUSTOMERS IN CHINA ARE PART OF THE CHINA TELECOM SYSTEM AND ARE SUBJECT TO
ITS ULTIMATE CONTROL. WE UNDERSTAND THAT CHINA TELECOM RECENTLY PROHIBITED ALL
POSTS AND TELECOMMUNICATIONS BUREAUS IN CHINA FROM PURCHASING LOW-MOBILITY
WIRELESS ACCESS SYSTEMS, SUCH AS OUR PAS SYSTEM, FOR IMPLEMENTATION IN LARGE
CITIES
Each of the local Posts and Telecommunications Bureaus in China which
comprise our existing or potential customers is part of the China Telecom system
and subject to its ultimate control. Accordingly, China Telecom may issue policy
statements or make other decisions which govern the equipment purchasing
decisions of all of our customers in China. For example, we understand that
China Telecom recently prohibited all Posts and Telecommunications Bureaus from
purchasing low-mobility wireless access systems, such as our PAS system, for
implementation in large cities. While to date we have not marketed or sold our
PAS systems in large cities, we may wish to do so in the future. As the majority
of our sales are generated from our operations in China, this decision of China
Telecom or other decisions by China Telecom could cause substantial harm to our
business.
CHINA'S GOVERNMENT POLICIES COULD IMPACT OUR BUSINESS
Since 1978, China's government has been and is expected to continue
reforming its economic and political systems. These reforms have resulted in and
are expected to continue to result in significant economic and social
development in China. Many of the reforms are unprecedented or experimental and
may be subject to change or readjustment due to a number of political, economic
and social factors. We believe that the basic principles underlying the
political and economic reforms will continue to be implemented and provide the
framework for China's political and economic system. New reforms or the
readjustment of previously implemented reforms could have a significant negative
effect on our operations. Changes in China's political, economic and social
conditions and governmental policies which could have a substantial impact on
our business include:
- new laws and regulations or the interpretation of those laws and
regulations;
- the introduction of measures to control inflation or stimulate growth;
- changes in the rate or method of taxation;
- the imposition of additional restrictions on currency conversion and
remittances abroad; and
- any actions which limit our ability to develop or sell our products in
China.
CHINA'S ECONOMIC POLICIES COULD IMPACT OUR BUSINESS
The economy of China differs from the economies of most countries belonging
to the Organization for Economic Cooperation and Development in various respects
such as structure, government involvement, level of development, growth rate,
capital reinvestment, allocation of resources, self-sufficiency, rate of
inflation and balance of payments position. In the past, the economy of China
has been primarily a planned economy subject to one- and five-year state plans
adopted by central government authorities and largely implemented by provincial
and local authorities which set production and development targets.
Since 1978, increasing emphasis had been placed on decentralization and the
utilization of market forces in the development of China's economy. Economic
reform measures adopted by China's government may be inconsistent or
ineffectual, and we may not in all cases be able to capitalize on any reforms.
Further, these measures may be adjusted or modified in ways which could result
in economic liberalization measures that are inconsistent from time to time or
from industry to industry or across different regions of the country. China's
economy has experienced significant growth in the past decade. This growth,
however, has been accompanied by imbalances in China's economy and has resulted
in significant fluctuations in general price levels, including periods of
inflation. China's
17
<PAGE>
government has implemented policies from time to time to increase or restrain
the rate of economic growth, control periods of inflation or otherwise regulate
economic expansion. While we may be able to benefit from the effects of some of
these policies, these policies and other measures taken by China's government to
regulate the economy could also have a significant overall impact on economic
conditions in China with a resulting negative impact on our business.
CHINA'S EXPECTED ENTRY INTO THE WTO CREATES UNCERTAINTY AS TO THE FUTURE
ECONOMIC AND BUSINESS ENVIRONMENTS IN CHINA
China has been attempting to join the World Trade Organization and recently
signed a bilateral trade agreement with the United States which has enabled
China to gain the support of the United States in China's attempt to enter the
WTO. With this agreement concluded, and subject to the support of other member
countries, China is expected to enter into the WTO as early as some time in
2000. Although China has been reducing tariff levels over the past several
years, entry into the WTO will require China to further reduce tariffs and
eliminate other trade restrictions. While China's entry into the WTO and related
relaxation of trade restrictions may lead to increased foreign investment, it
may also lead to increased competition in China's markets from international
companies. Whether or not China is accepted into the WTO, the impact on China's
economy and our business is uncertain.
IF TAX BENEFITS AVAILABLE TO OUR SUBSIDIARIES LOCATED IN CHINA ARE REDUCED OR
REPEALED, OUR BUSINESS COULD SUFFER
Our subsidiaries located in China enjoy tax benefits in China which are
generally available to foreign investment enterprises, including full exemption
from national enterprise income tax for two years starting from the first
profit-making year and/or a 50% reduction in national income tax rate for the
following three years. In addition, local enterprise income tax is often waived
or reduced during this tax holiday/incentive period. Under current regulations
in China, foreign investment enterprises that have been accredited as
technologically advanced enterprises are entitled to additional tax incentives.
These tax incentives vary in different locales and could include preferential
national enterprise income tax treatment at 50% of the usual rates for different
periods of time. Three of our four subsidiaries in China were accredited as
technologically advanced enterprises. Our fourth subsidiary is applying for
accreditation. These tax incentives may be repealed or reduced in the future. If
these tax incentives are abolished before our subsidiaries in China can take
full advantage of them, the tax liability of these subsidiaries will increase,
which will negatively impact our financial condition.
CHINA'S LEGAL SYSTEM EMBODIES UNCERTAINTIES THAT COULD NEGATIVELY IMPACT OUR
BUSINESS
China has a civil law legal system. Although often used by judges for
guidance, decided court cases do not have binding legal effect on future
decisions. Since 1979, many new laws and regulations covering general economic
matters have been promulgated in China. Despite this activity to develop the
legal system, China's system of laws is not yet complete. Even where adequate
law exists in China, enforcement of existing laws or contracts based on existing
law may be uncertain and sporadic and it may be difficult to obtain swift and
equitable enforcement, or to obtain enforcement of a judgment by a court of
another jurisdiction. The relative inexperience of China's judiciary in many
cases creates additional uncertainty as to the outcome of any litigation.
Further, interpretation of statutes and regulations may be subject to government
policies reflecting domestic political changes.
China has adopted a broad range of related laws, administrative rules and
regulations that govern the conduct and operations of foreign investment
enterprises and restrict the ability of foreign companies to conduct business in
China. These laws, rules and regulations provide some incentives to encourage
the flow of investment into China, but also subject foreign companies, and
foreign investment enterprises including our subsidiaries in China, to a set of
restrictions which may not always apply to domestic companies in China. Although
China is increasingly according foreign companies and
18
<PAGE>
foreign investment enterprises established in China the same rights and
privileges as Chinese domestic companies in anticipation of China's entry into
the WTO, these special laws, administrative rules and regulations governing
foreign companies and foreign investment enterprises may still place us and our
subsidiaries at a disadvantage in relation to Chinese domestic companies and may
adversely affect our competitive position. Moreover, as China's legal system
develops, the promulgation of new laws, changes to existing laws and the
pre-emption of local regulations by national laws may adversely affect foreign
investors and companies.
Many of our activities and products in China are subject to administrative
review and approval by various national and local agencies of China's
government. Because of the changes occurring in China's legal and regulatory
structure, there can be no assurance that we will be able to secure the
requisite governmental approval for our activities and products. Failure to
obtain the requisite government approval for any of our activities or products
could substantially harm our business.
RISKS RELATED TO THE OFFERING
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO SELL YOUR SHARES AT OR
ABOVE THE OFFERING PRICE
Prior to this offering, there has been no public market for our common
stock. We cannot assure you that an active public market for our common stock
will develop or be sustained after the offering. The initial public offering
price will be determined by negotiations between us and the underwriters, and
may not be indicative of the market price of our common stock after the
offering. Investors may not be able to resell their shares at or above the
initial public offering price due to a number of factors, including:
- actual or anticipated fluctuations in operating results;
- changes in expectations as to future financial performance or changes in
financial estimates or buy/sell recommendations of securities analysts;
- publications or technological innovations by us or our competitors; and
- the operating and stock price performance of other comparable companies.
In addition, stock markets have experienced extreme price and trading volume
volatility, particularly in the high technology sectors of these markets. This
volatility has significantly affected the market prices of securities of many
technology companies for reasons often unrelated to the operating performance of
the specific companies. These fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
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, SOFTBANK CORP. and its related
companies will beneficially own 52.3% of our outstanding stock. As a result,
SOFTBANK will have the ability to control all matters submitted to our
stockholders for approval and exert significant influence over our management
and affairs. This concentration of ownership may delay or prevent a change of
control or discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of our company, which could decrease the
market price of our common stock. Matters that could require stockholder
approval include:
- election and removal of directors;
- merger or consolidation of our company; and
- sale of all or substantially all of our assets.
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<PAGE>
Given the contractual and business relationships between SOFTBANK and us,
the interests of SOFTBANK may not always coincide with our interests. SOFTBANK,
acting through its designees on the Board of Directors and through its ownership
of voting securities, will have the ability to control our actions irrespective
of the desires of our other stockholders or directors.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE STOCK YOU PURCHASE
The initial public offering price of our common stock will be substantially
higher than the book value per share of the outstanding common stock after this
offering. Therefore, based on an assumed initial offering price of $13.00 per
share, if you purchase our common stock in this offering you will suffer
immediate dilution of approximately $10.03 per share. If additional shares are
sold by the underwriters following exercise of their over-allotment option, or
if outstanding options and warrants to purchase our common stock are exercised,
you will experience additional dilution.
FOLLOWING THIS OFFERING, SUBSTANTIAL NUMBERS OF SHARES OF OUR COMMON STOCK WILL
BECOME AVAILABLE FOR SALE IN THE PUBLIC MARKET, WHICH COULD CAUSE THE MARKET
PRICE OF OUR STOCK TO DECLINE
Upon completion of this offering, 89,307,159 shares of our common stock will
be outstanding, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants after December 31, 1999. Of
these shares, all of the shares sold in this offering will be freely tradable
without restriction under the Securities Act, unless purchased by our officers,
directors and some of our significant security holders.
The remaining 79,307,159 shares of our common stock outstanding as of
December 31, 1999 are subject to restrictions under Rule 144 of the Securities
Act. Of those shares, substantially all of the shares are subject to a lock-up
agreement with the underwriters and will not become eligible for sale in the
public market until 180 days following the date of this prospectus, unless
earlier released from the lock-up by the underwriters. As restrictions on resale
end, the market price of our common stock could drop significantly if the
holders of these shares sell them or are perceived by the market as intending to
sell them. In addition to the adverse effect a price decline could have on the
holders of our common stock, a price decline would likely impede our ability to
raise additional capital through the issuance of additional shares of our common
stock or other equity securities.
Shortly after this offering, we intend to file a registration statement
covering 2,000,000 shares of common stock reserved for issuance under our
employee stock purchase plan and 16,691,946 shares of common stock reserved for
issuance under our stock option plans. Any vested shares registered under the
registration statement will immediately become available for sale in the open
market, subject to the preceding contractual restrictions and, in the case of
our officers, directors and some significant security holders, Rule 144 volume
limitations.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER, EVEN IF THE TRANSACTION WOULD BENEFIT OUR
STOCKHOLDERS
Other companies may seek to acquire or merge with us. An acquisition or
merger of our company could result in benefits to our stockholders, including an
increase in the value of our common stock. Some provisions of our Certificate of
Incorporation and Bylaws, as well as provisions of Delaware law, may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
- authorizing the Board of Directors to issue additional preferred stock;
- prohibiting cumulative voting in the election of directors;
- limiting the persons who may call special meetings of stockholders;
20
<PAGE>
- prohibiting stockholder action by written consent;
- creating a classified Board of Directors pursuant to which our directors
are elected for staggered three year terms; and
- establishing advance notice requirements for nominations for election to
the Board of Directors and for proposing matters that can be acted on by
stockholders at stockholder meetings.
OUR MANAGEMENT MAY NOT USE THE PROCEEDS OF THIS OFFERING EFFECTIVELY
Our management has broad discretion over the use of proceeds of this
offering. In addition, our management has not designated a specific use for a
substantial portion of the proceeds of this offering. Accordingly, it is
possible that our management may allocate the proceeds differently than
investors in this offering would have preferred, or that we fail to maximize our
return on the proceeds.
------------------------
IN THIS PROSPECTUS, REFERENCES TO AND STATEMENTS REGARDING CHINA REFER TO
THE PEOPLE'S REPUBLIC OF CHINA, EXCLUDING HONG KONG, MACAU AND TAIWAN,
REFERENCES TO "U.S. DOLLARS," OR "$" ARE TO UNITED STATES DOLLARS, AND
REFERENCES TO "RENMINBI" ARE TO RENMINBI, THE LEGAL CURRENCY OF CHINA.
UNLESS SPECIFICALLY STATED, INFORMATION IN THIS PROSPECTUS GIVES EFFECT TO A
2-FOR-1 STOCK SPLIT EFFECTED IN DECEMBER 1999 AND ASSUMES:
- AN EXCHANGE RATE OF 8.3 RENMINBI FOR ONE U.S. DOLLAR;
- ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK HAVE BEEN CONVERTED ON A
ONE-FOR-ONE BASIS INTO AN AGGREGATE OF 70,377,322 SHARES OF COMMON STOCK;
AND
- THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT OPTION AND NO
OTHER PERSON WILL EXERCISE ANY OTHER OUTSTANDING OPTIONS OR WARRANTS.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. We use words like
"anticipates," "believes," "plans," "expects," "future," "intends" and similar
expressions to identify these forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including, but not limited to, the
following:
- devaluation of the Renminbi and fluctuations of exchange rates;
- changes in China's government, economic or regulatory policies;
- uncertainty regarding the commercial acceptance of our network access and
switching equipment and technologies;
- uncertainty regarding our future operating results;
- our ability to introduce new products;
- delays or losses of sales due to long sales and delivery cycles for our
products;
- the possibility of lower prices, reduced gross profit as a percentage of
net sales and loss of market share due to increased competition; and
- increased demands on our resources due to anticipated growth.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information or future events.
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<PAGE>
USE OF PROCEEDS
We estimate our net proceeds from the sale of the 10,000,000 shares of our
common stock offered in this offering will be approximately $118.9 million, or
approximately $137.0 million if the underwriters exercise their over-allotment
option in full, based on an assumed initial public offering price of $13.00 per
share and after deducting the estimated underwriting discount and estimated
offering expenses.
At this time, the principal purposes of this offering are to obtain
additional capital to increase our financial flexibility and to create a public
market for our common stock. We presently intend to use the net proceeds from
this offering as follows:
- an estimated $20.0 million to $30.0 million for research and development;
- an estimated $10.0 million to $20.0 million for capital expenditures;
- an estimated $30.0 million to $45.0 million in connection with sales,
marketing and administrative expenses, which will include the expansion of
our sales and marketing organization; and
- the remainder for working capital and general corporate purposes.
We have estimated some of our uses of proceeds above but these estimates may
not be accurate, and our actual use of proceeds may vary from these estimates.
Our management will have broad discretion in the application of the net proceeds
of this offering. Pending any use, we intend to invest the net proceeds in
short-term, investment-grade, interest-bearing securities.
From time to time, we may evaluate opportunities to acquire or invest in
complementary businesses, technologies or products and may use a portion of the
net proceeds from this offering to enter into these type of transactions. At
this time, we do not have any present understandings, commitments or agreements
with respect to any material acquisitions.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain future earnings to finance the growth and development
of our business, and we do not anticipate paying any cash dividends in the
foreseeable future. In addition, the terms of our revolving line of credit
agreement prohibit us from paying cash dividends without the prior consent of
the bank.
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<PAGE>
CAPITALIZATION
The following table summarizes our short-term debt and capitalization as of
December 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of preferred stock into common stock upon the completion of this offering;
and
- on a pro forma as adjusted basis to reflect the receipt of the net
proceeds from the sale of 10,000,000 shares offered hereby at an assumed
initial public offering price of $13 per share, after deducting the
estimated underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total short-term debt..................................... $ 43,338 $ 43,338 $ 43,338
======== ======== ========
Stockholders' equity:
Convertible preferred stock, $0.00125 par value;
actual--99,200,000 shares authorized, 70,377,322
shares issued and outstanding; pro forma and as
adjusted--5,000,000 shares authorized, no shares
issued and outstanding................................ 88 -- --
Common stock, $0.00125 par value; actual--142,800,000
shares authorized, 8,929,837 shares issued and
outstanding;
pro forma--250,000,000 shares authorized, 79,307,159
shares issued and outstanding; as adjusted--89,307,159
shares issued and outstanding(1)...................... 13 101 114
Common stock warrant.................................... 389 389 389
Additional paid-in capital.............................. 187,805 187,805 306,692
Deferred stock compensation............................. (7,728) (7,728) (7,728)
Accumulated deficit..................................... (19,865) (19,865) (19,865)
Notes receivable from stockholders...................... (555) (555) (555)
Cumulative translation adjustment....................... 95 95 95
-------- -------- --------
Total stockholders' equity............................ 160,242 160,242 279,142
-------- -------- --------
Total capitalization................................ $160,242 $160,242 $279,142
======== ======== ========
</TABLE>
- ------------------------
(1) Excludes 14,405,714 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999 at a weighted average exercise price of
$3.25 per share. Also excludes 532,000 shares of common stock issuable upon
exercise of warrants outstanding as of December 31, 1999 with a weighted
average exercise price of $6.025 per share. For additional information
regarding our capital structure, see "Management--Employee Benefit Plans,"
"Related Party Transactions," "Description of Capital Stock" and
Notes 16-19 of Notes to Consolidated Financial Statements.
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<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of
December 31, 1999 was approximately $146.7 million, or $1.84 per share. Pro
forma net tangible book value per share represents the amount of our total
assets, excluding net intangible assets, less our total liabilities, divided by
the total number of shares of our common stock outstanding, after giving effect
to:
- the conversion of all outstanding shares of preferred stock into an
aggregate of 70,377,322 shares of common stock.
Without taking into account any other changes in net tangible book value
after December 31, 1999, other than to give effect to the sale of 10,000,000
shares of common stock offered by this prospectus at an assumed initial public
offering price of $13.00 per share and after deducting the estimated
underwriting discount and estimated offering expenses payable us, the pro forma
net tangible book value of our common stock as of December 31, 1999 would have
been approximately $265.6 million, or $2.97 per share. This represents an
immediate increase in net tangible book value of $1.13 per share to existing
stockholders and an immediate dilution of $10.03 per share to new investors
purchasing common stock in this offering. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Net tangible book value per share as of December 31,
1999.................................................. $ 1.84
Increase per share attributable to new investors........ 1.13
------
Pro forma net tangible book value per share after this
offering.................................................. 2.97
------
Dilution per share to new investors......................... $10.03
======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 31,
1999:
- the total number of shares of common stock purchased from us;
- the total consideration paid and the average price per share paid by
existing stockholders and by new investors, assuming an initial public
offering price of $13.00 per share; and
- before deducting the estimated underwriting discount and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 79,307,159 89% $238,811,000 65% $3.01
New investors....................... 10,000,000 11% 130,000,000 35% 13.00
---------- ----- ------------ -----
Total............................. 89,307,159 100.0% $368,811,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and table assume (i) no exercise of any stock
options or warrants outstanding as of December 31, 1999. As of December 31,
1999, there were:
- options outstanding to purchase a total of 14,405,714 shares of common
stock at a weighted average exercise price of $3.25 per share;
- 16,831,090 shares authorized for issuance under our stock option plans of
which 172,243 were available for grant; and
- warrants outstanding to purchase a total of 532,000 shares of common stock
at a weighted average exercise price of $6.025 per share.
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<PAGE>
To the extent that any of the outstanding options or warrants are exercised,
additional options are issued and exercised, or the underwriters exercise all or
part of the over-allotment option, there will be further dilution to new
investors. For additional information about our capitalization and the options
and warrants described above, see "Management--Employee Benefit Plans," "Related
Party Transactions," "Description of Capital Stock" and Notes 17 and 18 of Notes
to Consolidated Financial Statements.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the years ended December 31, 1997, 1998 and 1999 and
consolidated balance sheet data at December 31, 1998 and 1999 are derived from,
and are qualified by reference to, our audited consolidated financial statements
included elsewhere in this prospectus. The consolidated statement of operations
data for the years ended December 31, 1995 and 1996 and the consolidated balance
sheet data at December 31, 1995 and 1996 have been derived from audited
financial statements not included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................... $ 10,006 $ 35,542 $ 75,597 $105,167 $187,516
Cost of sales........................................... 4,289 22,322 48,795 65,246 111,587
-------- -------- -------- -------- --------
Gross profit............................................ 5,717 13,220 26,802 39,921 75,929
Operating expenses:
Selling, general and administrative................... 3,452 8,042 21,211 23,233 32,513
Research and development.............................. 612 3,899 8,941 14,659 17,364
Amortization of deferred stock compensation........... -- -- -- -- 4,491
Amortization of intangible assets..................... 21 42 40 120 273
In-process research and development................... 10,811 -- -- -- 3,992
-------- -------- -------- -------- --------
Total operating expenses............................ 14,696 11,983 30,192 38,012 58,633
-------- -------- -------- -------- --------
Operating income (loss)................................. (8,979) 1,237 (3,390) 1,909 17,296
Interest and other income (expenses).................... 163 858 2,033 (1,138) (2,212)
Equity in net income (loss) of affiliated companies..... -- (291) 73 331 1,348
-------- -------- -------- -------- --------
Income (loss) before income taxes and minority
interest................................................ (8,816) 1,804 (1,284) 1,102 16,432
Income tax expense (benefit)............................ 54 575 400 1,423 157
Minority interest in (earnings) loss of consolidated
subsidiaries............................................ (701) (743) 301 914 (2,110)
-------- -------- -------- -------- --------
Income (loss) from continuing operations................ (9,571) 486 (1,383) 593 14,165
Income (loss) from discontinued operations.............. -- 301 1,413 (893) (1,656)
-------- -------- -------- -------- --------
Net income (loss)....................................... (9,571) 787 30 (300) 12,509
Preferred stock dividend (270) (1,097 -- -- --
Beneficial conversion feature of Series F preferred
stock................................................... -- -- -- -- (16,067)
-------- -------- -------- -------- --------
Net income (loss) applicable to common stock............ $ (9,841) $ (310) $ 30 $ (300) $ (3,558)
======== ======== ======== ======== ========
Earnings (loss) per share(1):
Basic................................................. $ (2.40) $ (0.04) $ 0.00 $ (0.04) $ (0.41)
======== ======== ======== ======== ========
Diluted............................................... $ (2.40) $ (0.04) $ 0.00 $ 0.00 $ (0.41)
======== ======== ======== ======== ========
Shares used in per share calculations(1):
Basic................................................. 4,108 8,344 7,320 7,582 8,678
======== ======== ======== ======== ========
Diluted............................................... 4,108 8,344 7,320 77,050 8,678
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents(2)................................ $12,531 $18,246 $ 35,049 $ 17,626 $ 87,364
Working capital............................................. 14,905 34,382 59,076 56,312 127,510
Total assets................................................ 26,318 49,610 101,097 142,121 265,438
Total short-term debt....................................... 5,704 1,127 1,579 38,426 43,338
Convertible preferred stock................................. 13,917 39,912 -- -- --
Total stockholders' equity.................................. 1,350 39,519 72,513 72,336 160,242
</TABLE>
- ------------------------------
(1) Based on the number of shares outstanding as of December 31, 1999. Excludes
(i) 16,831,090 shares of common stock authorized for issuance under our
stock option plans, under which options to purchase 14,405,714 shares were
outstanding as of December 31, 1999 with a weighted average exercise price
of $3.25 per share and 172,243 shares were available for grant and
(ii) 532,000 shares of common stock reserved for issuance upon the exercise
of warrants outstanding as of December 31, 1999 with a weighted average
exercise price of $6.025 per share.
(2) Includes restricted cash of $1,500 at December 31, 1998 and $4,550 at
December 31, 1999.
27
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL DATA
You should read the following selected financial data in conjunction with
our pro forma combined financial information and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. On December 14, 1999, we
acquired the minority interest of Wacos, Inc., a research and development
subsidiary, through a merger. The acquisition of the unaffiliated minority
interest in Wacos, Inc. was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the tangible
and intangible assets acquired and liabilities assumed on the basis of their
fair values on the acquisition date. The following unaudited pro forma combined
statement of operations data reflects the acquisition of Wacos, Inc.'s minority
interest as if the acquisition had occurred on January 1, 1999. This data may
not be indicative of the results of operations had the acquisition actually
occurred on January 1, 1999, nor do they purport to be indicative of our future
results of operations.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
---------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $187,516
Cost of sales............................................... 111,587
--------
Gross profit................................................ 75,929
Operating expenses:
Selling, general and administrative....................... 32,513
Research and development.................................. 17,364
Amortization of deferred stock compensation............... 4,491
Amortization of intangible assets......................... 3,351
--------
Total operating expenses................................ 57,719
--------
Operating income............................................ 18,210
Interest and other income (expense)......................... (2,212)
Equity in net income of affiliated companies................ 1,348
--------
Income before income taxes and minority interest............ 17,346
Income tax expense.......................................... 157
Minority interest in (earnings) loss of consolidated
subsidiaries.............................................. (2,110)
--------
Income from continuing operations........................... 15,079
Loss from discontinued operations........................... (1,656)
--------
Net Income.................................................. 13,423
Beneficial conversion feature of Series F convertible
preferred stock........................................... (16,067)
--------
Net income available to common stockholders................. (2,644)
========
Pro forma earnings (loss) per share:
Basic..................................................... $ (0.30)
--------
Diluted................................................... $ (0.30)
--------
Shares used in pro forma per share calculations:
Basic..................................................... 8,678
--------
Diluted................................................... 8,678
========
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER SUBSTANTIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS, INCLUDING THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS.
OVERVIEW
We provide communications equipment for service providers that operate
wireless and wireline networks in rapidly growing communications markets. Our
integrated suite of network access systems, optical transmission products and
subscriber terminal products allows service providers to offer efficient and
expandable voice, data and Internet access services. Because our systems are
based on key international communications standards, service providers can
easily integrate our systems into their existing networks and deploy our systems
in new broadband, IP-based and wireless network rollouts. To date, substantially
all of our sales have been to service providers in China.
We incorporated in Delaware as Unitech Industries Inc. in 1991. Since our
incorporation, we have focused our resources on developing products for China's
communications market. We shipped our first network access products in 1993. In
1994, we changed our name to Unitech Telecom, Inc. In 1995, we acquired StarCom
Network Systems, Inc. and changed our name to UTStarcom, Inc. During 1996, we
introduced our advanced, V5.1 and V5.2 compliant, multi-service network access
product, the AN-2000. Late in 1996, we introduced our Airstar wireless access
system. In December 1999, we completed the acquisition of Wacos, Inc., a
research and development subsidiary that develops IP-based switching systems. As
part of our business operations in China, we have established a wholly owned
subsidiary and two joint ventures.
To date, we have derived substantially all of our revenues from sales of
communications equipment to service providers in China. Each of the Posts and
Telecommunications Bureaus, or PTBs, to whom we sell our equipment in China is
part of the China Telecom system and subject to its ultimate control. However,
equipment purchasing decisions are generally made at the individual PTB level.
Our customers often make a large initial purchase of our equipment followed by
supplemental purchases of enhancements and upgrades. As a result, our largest
revenue-producing customers typically vary from period-to-period. For example,
in 1999, two of our customers together accounted for over 41% of our sales.
However, we expect that different customers will be our largest source of
revenues in subsequent periods.
Over 99% of our sales for 1999 were made in China. Accordingly, our
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in China, and by the general state of
China's economy. Our operations in China are subject to special considerations
and significant risks not typically associated with companies in the United
States. These include risks associated with, among others, the political,
economic and legal environments and foreign currency exchange. Our results may
be adversely affected by, among other things, changes in the political, economic
and social conditions in China, and by changes in governmental policies with
respect to laws and regulations, changes in China's telecommunications industry
and regulatory rules and policies, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation.
Specifically, remittances from China which are of a capital nature, such as
the repayment of bank loans denominated in foreign currencies, require approval
from appropriate governmental authorities before Renminbi can be used to
purchase foreign currency. Although the payment of cash dividends is permitted
so long as our subsidiaries have sufficient reserves and adequate amounts of
Renminbi to
29
<PAGE>
purchase foreign currency, regulations restrict the ability of our subsidiaries
to transfer funds to us through intercompany loans and advances.
We sell our products in China through a direct sales force. The evaluation
period for our products may span a year or more. Revenue from product sales is
recognized when title is passed and all significant contractual obligations have
been satisfied and collection of the resulting receivable is reasonably assured.
Cost of sales consists primarily of material costs, third party commissions,
costs associated with assembly and testing of products, costs associated with
installation and customer training and overhead and warranty costs. Cost of
sales also includes import taxes on components.
Our gross profit has been affected by material costs, product mix, average
selling prices, and the type of distribution channel through which we sell our
products. Our gross profit, as a percentage of net sales, varies among our
product families. The gross profits, as a percentage of net sales, on our mobile
phone handsets are very low. We expect that our overall gross profit, as a
percentage of net sales, will fluctuate from period to period as a result of
shifts in product mix, anticipated decreases in average selling prices and our
ability to reduce product costs.
Selling, general and administrative expenses include compensation and
benefits, professional fees, sales commissions, provision for uncollectible
accounts receivable and travel and entertainment costs. We intend to pursue
aggressive selling and marketing campaigns and to expand our direct sales
organization and, as a result, our sales and marketing expenses will increase in
future periods. We also expect that in support of our continued growth and our
operations as a public company general and administrative expenses will continue
to increase for the foreseeable future.
Research and development expenses consist primarily of salaries and related
costs of employees engaged in research, design and development activities, the
cost of parts for prototypes, equipment depreciation and third party development
expenses. We believe that continued investment in research and development is
critical to our long-term success. Accordingly, we expect that our research and
development expenses will increase in future periods.
In connection with the grant of stock options to some of our employees, we
recorded deferred compensation of $12.2 million during 1999, representing the
difference between the deemed fair value of common stock for accounting purposes
and the option exercise price for these options at the date of grant. Deferred
compensation is presented as a reduction of stockholders' equity, with
amortization recorded over the four year vesting period of the option. We
recorded amortization of deferred stock compensation of approximately
$4.5 million during 1999. At December 31, 1999, approximately $7.7 million
remained to be amortized.
Amortization of intangible assets consists primarily of the amortization of
intangible assets associated with acquisitions in China and our acquisition of
the minority interest in our Wacos, Inc. subsidiary.
In-process research and development costs resulted from our acquisition of
the minority interest in our Wacos, Inc. subsidiary in December 1999. Wacos,
Inc. develops an IP-based multi-service telephone switching system designed to
support wired and wireless access for both mobile and fixed telephony networking
applications. The in-process research and development projects had not reached
technological feasibility and there was no alternative future use.
Consolidated equity in net income (loss) of affiliated companies comprises
our share of the earnings from our Guangdong manufacturing subsidiary.
Under current regulations in China, foreign investment enterprises that have
been accredited as technologically advanced enterprises are entitled to
additional tax incentives. These tax incentives vary in different locales and
could include preferential national enterprise income tax treatment at 50% of
the usual rates for different periods of time. All of our active subsidiaries in
China were accredited as technologically advanced enterprises. The tax holidays
at two of our subsidiaries started to phase out in
30
<PAGE>
1999. Our wholly owned China subsidiary's income tax rate will rise from 0% in
1999 to 7.5% for 2000-2002 and 15% for 2003 and thereafter. Our Zhejiang
subsidiary's income tax rate will rise from 10% for 1999-2002 to 15% for 2003
and thereafter. The impact of these tax increases is expected to reduce future
net income.
Minority interest in (earnings) loss of consolidated subsidiaries represents
the share of earnings in our Zhejiang manufacturing subsidiary that is owned by
our subsidiary partner and, prior to the acquisition of our minority interest,
the share of losses in our Wacos, Inc. subsidiary not owned by us.
The beneficial conversion feature represents a charge to net income
resulting from a yield enhancement feature included in recent financing rounds
of preferred stock pursuant to which the preferred shares convert into common
shares on a one-for-one basis at a price below the expected offering price upon
completion of our initial public offering. This will result in a reduction of
net income available to common stockholders in the fiscal period ending
December 31, 1999 of approximately $16.1 million.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by
certain items reflected in our consolidated statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
PERCENTAGE OF NET SALES:
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 64.5 62.0 59.5
----- ----- -----
Gross profit................................................ 35.5 38.0 40.5
Operating expenses:
Selling, general and administrative....................... 28.1 22.1 17.3
Research and development.................................. 11.8 13.9 9.3
Amortization of deferred stock compensation............... 0.0 0.0 2.4
Amortization of intangible assets......................... 0.1 0.1 0.1
In-process research and development....................... 0.0 0.0 2.1
----- ----- -----
Total operating expenses................................ 40.0 36.1 31.2
----- ----- -----
Operating income (loss)..................................... (4.5) 1.9 9.3
Interest and other income (expenses)........................ 2.7 (1.1) (1.2)
Equity in net income (loss) of affiliated companies......... 0.1 0.3 0.7
----- ----- -----
Income (loss) before income taxes and minority interest..... (1.7) 1.1 8.8
Income tax expense (benefit)................................ 0.5 1.4 0.1
Minority interest in (earnings) loss of consolidated
subsidiaries.............................................. 0.4 0.9 (1.1)
----- ----- -----
Income (loss) from continuing operations.................... (1.8) 0.6 7.6
Income (loss) from discontinued operations.................. 1.8 (0.8) (0.9)
----- ----- -----
Net income (loss)........................................... 0.0% (0.2)% 6.7%
===== ===== =====
</TABLE>
31
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NET SALES. Our net sales increased from $75.6 million in 1997 to
$105.2 million in 1998 and $187.5 million in 1999. The 39% increase from 1997 to
1998 and the 78% increase from 1998 to 1999 were primarily attributable to
significant increases in the sales volume of network access systems and, to a
lesser extent, mobile phone handsets. Sales growth in 1998 was partially offset
by a slowdown in the overall industry due to the restructuring of China's
telecommunications industry. Sales growth in 1999 reflected an increase in sales
volume of our Airstar system. In 1999, sales to Xian PTB and Kunming PTB
accounted for 30% and 11%, respectively, of our net sales. In 1997 and 1998 no
customers accounted for over 10% of our net sales.
GROSS PROFIT. Gross profit increased from $26.8 million in 1997 to
$39.9 million in 1998 and $75.9 million in 1999. Gross profit, as a percentage
of net sales, was 36% in 1997, 38% in 1998 and 41% in 1999. Gross profit, as a
percentage of net sales, improved in each period primarily due to manufacturing
economies of scale and significant increases in sales of higher margin network
access products and a shift in product mix toward higher margin network access
products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $21.2 million in 1997 to $23.2 million in 1998 and
$32.5 million in 1999. The increase from 1997 to 1998 was primarily due to
increased sales and administrative personnel associated with the growth in net
sales and the expansion of our overall level of business activity. The increase
from 1998 to 1999 was primarily due to increased sales and administrative
personnel associated with the growth in net sales and the expansion of our
overall level of business activity, as well as a higher provision for
uncollectible accounts and non-cash expenses associated with the issuance of
stock options to non-employees. Selling, general and administrative expenses as
a percentage of net sales were 28% in 1997, 22% in 1998 and 17% in 1999.
Selling, general and administrative expenses as a percentage of net sales
declined during these periods due to economies of scale associated with the
significant increases in net sales.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$8.9 million in 1997 to $14.7 million in 1998 and $17.4 million in 1999. These
increases were primarily due to the hiring of additional technical personnel and
the purchase of laboratory tools and test equipment necessary to support our
product development efforts. Research and development expenses as a percentage
of net sales were 12% in 1997, 14% in 1998 and 9% in 1999.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation increased from $0 in 1997 and 1998 to $4.5 million in 1999. This
amortization was due to deferred compensation of approximately $12.2 million
related to certain stock option grants to employees which we are amortizing over
the vesting periods of the applicable options beginning in 1999.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was
$40,000 in 1997, $120,000 in 1998 and $273,000 in 1999. The increase in
amortization of intangible assets from 1997 to 1998 was primarily due to the
increase in our investment in our Guangdong manufacturing subsidiary and the
addition of amortization of our Wacos, Inc. subsidiary. The increase in
amortization of intangible assets from 1998 to 1999 was due to the increase in
amortization associated with our December 1999 acquisition of the portion of our
Wacos, Inc. subsidiary owned by the minority shareholders.
IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. In-process research and
development costs resulted from our acquisition of the non-affiliated minority
interest in our Wacos, Inc subsidiary in December 1999. The aggregate purchase
price of Wacos, Inc. was approximately $20.8 million which, based upon an
independent appraisal of all the assets acquired and liabilities assumed, was
allocated to the specifically identifiable tangible and intangible assets
acquired. Intangible assets included approximately $4.0 million of in-process
research and development which was charged to operations in December 1999,
$0.2 million of assembled workforce and approximately $16.5 million of excess
purchase price over the fair market values of the tangible and identified
intangible assets, being amortized over periods of three to five years.
32
<PAGE>
The values of Wacos, Inc. in-process research and development projects were
estimated by an excess income approach. Management revenue and operating expense
projections were reduced by appropriate amounts to reflect a fair return on the
net tangible and collateral intangible assets to be employed in realizing the
forecasted net incomes. The resulting forecasted "excess" income figures were
discounted to present value using a 40% rate of return, reflecting the
technological, market and other risks associated with the subject technologies
and future products. The discounted excess incomes were summed and then, in
accordance with methodology approved by the Securities and Exchange Commission,
reduced by any appropriate percentage completion factor for each project to
account for the anticipated remaining research and development factors.
Wacos, Inc. develops technology called WACOS (Wireless Access Central Office
Switch), which is an Internet Protocol (IP) based multi-service telephone
switching system designed to support wired and wireless access for both mobile
and fixed telephony networking applications. The three main components of the
integrated WACOS product are not yet considered to have reached technological
feasibility. The initial release date is due late 2000 with second and third
phases being released through late 2002. Significant cash inflows resulting from
these projects are expected to begin in late 2000. We estimate operating costs
to complete these WACOS projects will be approximately $5.8 million in 2000 and
approximately $8.9 million in 2001. If the development completion dates are not
met the key risk is considered the potential lost opportunity to hold a unique
competitive advantage.
The current projects provide the ability to service over 400,000
subscribers, a higher number of users than previously available, and various
China specific adaptations that are not available in other products.
INTEREST INCOME (EXPENSES). Interest income (expenses) was $2.0 million in
1997, $(0.1) million in 1998 and $(1.0) million in 1999. The change in interest
income (expenses) in each period was primarily due to increased interest charges
on higher average debt balances combined with decreased interest income from
lower average cash balances.
OTHER INCOME (EXPENSES). Other income (expenses) was $5,000 in 1997,
$(1.0) million in 1998 and $(1.2) million in 1999. The change from 1997 to 1998
was primarily due to a $1.3 million loss on one investment. The 1999 other
income (expenses) included a $1.0 million loss on asset sales.
EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANIES. Consolidated equity in
net income (loss) of affiliated companies was $0.1 million in 1997,
$0.3 million in 1998 and $1.3 million in 1999. The increases in each period
reflected increased profitability at our Guangdong manufacturing joint venture.
INCOME TAX EXPENSE (BENEFIT). Income tax expense (benefit) was
$0.4 million in 1997, $1.4 million in 1998 and $0.2 million in 1999 reflecting
our increasing income and required adjustments to our deferred tax asset
valuation allowance. The 1999 tax also reflected tax incentives and a one time
tax refund of $0.4 million in China. We were granted tax holidays for our wholly
owned China subsidiary and our Zhejiang manufacturing subsidiary which started
to phase out in 1999. The net impact of these tax holidays was to decrease net
loss by approximately $0.9 million in 1997, increase net income by approximately
$0.3 million in 1998, and increase net income by approximately $4.5 million in
1999. Our wholly owned China subsidiary's income tax rate is expected to rise
from 0% in 1999 to 7.5% for 2000-2002 and 15% for 2003 and thereafter. Our
Zhejiang manufacturing subsidiary's income tax rate is expected to rise from 10%
for 1999-2002 to 15% for 2003 and thereafter. The impact of these tax increases
is expected to reduce future net income. We have not provided for U.S. taxes on
our foreign subsidiaries' undistributed earnings because such earnings are
intended to be indefinitely reinvested in those subsidiaries.
MINORITY INTEREST IN (EARNINGS) LOSS OF CONSOLIDATED SUBSIDIARIES. Minority
interest in the loss of consolidated subsidiaries was $0.3 million in 1997 and
$0.9 million in 1998. Minority interest in the earnings of consolidated
subsidiaries was $2.1 million in 1999. The change from 1997 to 1998 was a result
of increased research and development spending at our Wacos, Inc. subsidiary and
increased
33
<PAGE>
losses at our Zhejiang manufacturing subsidiary. The change from 1998 to 1999
was due to the increased profitability at our Zhejiang manufacturing subsidiary
in 1999.
BENEFICIAL CONVERSION FEATURE. The issuance of Series F preferred stock
included a beneficial conversion feature pursuant to which the preferred shares
convert into common shares on a one-for-one basis at a price below the expected
offering price upon the completion of our initial public offering. This will
result in a charge to net income in 1999 of approximately $16.1 million,
reducing diluted earnings per share by $0.21.
34
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly statement of operations
data, in dollars and as a percentage of net sales, for each of the six quarters
ended December 31, 1999. This unaudited quarterly information has been prepared
on the same basis as the annual information presented elsewhere in this
prospectus and reflects all normal non-recurring adjustments that we consider
necessary for a fair presentation of such information in accordance with
generally accepted accounting principles. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31
1998 1998 1999 1999 1999 1999
--------- --------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales............................................. $31,352 $25,289 $27,551 $42,131 $55,019 62,814
Cost of sales......................................... 19,982 16,576 16,848 23,873 31,956 38,910
------- ------- ------- ------- ------- -------
Gross profit.......................................... 11,370 8,713 10,703 18,258 23,063 23,904
Operating expenses:
Selling, general and administrative................. 6,216 5,562 5,587 8,292 10,217 8,418
Research and development............................ 3,668 4,200 4,045 4,138 4,307 4,873
Amortization of deferred stock compensation......... -- -- 637 1,669 1,215 470
Amortization of intangible assets................... 22 55 37 37 38 160
In-process research and development................. -- -- -- -- -- 4,491
------- ------- ------- ------- ------- -------
Total operating expenses.......................... 9,906 9,817 10,306 14,136 15,777 18,412
------- ------- ------- ------- ------- -------
Operating income (loss)............................... 1,464 (1,104) 397 4,122 7,286 5,492
Interest and other income (expenses).................. (370) (910) (220) (489) 22 (1,524)
Equity in income (loss) of affiliated companies....... 236 50 190 702 92 364
------- ------- ------- ------- ------- -------
Income (loss) before income taxes and minority
interest............................................ 1,330 (1,964) 367 4,335 7,400 4,332
Income tax expense (benefit).......................... 185 586 222 242 (1,487) 1,180
Minority interest in (earnings) loss of consolidated
subsidiaries........................................ 734 612 (486) (103) (644) (877)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations.............. 1,879 (1,938) (341) 3,990 8,243 2,275
Income (loss) from discontinued operations............ (454) (97) (267) (1,389) -- --
------- ------- ------- ------- ------- -------
Net income (loss)..................................... $ 1,425 $(2,035) $ (608) $ 2,601 $ 8,243 $ 2,275
======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET SALES:
Net sales............................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 63.7 65.5 61.2 56.7 58.1 61.9
------- ------- ------- ------- ------- -------
Gross profit.......................................... 36.3 34.5 38.8 43.3 41.9 38.1
Operating expenses:
Selling, general and administrative................. 19.8 22.1 20.3 19.7 18.6 13.4
Research and development............................ 11.7 16.6 14.7 9.8 7.8 7.8
Amortization of deferred stock compensation......... 0.0 0.0 2.3 4.0 2.2 0.7
Amortization of intangible assets................... 0.1 0.2 0.1 0.1 0.1 0.3
In-process research and development................. -- -- -- -- -- 7.1
------- ------- ------- ------- ------- -------
Total operating expenses.......................... 31.6 38.9 37.4 33.6 28.7 29.3
------- ------- ------- ------- ------- -------
Operating income (loss)............................... 4.7 (4.4) 1.4 9.7 13.2 8.8
Interest and other income (expenses).................. (1.2) (3.6) (0.8) (1.2) 0.0 (2.4)
Equity in income (loss) of affiliated companies....... 0.8 0.2 0.7 1.7 0.2 0.6
------- ------- ------- ------- ------- -------
Income (loss) before income taxes and minority
interest............................................ 4.3 (7.8) 1.3 10.2 13.4 7.0
Income tax expense (benefit).......................... 0.6 2.3 0.8 0.6 (2.7) 1.9
Minority interest in (earnings) loss of consolidated
subsidiaries........................................ 2.3 2.4 (1.7) (0.2) (1.2) (1.4)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations.............. 6.0 (7.7) (1.2) 9.4 14.9 3.7
Income (loss) from discontinued operations............ (1.4) (0.4) (1.0) (3.3) 0.0 0.0
------- ------- ------- ------- ------- -------
Net income (loss)..................................... 4.6% (8.1)% (2.2)% 6.1% 14.9% 3.7%
======= ======= ======= ======= ======= =======
</TABLE>
35
<PAGE>
Our net sales have increased in each quarter since the fourth quarter of
1998. The increase in net sales was primarily due to significant increases in
sales of network access products, particularly our Airstar system. Sales during
the third and fourth quarters of 1998 were negatively impacted by the weaker
demand experienced during the reorganization of the telecommunications industry
in China. Business activity in China declines significantly during the first
quarter of each year in observance of the Lunar New Year. Although the usual
seasonal slowdown was present during the first quarter of 1999, it was not
evident because of the relatively low level of fourth quarter 1998 sales.
Gross profit has increased in each quarter since the fourth quarter of 1998.
The increase in gross profit was primarily due to significant increases in sales
of network access products, particularly our Airstar system. Gross profit, as a
percentage of net sales, has fluctuated from quarter to quarter primarily due to
product mix. Gross profit, as a percentage of net sales, generally has been
higher since the fourth quarter of 1998, primarily due to significant increases
in sales of higher margin network access products and a shift in product mix
toward higher margin network access products. The decrease in gross profit, as a
percentage of net sales, from the third quarter to the fourth quarter of 1998
was primarily due to decreases in sales volume and price pressures resulting
from a slowdown in the overall industry due to the restructuring of China's
telecommunications industry.
Operating expenses have generally increased in absolute dollars over the
quarters shown as we have increased staffing in research and development, sales
and marketing and administrative functions. The recent decline in selling,
general and administrative expenses as a percentage of net sales reflects the
relatively higher sales level as well as a leveling off of the proportion of
expenses that are variable to sales, such as commissions. Research and
development expenses as a percent of net sales have generally declined as our
net sales have increased.
Our quarterly operating results have fluctuated in the past and are likely
to fluctuate in the future as a result of a variety of factors. These factors,
some of which are beyond our control, include:
- the timing, number and size of orders for our products as well as product
mix;
- market acceptance of our products and product enhancements;
- the evolving and unpredictable nature of the economic, regulatory and
political environments in China and other countries in which we market or
plan to market our products;
- longer collection periods of accounts receivable in China and other
countries;
- the lengthy and unpredictable sales cycles associated with sales of our
products;
- our ability to secure and maintain regulatory and governmental
authorizations for our products; and
- the decline in business activity in the first quarter associated with the
Lunar New Year.
Our net sales and gross profit, as a percentage of net sales, have also
fluctuated and are likely to continue to fluctuate in large part due to the
volatility of the volume of sales of lower margin mobile phone handsets and
competitive pricing pressure across product lines. As a result of the foregoing
factors, we believe period to period comparisons are not necessarily meaningful
and should not be relied upon as indicative of future results.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through private sales
of equity securities and, to a lesser degree, bank lines of credit. We have a
line of credit arrangement with a Bank of China permitting Renminbi denominated
borrowings of up to $48.2 million. This facility bears interest at rates ranging
from 5.6% to 6.4% and matures from February to July 2000. At December 31, 1999,
the equivalent of $27.1 million was outstanding under this facility. We also
have a line of credit with Commercial Bank of Hangzhou permitting Renminbi
denominated borrowings of up to $12.0 million. This facility bears interest at
6.4% and matures in October 2000. At December 31, 1999, the equivalent
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of $6.0 million was outstanding under this facility. In June 1998, we entered
into a loan agreement with SOFTBANK. We borrowed a total of $25.0 million in
June 1998. Borrowings under this facility were repaid in full in December 1999.
In December 1998, we guaranteed a bank loan incurred by one of our customers in
the amount of $1.6 million in conjunction with the sale of equipment. As of
December 31, 1999, we had working capital of $127.5 million, including
$87.4 million in cash and cash equivalents and $34.6 million worth of Renminbi
denominated bank borrowings. In November and December 1999, we secured private
equity financing totaling $55.0 million.
We plan to invest $10.0 million in an investment fund to be established by
SOFTBANK CORP. focused on investments in Internet companies in China. Our
investment will constitute 10% of the funding for the SOFTBANK investment fund,
with SOFTBANK contributing the remaining 90%. We will be a passive investor and
have no decision-making authority with respect to investments by the fund. The
fund will have a separate management team, and none of our employees will be
employed by the fund. One of our directors will serve as the Chief Executive
Officer of the fund, and our Chief Executive Officer will be chairman of the
board of the fund. None of the proceeds from this offering will be invested in
the fund.
As of December 31, 1999, we had cash and cash equivalents totaling
$87.4 million. Of this amount, $4.6 million was restricted. Of the restricted
amount, $2.4 million related to cash from asset sales pending completion of
contractual obligations, $0.6 million was for collateral on letters of credit
and $1.5 million was collateral for a bank loan.
Net cash used in operations was $26.6 million in 1997 and $47.0 million in
1998. Net cash provided by operations was $10.8 million in 1999. The increase in
net cash used by operations from 1997 to 1998 was primarily a result of an
increase in accounts receivable levels associated with net sales growth. The net
cash provided by operations in 1999 was primarily a result of increased
profitability and cash collections, partly offset by an increase in inventory
levels.
Net cash used in investing activities was $4.9 million in 1997,
$3.4 million in 1998 and $3.2 million in 1999. These expenditures included
additions to property, plant and equipment of $3.7 million in 1997,
$2.3 million in 1998 and $3.6 million in 1999.
Net cash provided by financing activities was $48.2 million in 1997,
$33.2 million in 1998 and $61.7 million in 1999. Net cash provided by financing
activities in 1997 primarily consisted of net proceeds from the sale of
preferred stock and receipts from a shareholder note, which was partially offset
by a distribution to shareholders. Net cash provided by financing activities in
1998 primarily consisted of borrowings of $25.0 million from SOFTBANK under a
short-term line of credit. Net cash provided by financing activities in 1999
primarily consisted of net proceeds from the sale of preferred stock and
borrowings under an existing line of credit, which was used in part to repay
indebtedness to SOFTBANK.
Our international sales are generally denominated in local currencies. Due
to the limitations on converting Renminbi, we are limited in our ability to
engage in currency hedging activities in China. We do not currently engage in
currency hedging activities with respect to any other currencies. Although the
impact of currency fluctuations to date has been insignificant, we cannot
guarantee that fluctuations in currency exchange rates in the future will not
have a material adverse effect on revenues from international sales and,
correspondingly, on our business, financial condition and results of operations.
We believe that the net proceeds of this offering, together with cash
generated from operations and funds available under our credit facilities, will
be sufficient to meet our capital requirements for at least the next 12 months.
Our future cash requirements will depend on many factors, including but not
limited to:
- the extent to which average sales prices for our products decline;
- the levels at which we maintain inventory;
- the timing and extent of spending to support product development;
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- sales and marketing and customer support efforts;
- the timing of introductions of new products and enhancements to existing
products; and
- market acceptance of our products.
To the extent that the funds generated by this offering, together with
existing resources and future earnings, are insufficient to fund our future
activities, we may need to raise additional funds through public or private
financing, which could include the issuance of additional equity. We are also
exploring the possibility of securing additional equity investments by third
parties in our joint ventures in China. We cannot assure you that additional
financing will be available or that, if available, such financing will be
obtainable on favorable terms.
IMPACT OF YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two-digit entries in date code fields. Beginning in the year 2000,
these date code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. Computer programs or hardware that
have date-sensitive software or embedded chips and have not been upgraded to
comply with these "year 2000" requirements may recognize a date using "00" as
the year 1900 rather that the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
GENERAL READINESS ASSESSMENT. The year 2000 problem can affect the
computers, software and other equipment that we use in our operations. As a
result, we instituted a year 2000 compliance plan, implemented by a team of our
internal information technology staff responsible for monitoring the assessment
and remediation of our year 2000 projects and reporting that status to our
executive staff. This project team has assessed the potential effect and costs
of remediating the year 2000 problem for our internal systems.
ASSESSMENT OF OUR PRODUCTS. We have assessed the ability of our products to
operate properly in the year 2000. We believe that our current products are year
2000 compliant. Since January 1, 2000, we have not experienced any problems with
our products related to the year 2000 problem. Accordingly, we do not believe
that the year 2000 issue presents a material exposure as it relates to our
products.
ASSESSMENT OF INTERNAL INFRASTRUCTURE. We believe that we have identified
most of the major computers, software applications and related equipment used in
connection with our internal operations that need to be evaluated to determine
if they must be modified, upgraded or replaced to minimize the possibility of a
material disruption to our business. Based on a review of these computer
systems, we have determined that our computer systems and applications are
compliant with the year 2000 format. Since January 1, 2000, we have not
experienced any problems with our computer systems or applications related to
the year 2000 problem.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems and other common devices, may
be affected by the year 2000 problem. We have assessed the potential effect of
the year 2000 problem on our office and facilities equipment and have determined
that no problems exist that cannot be remediated by the replacement of
relatively inexpensive equipment. Since January 1, 2000, we have not experienced
any problems with our office and facilities equipment related to the year 2000
problem.
COSTS OF REMEDIATION. Our total cost of completing required modifications,
upgrades or replacements of our internal systems was less than $100,000. Based
on the activities described above, we do not believe that the year 2000 problem
will have a material adverse effect on our business or operating results.
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SUPPLIERS. As part of our review of the year 2000 problem, we contacted
third-party suppliers of components and key contractors used in the assembly of
our products to identify and, to the extent possible, resolve issues involving
the year 2000 problem. However, we have limited or no control over the actions
of these third-party suppliers and subcontractors. Thus, while we believe that
we have resolved any significant year 2000 problems with these third parties,
there can be no assurance that these suppliers have resolved any or all year
2000 problems before the occurrence of a material disruption to the operation of
our business. Any failure on the part of these third parties to timely resolve
year 2000 problems with their systems could have a material adverse effect on
our business. Since January 1, 2000, we have not experienced any disruption in
our business or operations resulting from any year 2000 problems of any of our
third-party suppliers or contractors.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. We believe that we have
identified and resolved all year 2000 problems that could materially adversely
affect our business operations. Since January 1, 2000, we have not experienced
any year 2000 problems that have affected our business and operations. However,
we believe that it is not possible to determine with complete certainty that all
year 2000 problems affecting us have been identified or corrected. The number of
devices and systems that could be affected and the interactions among these
devices and systems are too numerous to address. In addition, no one can
accurately predict whether failures will occur as a result of the year 2000
problem or the severity, timing, duration or financial consequences of these
potential failures. As a result, we believe that the following consequences are
possible:
- a significant number of operational inconveniences and inefficiencies for
us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
- possible business disputes and claims, including claims under product
warranty, due to year 2000 problems experienced by our customers and
incorrectly attributed to our products, which we believe will be resolved
in the ordinary course of business; and
- a few serious business disputes alleging that we failed to comply with the
terms of contracts or industry standards of performance, some of which
could result in litigation or contract termination.
CONTINGENCY PLANS. We have developed contingency plans to be implemented if
our efforts to identify and correct year 2000 problems affecting our internal
systems are not effective. Depending on the systems affected, these plans
include:
- accelerated replacement of affected equipment or software;
- short- to medium-term use of backup equipment or software or other
redundant systems;
- increased work hours for our personnel or the hiring of additional
information technology staff; and
- the use of contract personnel to correct, on an accelerated basis, any
year 2000 problems that arise or to provide interim alternate solutions
for information system deficiencies.
Our implementation of any of these strategies could have a material adverse
effect on our business.
DISCLAIMER. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year 2000
compliance, and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of contract
personnel and external resources, third-party suppliers' ability to modify
proprietary software and unanticipated problems not identified in the ongoing
compliance review.
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BUSINESS
OVERVIEW
We provide communications equipment for service providers that operate
wireless and wireline networks in rapidly growing communications markets. Our
integrated suite of network access systems, optical transmission products and
subscriber terminal products allows service providers to offer efficient and
expandable voice, data and Internet access services. Because our systems are
based on key international communications standards, service providers can
easily integrate our systems into their existing networks and deploy our systems
in new broadband, Internet Protocol, or IP, and wireless network rollouts. To
date, substantially all of our sales have been to service providers in China.
Our integrated suite of products consists of Airstar, AN-2000, OMUX and
WACOS. Our Airstar network access system allows service providers to offer voice
and data services over fixed wireless and city-wide wireless mobile networks.
With over 900,000 lines installed at 12 large commercial sites, we believe that
Airstar is the most widely deployed wireless local access system in China. For
wireline networks, we provide a broadband-ready access system called AN-2000.
Over 1.2 million lines of our wireline AN-2000 access system have been deployed
in China, including deployments in the six largest regional communications
markets. Our optical multiplexing, or OMUX, products provide optical
transmission and are often bundled with our AN-2000 and Airstar systems. The
OMUX, either as a stand-alone or bundled product, is currently installed at over
5,000 locations for over 200 communications service providers. Our newest
product, WACOS, is an IP-based switch designed to deliver multiple voice and
data services using a highly distributed architecture. We expect to begin
initial shipments of WACOS in 2000. Our access and switching systems are
currently designed to address the unique performance requirements of rapidly
expanding communications infrastructure markets such as China.
INDUSTRY BACKGROUND
COMMUNICATIONS NEEDS OF DEVELOPING COUNTRIES. Demand for voice and data
communications services in developing nations continues to grow rapidly and is
driven by both public sector infrastructure investment and private sector
business growth. The governments of many developing countries have identified
the development of a communications infrastructure as a key driver of
modernization and economic growth. According to a 1998 report by the
International Telecommunication Union, developing countries are investing in
communications infrastructure at a rate of $53.1 billion annually, representing
31.9% of all communications infrastructure spending worldwide. Governments are
increasingly implementing and funding infrastructure development through
privatization of state-owned telecommunications service providers. These service
providers, in turn, are deploying advanced networks for voice and data services.
In addition, increasingly affluent businesses and residential consumers in the
highest growth regions of these countries are demanding state-of-the-art voice
and data communications solutions to interact and compete on a global basis.
GROWTH IN CHINA'S COMMUNICATIONS MARKET. China has one of the fastest
growing communications markets in the world. Growth in China's communications
equipment and services markets is being driven by the government's commitment to
developing a communications infrastructure, pent-up demand for communication
services and robust economic growth. Dataquest estimates that the market for
communications equipment and services in China will grow from $44.2 billion in
1998 to $89.9 billion in 2002, representing a compound annual growth rate of
19.4%. Dataquest forecasts that the market for access equipment in China will
grow at a compound annual rate of 32.8% from 1998 to 2002. This market
represents the fastest growing segment of the communications market in China and
the fastest growing access equipment market in the world. China's demand for
communication services is highlighted by its relatively low teledensity rate,
which is a measure of the number of lines per hundred people. According to 1998
statistics from the International Telecommunication Union, China, with a
population of 1.2 billion, has a teledensity rate of only 7.0% compared to
teledensity rates in
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Brazil of 12.1%, in Western Europe of 53.1%, in Hong Kong of 55.8% and in the
United States of 66.1%. While growth in the China communications market is
currently driven predominantly by voice services, the increasing demand for data
services presents a growing opportunity. The Strategis Group and BDA China
Limited estimate that Internet subscribers in China will grow from 2.1 million
in 1998 to 40.4 million in 2003, representing a compound annual growth rate of
80.6%. China's ability to invest heavily in its communications infrastructure is
fueled by the country's strong economic activity, primarily in its coastal
provinces which represented 41.1% of China's gross domestic product of
$961 billion in 1998. In addition, the World Bank estimates China's GDP will
grow at a compound annual rate of 7% from 1999 to 2003.
STRUCTURE OF CHINA'S TELECOMMUNICATIONS INDUSTRY. Historically, the China
Telecom system was the sole provider of public telecommunications services in
China. In 1993, the State Council, in an effort to promote competition, began
issuing licenses to new telecommunications operators including China United
Telecommunications Corporation, or Unicom, a provider of mobile communication
services, and Jitong Communications Co., Ltd., a provider of data communications
and Internet access services. In February 1999, the State Council approved a
restructuring plan for the China Telecom system. The plan separated the
telecommunications operations of the China Telecom system along four business
lines: fixed line, mobile, paging and satellite communications services. Under
the new structure, a new state-owned company, China Mobile, holds and operates
the nationwide mobile communications assets. China Mobile also controls China
Telecom (Hong Kong) Limited, a public company, that operates cellular services
in six of China's provinces. A new state-owned company, China Satellite, holds
and operates the satellite assets. The paging operations have been merged into
Unicom. China Telecom holds and operates the fixed line telephone and data
communications assets. China Telecom operates through a network of approximately
2,400 local level telephone companies called Posts and Telecommunications
Bureaus, or PTBs. PTBs are responsible for purchasing, installing and operating
the voice and data communications services in their local markets.
GOVERNMENT REGULATION OF THE TELECOMMUNICATIONS INDUSTRY. The China
telecommunications industry is regulated at the national, provincial and local
levels. At the national level, the Ministry of Information Industry, or MII,
regulates the industry. The MII was established in March 1998 to assume the
regulatory, administrative and other governmental duties of the former Ministry
of Posts and Telecommunications. The MII has broad authority to regulate all
aspects of the telecommunications and information technology industries in China
including managing spectrum bandwidths, setting network equipment specifications
and standards, regulating the Internet and drafting laws and regulations related
to the electronics and telecommunications industries. We believe that the MII's
general telecommunications equipment strategy is to ensure that China's
infrastructure is based on advanced open architectures that are expandable, cost
efficient and quickly deployed. The MII also oversees the 33 Post and
Telecommunications Administrations, or PTAs, that have regulatory responsibility
over the telecommunications industry in their respective provinces. In China
today, each PTA oversees all local PTBs in its region and approves a subset of
telecommunications products that meet MII standards from which PTBs can then
select the specific products they purchase, install and operate. Although
historically the MII has shared regulation and operation of China's
telecommunications industry with the China Telecom system, as part of the
Chinese government's industry restructuring, the regulatory functions of the MII
and the PTAs are in the process of being separated from the operational
functions of the state-owned PTBs under their control. Following this
separation, it is expected that the MII will act exclusively as the industry
regulator and that the local PTBs will act exclusively as operators. Given the
multi-level regulatory environment, equipment providers in China must generally
market intensively to all three levels of the communications industry.
COMMUNICATIONS NETWORK ARCHITECTURE IN CHINA. The development of China's
communications infrastructure involves not only installing a nationwide network
of high-bandwidth fiber-optic backbones, but also locally connecting each
business and residential subscriber to these backbones. The systems of wireline
or wireless connections that link local subscribers to these backbone networks
are
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often referred to as the "last mile" or the local access network. Because of the
high growth rate, geographic dispersion and diverse communications needs of
residences and businesses in China, the direct wiring of subscribers to the
backbone network using traditional copper connections is a lengthy, costly and
inefficient process. Direct wiring of subscribers to traditional telephone
switches often locks those subscribers into a limited set of communications
services and limits expandability and migration to other services. In contrast,
service providers in China require communications equipment that allows them to
rollout different services quickly, efficiently and cost-effectively. Given the
relative absence of a legacy communications infrastructure, these service
providers are less constrained and thus often deploy the latest, "best-of-breed"
systems with the flexibility to handle future services such as data. This is
true in both the local access networks and the backbone networks.
A new trend in access network design is the use of remote nodes that push
network intelligence closer to a group of subscribers, thus making it easier and
more efficient to deliver multiple services from the backbone network to
subscribers at the local level. These nodes use a standard digital protocol
known as V5.2 to communicate with backbone networks. This open protocol allows
equipment from various vendors to be interconnected seamlessly and allows
service providers to deliver a variety of services from multiple backbones over
the same access network thus reducing costs. By deploying small, intelligent
nodes close to subscribers, service providers can deploy fewer central office
switches, each covering larger areas, optimizing manageability and lowering
per-subscriber cost. Because of these benefits, service providers in China are
deploying open architecture switches capable of interacting with access networks
at most new installations.
Another new trend can be seen in the backbone network, where an increasing
portion of traffic travels across IP-based systems instead of traditional voice
systems using circuit switches. IP-based architectures differ fundamentally from
circuit-switched architectures in the way information travels from point to
point through networks. IP-based technology does not require a dedicated
connection or circuit between the callers. Instead, the caller's voice is
divided into numerous small packages of information called packets. These
packets are sent over the network intermixed with other packets of data, such as
fax, email or Internet content, to be reassembled at the destination of the
call. In contrast, traditional telephone technology requires that a circuit
between the callers be established and maintained during the length of the call,
and voice and data cannot easily be transmitted simultaneously over this
circuit. This is inefficient because much of a phone call is silence which
effectively wastes capacity on the circuit. This inefficiency has caused service
providers to seek new switches based on IP-based technology.
NEEDS OF CHINA'S COMMUNICATIONS SERVICE PROVIDERS. Service providers in
China often require network solutions with a suite of integrated products that
address all of their access needs, including wireline and wireless, voice and
data. These comprehensive product offerings enable service providers to quickly,
and with minimal incremental investment, address the changing demands of their
subscribers for expanded or more advanced services over time. Service providers
also require solutions that are based on widely-adopted international
communications standards to ease installation and avoid duplicate buildout of
separate networks. In addition, given the rapid growth in China's emerging
communications market, network solutions must be efficient and expandable so
that the same architecture can provide an affordable entry level solution for as
few as hundreds of subscribers yet economically extend to hundreds of thousands
of subscribers over time. Additionally, service providers in China will often
require the vendors to continually develop products to meet evolving market
needs and to have a local service and support presence.
Although markets such as China represent substantial opportunities for
communications equipment vendors, to date, few companies have delivered the
combination of leading technology, market specific products and a local presence
that service providers require.
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THE UTSTARCOM SOLUTION
Our wireless and wireline access and switching systems are designed to
deliver the following key benefits to service providers:
INTEGRATED, COMPREHENSIVE PRODUCT OFFERING. By offering communications
systems that link the backbone network, the access network and subscribers'
premises, we supply service providers with solutions that enable them to quickly
deploy services to subscribers. For the implementation of completely new
networks, which is typical in China, service providers can choose to deploy our
complete suite of product offerings. By contrast, for locations where some
network infrastructure is already in place, service providers can deploy a
subset of our products and integrate them into their existing networks.
Furthermore, as subscriber needs evolve from voice to data, we offer solutions
to meet these needs. All of our products can be managed from a single integrated
management station through the use of our Netman software.
FLEXIBILITY FOR VOICE AND DATA SERVICES. We have designed our systems to
offer a high degree of flexibility in terms of the number of subscribers and
types of traffic delivered to those subscribers. Our equipment can be flexibly
configured to offer a variety of services in response to subscriber demand. This
flexibility is particularly important in China, as the communications services
market is undergoing rapid change and growth. As Internet usage achieves greater
penetration in China, service providers will desire systems which are designed
to deliver high-speed data capability. Our access systems allow service
providers to quickly and cost-effectively implement upgrades for new services,
including high-speed data capability, compared to alternative solutions which
may require the purchase of an entirely new system to provide these services.
LEADING PRICE AND PERFORMANCE SOLUTION. All of our products are based on a
modular design, using cost effective off-the-shelf components wherever possible
and realizing most of the products' added value through our software. By
delivering a modular system, we allow service providers to purchase only the
functionality and capacity needed and to purchase additional functionality and
capacity over time as subscriber demand warrants. In response to large pent-up
demand, most service providers in China are currently delivering voice services.
However, we expect demand for data services to increase dramatically in China.
To meet this growing demand, service providers will be able to deliver data
traffic with modular upgrades to our systems rather than through large-scale
purchases of replacement equipment. Furthermore, as demand for communications
services in China grows, our expandable systems will allow service providers to
grow from a small initial subscriber base to hundreds of thousands of
subscribers in a cost-effective and efficient manner.
ARCHITECTURE BASED ON WIDELY ADOPTED COMMUNICATION STANDARDS. Our products
are designed to comply with widely adopted international open communication
standards for multi-vendor interoperability, which are consistent with standards
established by the MII. For example, we were one of the first companies to
deliver an access system to the China market that incorporated an open
interface, known as the V5.2 protocol, to central office switches. The open
interface is a technology that allows service providers to connect our products
to equipment from multiple vendors and thus integrate multiple voice and data
traffic types within one system. In this manner an operator can deploy our
system for voice services first, but offer mobile or Internet services at a
later time as the market for these services develops. Furthermore, our
compliance with open standards lowers costs by permitting service providers to
shorten evaluation times and ease integration of our products with other systems
in the service providers' networks.
LOCAL PRESENCE. We have established a strong local presence in China that
allows us to be responsive to the needs of service providers and their
subscribers. We manufacture our products primarily at two facilities located in
the cities of Huizhou in Guangdong province and Hangzhou in Zhejiang province
that are owned by joint ventures between us and affiliates of the corresponding
PTAs. By using local facilities in China, we have helped create new jobs within
the provinces and have
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strengthened our relationships with the PTAs in some of China's most modernized
and rapidly growing provinces. We also maintain nine sales and customer support
sites in China that allow us to deploy a customer support representative onsite
anywhere in China within 24 hours. Our sales force develops direct relationships
with decision makers at both the provincial and the local levels through
pre-sales design and consulting services, as well as performing more traditional
product sales functions. Additionally, through our relationships at the
national, provincial and local levels we receive a continuous flow of
information on market changes and insight into unique service provider needs and
related opportunities.
STRATEGY
Our objective is to be a leading provider of broadband, IP and wireless
network equipment to high growth communications markets. The principal elements
of our strategy are as follows:
LEVERAGE OUR INSTALLED BASE AS DEMAND FOR BROADBAND AND HIGH-SPEED DATA
GROWS IN CHINA. We believe we are a leading supplier of both wireline and
wireless access systems in China. Communications service providers currently
face a large subscriber demand for voice services. Accordingly, our systems are
being used primarily for voice services. However, given the increasing demand
for Internet and data access in China, we believe we are well positioned to
leverage our installed base of systems and service provider relationships to
deliver additional data capabilities. We intend to capitalize on this
opportunity by supplying systems that enable service providers to offer
broadband services over copper connections through digitial subscriber line, or
xDSL, technologies and over fiber optic connections. We also intend to enable
high-speed data services over 64 Kilobits per second, or Kbps, wireless links.
DEVELOP PRODUCTS AND TECHNOLOGIES FOR MARKET-DRIVEN SOLUTIONS; PENETRATE
EMERGING IP-BASED SWITCHING MARKET. By working closely with multiple service
providers over the last five years, we have gained unique insight into future
service provider requirements. For example, we developed our Personal Access
System, or PAS, wireless access system in response to a market need for a
low-cost, community-based mobile service. We believe PAS has been deployed in
more cities in China than any other city-wide wireless mobile service. We
believe increases in Internet usage, particularly voice over IP traffic, have
resulted in a market need for a next-generation switching platform optimized for
IP traffic. Accordingly, we have made a substantial investment in developing our
WACOS IP-based switching system which we expect to ship in 2000. WACOS is
designed to integrate with our existing products and to scale over time as
demand for new services grows. We believe that WACOS can deliver value to
service providers, both as a stand-alone system and in connection with
expansions to our Airstar PAS system installations. We have a history of
developing unique systems, such as PAS and WACOS, and we intend to continue to
provide market-driven solutions to our customers.
EXPAND PRESENCE IN CHINA. We intend to further capitalize on China's large
population, low teledensity and increasing demand for communications services.
Since our inception, we have focused our engineering, product development and
sales and marketing efforts primarily on communications equipment for China.
This focus has enabled us to be a leader in this market by quickly identifying
the needs of service providers in China and rapidly developing market-specific
products to address those needs. We intend to expand our presence in this market
by:
- increasing the number of sales and support staff and offices within China;
- developing new products to address the demands of our existing and
emerging customer base;
- migrating our installed base from voice to data as market demand warrants;
and
- increasing our local research and development and manufacturing
capabilities.
LEVERAGE SUCCESS IN CHINA TO ADDRESS OTHER HIGH-GROWTH COMMUNICATIONS
MARKETS. Since our products comply with many international standard protocols
and are attractive and readily adaptable to
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the requirements of service providers in many markets outside of China, we
intend to leverage our success in China to penetrate other high-growth
communications markets. We anticipate supplying these markets through original
equipment manufacturer, or OEM, sales relationships or through the development
of local sales agency and distributor relationships within the specific
communications market. We are initiating this strategy with NEC Corporation,
which offers our AN-2000 as an OEM through its worldwide sales organization. We
have also implemented an OEM strategy in Brazil, Hong Kong, the Phillipines and
Russia. We have conducted field trials of our products in Columbia, Hong Kong,
India, the Phillipines, Russia and Vietnam. Additionally, we have applied for
regulatory approval of our products in Brazil and Russia, and will seek
additional regulatory approvals as needed.
PRODUCTS
Our integrated suite of network access, optical multiplexing, subscriber
terminal and IP-based switching products gives service providers in high-growth
markets an efficient means to offer voice and data services. Our product lines
include Airstar, AN-2000, OMUX, Netman and WACOS.
AIRSTAR
Airstar is a wireless access system that enables voice and data access over
fixed and city-wide wireless links. The following diagram shows how our Airstar
system is deployed.
[Diagram depicting our Airstar system.]
A typical Airstar installation consists of several remote terminals based on
our AN-2000 architecture, each coupled through one or more digital radio port
controllers to many small indoor and outdoor radio ports, and various subscriber
terminals. The remote terminals connect to the central office switch to provide
local and long distance telephone service over a standard V5.2 interface or an
analog 2-wire interface for switches without V5.2 capability. This provides for
an open interface to the central office switch which benefits service providers
by shifting network intelligence to the access network, thus reducing reliance
on costly and proprietary distributed central office switch architectures. The
remote terminals pass traffic through the radio port controllers to the radio
ports, which each serve multiple subscribers. From the radio port, the signal is
passed to a remote subscriber terminal or handset. The air traffic controller
provides wireless traffic-channel and mobility management throughout the system.
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Airstar enables rapid and reliable deployment of communications services to
subscriber communities where the installation of a wireline alternative may be
uneconomical. Airstar can also be used in large indoor spaces such as office
buildings, airports and shopping malls. Airstar is optimized for high-capacity
urban or suburban traffic densities and can deliver wireline equivalent voice
quality, including voice-band modem and fax support, with the advantages of
simple planning for radio siting, immunity to inter-radio interference, low
power consumption and expandability. Our Airstar system operates in China in the
1900-1915 MHz band allocated by the Radio Regulatory Bureau of the MII.
Service providers have installed our Airstar system at 12 large commercial
sites in China representing a total installed base of over 900,000 lines. We
currently offer the Airstar for two different applications: Personal Access
System, or PAS, and wireless local loop, or WLL.
PERSONAL ACCESS SYSTEM
PAS provides city-wide wireless mobile phone service for a community of
up to several hundred thousand subscribers at traffic densities of upwards
of 2,000 subscribers per square kilometer. PAS targets first-time
subscribers, second line subscribers and small businesses. PAS provides
distinct benefits to both service providers and subscribers. Service
providers can quickly illuminate entire communities with strategically
located low-power radios, creating the potential for new revenue streams
from city-wide mobile service. Additionally, compared to traditional
cellular systems, PAS mobility functions are completely integrated into the
access network architecture and thus require no central office switch
modification or incremental mobile switching hardware. By integrating PAS
into the existing access network, service providers can take advantage of
unused central office switching capacity to carry incremental wireless
traffic loads. This integration also allows a service provider to offer
existing switch-based services, such as caller ID, call forwarding, and
voice mail, to its wireless subscribers. Subscribers benefit from rapid
service activation and enjoy the mobility of small handsets weighing less
than three ounces with over 800 hours of standby battery capacity and up to
6.5 hours of talk time. We purchase a variety of handsets manufactured by
multiple Japanese vendors under the UTStarcom label.
With the PAS system, a service provider does not need to modify its
existing billing system. However, PAS does provide separate call detail
records that the service provider can use for specific mobility-related
billing policies such as premium billing for roaming calls or wireless data
calls, or for pre-paid PAS services.
An additional benefit of PAS is its support of wireless data
transmission of 32Kbps, upgradeable to 64Kbps. This enables wireless
Internet access at speeds faster than those possible with many wireline
dial-up modems. We believe PAS allows faster Internet access than other
wireless technologies currently commercially deployed in China.
WIRELESS LOCAL LOOP
WLL provides for fixed, as opposed to mobile, wireless network access.
In a WLL deployment, small and inexpensive radios located strategically
throughout the service area provide a wireless digital link to the
subscriber's home or business. We believe this offers both a cost and
time-to-market advantage over some traditional copper deployments. A fixed
subscriber unit located in the subscriber's home or business converts the
wireless signals to a standard analog telephone interface that can be
distributed through conventional inside-building wiring.
AN-2000
Our AN-2000 is a digital wireline network access system that delivers a
variety of services to subscribers over copper, fiber or microwave radio links.
These services include:
- traditional analog voice;
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- dialed voice and data in digital format over integrated services digital
network, or ISDN, lines;
- analog leased lines; and
- business data services over integrated digital subscriber line, or IDSL,
and high-data-rate digital subscriber line, or HDSL.
Service providers have deployed over 1.2 million AN-2000 subscriber lines.
In response to a developing market need, in the second half of 2000 the AN-2000
will be enhanced to enable high-performance, always-on Internet access for
residential and business subscribers using advanced asymmetric digital
subscriber line, or ADSL, technology.
The following diagram depicts a typical AN-2000 deployment.
[Diagram depicting our AN-2000 system.]
The AN-2000 system consists of both central office terminals and remote
terminals which are linked together to form a digital access network using
copper, fiber or microwave radio. The AN-2000 connects to the access ring
through either our OMUX product or a high performance robust transmission
technology, known as synchronous digital hierarchy, or SDH. A central office
AN-2000, or CT, connects the access ring to Internet access, local and long
distance and dedicated data services. A remote AN-2000, or RT, connects to the
access ring and offers voice and data services to the subscribers. A regional
access network has the potential to contain hundreds of AN-2000s servicing
hundreds of thousands of subscribers.
The AN-2000 provides several important features which together form a
cost-effective access platform for the delivery of voice and data services. We
were among the earliest to offer a V5.2 switch interface to the China market.
This capability benefits service providers by shifting network intelligence out
into the access network, reducing reliance on costly and proprietary distributed
central office switch architectures. In addition, we designed the AN-2000 to
provide high capacity, expandability and redundancy, offering reliable operation
and economical service management. For service providers
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whose switches are not yet V5.2 compliant, we provide a migration capability
whereby the AN-2000 terminates analog and ISDN ports in the central office,
effectively creating a V5.2 interface to the remote AN-2000s. We believe that
the AN-2000 is currently the leading system available that can convert existing
analog central office interfaces to V5.2.
Our OMUX product, which converts data transmission between electrical and
optical formats, is often bundled with our Airstar and AN-2000 systems.
Together, these products can comprise a complete access system. In addition to
bundled sales, the OMUX is used by cellular service providers to connect base
station controllers to base stations and by other enterprises for private data
networks and data collection applications.
The primary advantage of the OMUX is its ability to offer highly competitive
price and performance characteristics to service providers, particularly in low
capacity implementations. The OMUX employs our SPDH technology, which provides
the reliability of higher priced synchronous digital hierarchy, or SDH, networks
for lower capacity access networks and enables highly reliable operations. The
OMUX is available in varying capacities depending on network configuration and
service provider requirements. To date, service providers have deployed the OMUX
at over 5,000 locations, both as a stand-alone product and bundled with Airstar
and AN-2000.
NETMAN
Our Netman network management system, which is integrated with our network
access products, provides for centralized management of our Airstar, AN-2000 and
OMUX products. Netman provides the ability to manage individual network
components and to report the status of the network as a whole. Netman runs on a
personal computer using a Microsoft Windows-based graphical user interface
software. With Netman, a service provider can add and drop subscribers
independently, saving configuration and installation time. Netman can
continuously monitor all access network elements, providing for real-time
reporting and alarms in addition to performance management and optimization and
distribution of software updates. The expandability of Netman allows a single
system to serve an entire distributed network of up to several thousand remote
nodes under normal network conditions. Netman can also be installed on a
portable personal computer to be used as the local on-site maintenance terminal
wherever remote nodes are installed.
WACOS
Our WACOS system is an IP-based switching system which is deployed as a
layered network architecture designed to support end-to-end communications and
data services. The WACOS system supports communication between legacy telephone
equipment and next-generation IP devices. In addition, operational support
system, or OSS, software provided with WACOS enables management of WACOS
equipment, billing for WACOS services and customer care for WACOS subscribers.
The use of IP technology to transmit voice and data over a single network
enables the use of lower cost equipment and improves bandwidth efficiency for
service providers. This results in a wider variety of communications
applications at lower per subscriber cost. The WACOS family includes:
- PSTN Gateway devices which support connection to the public switched
telephone network, or PSTN, through standard interfaces;
- Wireless Gateways which support expansion of PAS networks; and
- OSS Server Cluster which supports management, billing and customer care
functions.
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The following diagram depicts our WACOS system.
[Diagram depicting our WACOS system.]
MARKETS AND CUSTOMERS
Market opportunities within China's 31 provinces vary greatly by region,
with the more densely populated coastal provinces experiencing the strongest
economic development. While we provide our communications equipment to PTBs in a
wide variety of provinces, to date, we have focused on marketing and selling our
products to PTBs in Guangdong, Zhejiang, Fujian, Shandong and Jiangsu provinces
and the municipality of Shanghai. The PRC State Statistical Bureau estimates
that in 1997, these six regions represented 26.3% of China's population and
41.1% of China's gross domestic product. These regions also represent a
disproportionately high percentage of China's wireline and wireless subscribers
and influence adoption of technology among other regions. While each of the PTBs
is part of the China Telecom system and subject to its ultimate control,
equipment purchasing decisions are generally made at the individual PTB level.
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The following table is a list of our customers in China who have each
purchased more than $200,000 of our products during 1999.
BEIJING MUNICIPALITY
Beijing PTA
FUJIAN PROVINCE
Putian PTB
Quanzhou PTB
GUANGDONG PROVINCE
Foshan PTB
Guangzhou PTB
Huizhou PTB
Shenda Tel. Co.
Shenzen Mobile Bureau
Shenzhen PTB
Yunfu PTB
Zhaoqing PTB
GUANGXI PROVINCE
Liuzhou PTB
HEBEI PROVINCE
Baoding PTB
HEILONGJIANG PROVINCE
Haerbin PTB
HUBEI PROVINCE
Wuhan Unicom
HUNAN PROVINCE
Chenzou PTB
JIANGSU PROVINCE
Taizhou PTB
Xuzhou PTB
LIAONING PROVINCE
Shenyang Unicom
NINGXIA PROVINCE
Pingluo PTB
Shizhuishan PTB
Wuzhong City PTB
SHAANXI PROVINCE
Xian PTB
SHANDONG PROVINCE
Dongying PTB
Jinan PTB
Jining PTB
Qingdao PTB
Qingdao Unicom
Zhoucheng PTB
SHANGHAI MUNICIPALITY
Songjiang PTB
SICHUAN PROVINCE
Chongqing PTB
TIANJIN MUNICIPALITY
Dezun Tel. & Comm.
Material Co.
YUNNAN PROVINCE
Kunming PTB
ZHEJIANG PROVINCE
Changnan PTB
Hangzhou PTB
Ningbo PTB
Quzhou PTB
Ruian PTB
Shangyu PTB
Shaoxing PTB
Shengzhou PTB
Wenchen PTB
Xiaoshan PTB
Xiaoshan Tel. & Comm.
Material Co.
Xinchang PTB
Yuhang PTB
Zhenjiang Unicom
Zhuji PTB
We also sell our network access equipment to service providers in high
growth communications markets outside of China. Markets outside of China
accounted for less than 1.0% of our total sales in 1999.
As of December 31, 1999, our backlog totalled $71.8 million, compared to
approximately $3.0 million as of December 31, 1998. We expect to fill all of our
current backlog orders during the 2000 fiscal year.
SALES, MARKETING AND CUSTOMER SUPPORT
We pursue a direct sales and marketing strategy in China, targeting sales to
individual PTBs and to manufacturers or equipment distributors with closely
associated customers. We maintain sales and customer support sites in Beijing,
Shanghai, Guangzhou, Shenyang, Wuhan, Xian, Hangzhou, Jinan and Chengdu. We also
sell through relationships with regional government-owned telecommunications
manufacturing companies, which act as agents in the sale of our products to
PTBs.
We believe our customer support services allow us to distinguish ourselves
from competing equipment providers and build customer loyalty. The customer
service operation in Hangzhou is co-located with the manufacturing joint venture
and serves as both a technical resource and liaison to our product development
organization. In China, customer service technicians are distributed in the
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regional sales and customer support sites to provide a local presence. We
provide additional support on a 24-hour, 365-day basis from the customer support
center in Hangzhou in the form of field dispatch personnel, who also provide
training on installation, operation and maintenance of equipment. As of
December 31, 1999, we employed 405 people in sales, marketing and customer
support.
Our sales efforts in markets outside of China combine direct sales, original
equipment manufacturer, or OEM, sales and manufacturing licensing. Our OEM sales
focus on the AN-2000. Our most significant customers outside of China are NEC,
which will sell the AN-2000 under a private label, and Kyocera Corporation,
which incorporated the AN-2000 into its wireless local loop product. Itochu
Corporation and Kanematsu Corporation have also helped us sell our products
outside of China.
TECHNOLOGY
Our research and development efforts have led to the creation of key
technologies that have contributed to the success of our products in the
marketplace.
V5.2 PROTOCOL AND DYNAMIC SWITCHING. The AN-2000 and Airstar intelligent
call processor and 2,048 timeslot interchange allow these systems to fully
exploit the power of the V5.2 interface protocol between the central office
switch and access node, which requests voice channel allocation from the switch
on a call-by-call basis. Since most subscriber telephones are idle most of the
time, a small number of channels can be shared by many subscribers, saving money
and increasing reliability. The AN-2000 and Airstar can economically split a
large bundle of V5.2 voice channels from the central office switch into many
smaller, more economical bundles to be transmitted to the remote access nodes
that may contain fewer subscribers than the switch is optimized for. This
capability increases switch utilization, reduces the number and expense of V5.2
interfaces provided by the central office switch and economically allows the
deployment of many small remote access nodes. Our V5.2 interface product is
extensively deployed throughout China and is interoperable with the products of
major switch vendors.
SDH OPTICAL TRANSMISSION. Service providers have widely chosen to adopt and
deploy fiber optic transmission systems conforming to the synchronous digital
hierarchy, or SDH, standard promulgated by the International Telecommunications
Union. The SDH standard is the international equivalent of the North American
SONET standard. The SDH standards for first tier capacity allow up to 1,953
information channels to be transmitted over optical fiber between nodes that can
be structured in a redundant ring configuration. If the fiber in the ring is cut
accidentally, the SDH system can recover its operation immediately and maintain
service while the cut is repaired. The AN-2000 fully integrates the SDH fiber
with self-healing ring capability into a single plug-in module in contrast to
earlier generation equipment that required a separate external SDH multiplexer.
This configuration saves expense and provides a simple unified management
structure for the SDH and access node functions.
AIRSTAR MOBILITY MANAGEMENT. We have developed a specially configured
AN-2000 node, called the air traffic controller, or ATC, in the PAS to provide
the function of wireless traffic-channel and mobility management. Airstar
subscribers are assigned wireless traffic channels at the time they become
active on a call and the precise channel may be different from call to call or,
in the case of PAS users, may change during a call, because of variable channel
availability and also movement of the subscriber. The ATC collects all of these
dynamically assigned channels and re-maps them to fixed channels on the access
network interface, providing wireless benefits without alteration of the access
network. Service providers can mix and match wireline and wireless service
delivery in a seamless manner without regard for access network compatibility or
special provisioning. Airstar PAS can manage hundreds of thousands of air
traffic channels by arranging a network of ATCs into a two-stage configuration
with regional nodes handling local traffic and a network of central nodes
handling traffic between regional nodes.
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WACOS IP-BASED SWITCHING AND SERVICE DELIVERY PLATFORM. The WACOS system is
deployed as a layered network architecture designed to support end-to-end
communications and data services. This type of architecture is rapidly gaining
worldwide acceptance with a large number of vendors and service providers
cooperating in the creation of new standards for IP-based networks. In the WACOS
implementation, unlike current telephone networks, service providers and
subscribers are able to quickly and easily deploy new services and features
based on these emerging standard protocols.
WACOS is a complete telecommunications system that offers technology at
several levels:
- TRADITIONAL PHONES AND IP APPLIANCES. Innovative protocols used by WACOS
provide support for traditional telephone service and provide the
foundation for next-generation IP-based appliances such as IP-enabled cell
phones and personal digital assistants.
- IP ACCESS NETWORK. The WACOS gateway converts between legacy telephony
protocols such as SS7 and V5.2 and modern IP-based services. The gateway
provides an open platform for the development of enhanced services, such
as unified messaging, by us or third party developers.
- BACKBONE NETWORK. WACOS relies on industry standard IP-based network
architecture. Initially based on widely deployed IP over asynchronous
transfer mode, or ATM, technology, WACOS is capable of economical upgrade
to emerging packet over SONET and gigabit ethernet standards.
- OPERATIONAL SUPPORT SYSTEM. The operational support system, or OSS, is
implemented using industry-standard computing platforms based on
Windows NT or Unix, depending on customer preference. The OSS allows
service providers to flexibly tailor billing policies and allows
subscriber self-provisioning through on-line account access. Web-based
graphic user interfaces provide precise management information to support
staff with minimal training requirements, reducing operational costs.
RESEARCH AND DEVELOPMENT
We believe that continued and timely development and introduction of new and
enhanced products are essential if we are to maintain our competitive position.
While we use competitive analyses and technology trends as factors in our
product development plans, the primary input for new products and product
enhancements comes from soliciting and analyzing information about service
providers' needs. Our MII, PTA and PTB relationships and full-service post-sale
customer support provide our research and development organization with insight
into trends and developments in the marketplace. The insights provided from
these relationships allowed us to develop unique, market-driven products such as
PAS and WACOS. Current projects include the development of:
- high speed IP-based switching technologies;
- locator functions for Airstar PAS;
- broadband ADSL delivery for AN-2000 and the WACOS network;
- increased wireless data rates for Airstar PAS;
- significantly enhanced network management capabilities; and
- an OMUX product using the SDH architecture.
We maintain a strong relationship between our U.S. and China research
centers. Projects are typically designed and developed in the United States by
one team and tested in China by another, allowing us to conduct research and
development activities 24 hours a day. We rotate engineers between the U.S. and
China research centers to further integrate our research and development
operations. We have been able to cost-effectively hire highly skilled technical
employees from a large
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pool of qualified candidates in China. Our research and development efforts are
conducted at the following facilities:
- The New Jersey Technical Center, with 98 engineers as of December 31,
1999, provides technical leadership on PAS and AN-2000 developments,
including hardware and software development, system engineering and system
architecture, as well as project management and engineering methodology.
- The Hangzhou Technical Center, with 64 engineers as of December 31, 1999,
takes leadership on most transmission system developments, and also
participates in AN-2000 and PAS projects, performing software, hardware
and mechanical design. It also provides manufacturing engineering support,
high-level field support and takes the lead in operations systems
development for the China market.
- The Alameda Technical Center, with 34 engineers as of December 31, 1999,
focuses primarily on IP gateways and distributed switching for wireless
communications.
- The Hefei Technical Center, with 25 engineers as of December 31, 1999,
focuses on the development of wireless technology. The Hefei facility is
located at the University of Science and Technology of China.
In the past we have made, and expect to continue to make, significant
investments in research and development. Our research and development
expenditures totaled $8.9 million in 1997, $14.7 million in 1998 and
$17.4 million in 1999.
MANUFACTURING, ASSEMBLY AND TESTING
We manufacture or engage in the final assembly and testing of our Airstar
systems, AN-2000 and OMUX products at the facilities of our two manufacturing
joint ventures in China. In Zhejiang province, we have a joint venture with
Zhejiang Telecommunication Equipment Factory. In Guangdong province, we have a
joint venture with Guangdong Nanfang Communications Group Corporation. These
manufacturing operations consist of circuit board assembly, final system
assembly, software installation and testing. We assemble circuit boards
primarily using surface mount technology. Assembled boards are individually
tested prior to final assembly and tested again at the system level prior to
system shipment. We use internally developed functional and parametric tests for
quality management and process control and have developed an internal system to
track quality statistics at a serial number level.
Both the Guangdong and the Zhejiang manufacturing facilities are ISO 9002
certified. ISO 9002 certification requires that the certified entity establish,
maintain and follow an auditable quality process including documentation,
requirements, development, training, testing and continuous improvement and
which is periodically audited by an independent outside auditor.
We have contracted with Matsushita Electric Industrial Co., Ltd., which
distributes products under the Panasonic brand, to manufacture the Airstar
wireless infrastructure components and handsets for distribution under the
UTStarcom label. Other suppliers include Kyocera Corporation, which provides
handsets under the UTStarcom label, and Sharp Corporation, which provides
handsets and repeaters under the UTStarcom label. Our AN-2000 product line
integrates some third party products for subscriber premises equipment and
testing. In order to gain more control over the quality of the products, further
reduce the cost and ease restrictions on China's import license quotas, we have
started and will continue local assembly of the wireless infrastructure
components and handsets in China. We anticipate that we will enter into
arrangements with third parties to manufacture handsets in China. We also intend
to develop the capacity to manufacture our own handsets.
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STRATEGIC RELATIONSHIPS
We benefit from strategic relationships with other major companies that act
as our suppliers, investors and customers. SOFTBANK CORP. is a major investor in
our company and holds two seats on our Board of Directors. Prior to this
offering, we intend to invest in an investment fund established by SOFTBANK
focused on investments in Internet companies in China. Intel Pacific, Inc., a
wholly owned subsidiary of Intel Corporation, is another one of our investors.
Matsushita Communication Industrial Co., Ltd. is a major supplier of radio and
terminal equipment for the Airstar system, and is also an investor and has
funded custom developments related to the WACOS system. Mitsubishi Electric
Corporation has also invested in our company. Affiliates of the Guangdong and
Zhejiang PTAs are our manufacturing joint venture partners in China. NEC
Corporation is marketing our AN-2000 system under a private label worldwide.
COMPETITION
We face intense competition in our target markets and expect competition to
increase. Our principal competitors in our various product lines include:
- AIRSTAR SYSTEM: Alcatel Alsthom CGE, S.A.; Ericsson LM Telephone Co.;
Huawei Technology Co., Ltd.; Lucent Technologies, Inc.; Motorola, Inc.;
NEC Corporation; Siemens AG; and Zhongxing Telecommunications Equipment.
- AN-2000 AND OMUX: Advanced Fibre Communications, Inc.; Alcatel; Bosch
Telecom GmbH; ECI Telecom Ltd.; Ericsson; Fujitsu Limited; Huawei; Lucent;
NEC; Nokia Corporation; Shanghai Bell Alcatel Mobile Communication;
Siemens; and Zhongxing.
- WACOS SYSTEM: Alcatel; Cisco Systems, Inc.; Clarent Corporation; Ericsson;
Huawei; Lucent; Motorola; Nokia; Nortel Networks Corporation; Nuera
Communications, Inc.; Siemens; Tachion Networks, Inc.; and Vienna Systems
Corp.
We are increasingly facing competition from domestic companies in China. We
believe that our strongest competition in the future may come from these
companies, many of which operate under lower cost structures and more favorable
governmental policies and have much larger sales forces than we do. Furthermore,
other companies not presently offering competing products may also enter our
target markets. Many of our competitors have significantly greater financial,
technical, product development, sales, marketing and other resources than we do.
As a result, our competitors may be able to respond more quickly to new or
emerging technologies and changes in service provider requirements. Our
competitors may also be able to devote greater resources than we can to the
development, promotion and sale of new products. These competitors may also be
able to offer significant financing arrangements to service providers, in some
cases facilitated by government policies, which is a competitive advantage in
selling systems to service providers with limited financial and currency
resources. Increased competition is likely to result in price reductions,
reduced gross profit as a percentage of net sales and loss of market share, any
one of which could materially harm our business, financial condition and results
of operations.
Moreover, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties,
including PTAs, PTBs and other local organizations, to increase the ability of
their products to address the needs of prospective customers in our target
markets. Accordingly, alliances among competitors or between competitors and
third parties may emerge and rapidly acquire significant market share. To remain
competitive, we believe that we must continue to partner with PTAs and other
local organizations, maintain a high level of investment in research and
development and in sales and marketing, and manufacture and deliver products to
service providers on a timely basis and without significant defects. If we fail
to meet any of these objectives, our business, financial condition and results
of operations could be harmed.
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The introduction of inexpensive wireless telephone service or other
competitive services in China may also have an adverse impact on sales of our
Airstar system in China. We cannot assure you that we will be able to compete
successfully against current or future competitors or that competitive pressures
in the future will not materially adversely effect our business, financial
condition and results of operations.
We believe that the principal competitive factors affecting the market for
our network access products include:
- total initial cost of solution;
- short delivery and installation intervals;
- design and installation support;
- ease of integration with the backbone network;
- flexibility in supporting multiple interfaces and services
- life-cycle cost determined by reliability; and
- manageability of the solution and scalability.
We believe we have in the past generally competed favorably with offerings
of our competitors on the basis of these factors. However, we may not be able to
compete effectively against current and future competitors based on these or any
other competitive factors in the future, and the failure to do so would have a
material adverse effect on our business, financial condition and results of
operations.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part on our proprietary
technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect our proprietary rights. To date, we have relied
primarily on proprietary processes and know-how to protect our intellectual
property. We presently hold one U.S. patent for existing products. The term of
the patent will expire as late as the year 2016, depending on whether we
maintain the patent for the whole term. We have submitted ten U.S. patent
applications and four foreign patent applications. We cannot assure you that any
of our patent applications will be granted or that any patents issued will cover
the scope of the claims sought in the applications. Our U.S. patents do not
afford any intellectual property protection in China or other international
jurisdictions. Moreover, we have applied for but have not yet obtained patents
in China. We can give no assurance that we will be able to obtain patents in
China on our products or the technology that we use to manufacture our products.
Our joint ventures in China rely upon our trademarks, technology and know-how to
manufacture and sell our products. Under the terms of our joint venture
agreements, any modifications or enhancements to or derivatives of our
intellectual property developed by the joint ventures will be owned by the joint
ventures. Any infringement of our proprietary rights could result in significant
litigation costs, and any failure to adequately protect our proprietary rights
could result in our competitors offering similar products, potentially resulting
in loss of a competitive advantage and decreased revenues. Despite our efforts
to protect our proprietary rights, existing patent, copyright, trademark and
trade secret laws afford only limited protection. In addition, the legal systems
of some foreign countries, including China, do not protect our proprietary
rights to the same extent as does the legal system of the United States.
Attempts may be made to copy or reverse engineer aspects of our products or to
obtain and use information that we regard as proprietary. Accordingly, we may
not be able to prevent misappropriation of our technology or deter others from
developing similar technology. Furthermore, policing the unauthorized use of our
products is difficult. Litigation may be necessary in the future to enforce our
intellectual property rights or to
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<PAGE>
determine the validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and diversion of resources and
could significantly harm our business.
The communications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies and in various
jurisdictions that are important to our business. Any claims asserting that our
products infringe or may infringe proprietary rights of third parties, if
determined adversely to us, could significantly harm our business. Any claims,
with or without merit, could be time-consuming, result in costly litigation,
divert the efforts of our technical and management personnel, cause product
shipment delays or require us to enter into royalty or licensing agreements, any
of which could significantly harm our business. Royalty or licensing agreements,
if required, may not be available on terms acceptable to us, if at all. In the
event a claim against us was successful and we could not obtain a license to the
relevant technology on acceptable terms or license a substitute technology or
redesign our products to avoid infringement, our business would be significantly
harmed.
We have an agreement with a third party that also uses the Airstar trademark
for one of its products. Under the terms of this agreement, we have rights to
the Airstar trademark in China and the third party has trademark rights outside
of China.
EMPLOYEES
As of December 31, 1999, we employed a total of 960 full-time employees. We
also from time to time employ part-time employees and hire contractors. Of the
total number of full-time employees, 296 are in research and development, 137 in
manufacturing, 405 in marketing, sales and support, and 122 in administration.
We have 799 employees located in China, including 214 employees at the Zhejiang
manufacturing joint venture. The remaining 161 employees are located in the
United States. In addition to our total full-time employees, the Guangdong
manufacturing joint venture has 119 employees. Our employees are not represented
by any collective bargaining agreement, and we have never experienced a work
stoppage. We believe that our employee relations are good.
FACILITIES
Our corporate headquarters are located in a 25,756 square foot leased
facility in Alameda, California. We use this facility for sales, marketing,
administration, purchasing and research and development. Our lease expires in
January 2003. Our main research and development facility is located in a 27,238
square foot facility in Iselin, New Jersey, under a lease which expires in July
2002. We also have research and development facilities in Hefei and Hangzhou. We
lease two facilities in China for manufacturing and multiple offices for sales,
marketing, support and administration in China. Our Zhejiang manufacturing
facility is a 83,926 square foot facility with a lease that expires in March
2002. Our Guangdong manufacturing facility is a 44,250 square foot facility with
a lease that expires on December 31, 2000. We believe our current facilities are
well maintained, are in good operating condition and will be adequate to meet
our anticipated level of operations over the next twelve months.
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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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages as of December 31,
1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- -------- -----------
<S> <C> <C>
Masayoshi Son............................. 42 Chairman of the Board of Directors
Hong Liang Lu............................. 45 President, Chief Executive Officer and
Director
Ying Wu................................... 40 Vice Chairman of the Board of Directors,
Executive Vice President and Chief
Executive Officer, China Operations
Michael Sophie............................ 42 Vice President of Finance, Chief Financial
Officer and Assistant Secretary
Bill Huang................................ 37 Vice President, Chief Technology Officer
Shao-Ning J. Chou......................... 37 Executive Vice President and Chief
Operating Officer, China Operations
Paul Berkowitz............................ 47 Vice President, International Sales
Gerald Soloway............................ 51 Vice President, Engineering
Yoshitaka Kitao........................... 48 Director
Charles Xue............................... 46 Vice Chairman of the Board of Directors
and Secretary
Thomas J. Toy............................. 44 Director
Chauncey Shey............................. 42 Director
</TABLE>
MASAYOSHI SON has been our Chairman of the Board since October 1995. For
more than 15 years, Mr. Son has been President and Chief Executive Officer of
SOFTBANK CORP., a leading global provider of Internet content, technology and
services. Mr. Son is currently a director of Cisco Systems, Inc., E*Trade Group,
Inc. and Ziff-Davis, Inc. Mr. Son holds a B.A. in Economics from the University
of California at Berkeley.
HONG LIANG LU has been our President and Chief Executive Officer and a
director since June 1991. Mr. Lu co-founded UTStarcom under its prior name,
Unitech Telecom, Inc., in June 1991 which subsequently acquired StarCom Network
Systems, Inc. in September 1995. From 1986 through December 1990, Mr. Lu was
President and Chief Executive Officer of Kyocera Unison, a majority-owned
subsidiary of Kyocera International, Inc. From 1983 until its merger with
Kyocera in 1986, he was President and Chief Executive Officer of Unison
World, Inc., a software development company. From 1979 to 1983 he was Vice
President and Chief Operating Officer of Unison World, Inc. Mr. Lu holds a B.S.
in Civil Engineering from the University of California at Berkeley.
YING WU has been our Executive Vice President and Vice Chairman of the Board
of Directors since October 1995. Mr. Wu has also been the President and Chief
Executive Officer of one of our subsidiaries, UTStarcom China, since October
1995. From February 1991 to September 1995, Mr. Wu was a co-founder and Senior
Vice President of StarCom Network Systems, Inc., a company that marketed and
distributed third party telecommunications equipment. From 1988 to 1991, Mr. Wu
was a member of the technical staff of Bellcore Laboratories. From 1987 through
1988, Mr. Wu was a consultant at AT&T Bell Labs. He holds a B.S. in Electrical
Engineering from Beijing Industrial University and an M.S. in Electrical
Engineering from the New Jersey Institute of Technology.
MICHAEL SOPHIE has been our Vice President of Finance and Chief Financial
Officer since August 1999. Prior to joining our company, Mr. Sophie held
executive positions at P-Com, Inc. from August 1993 to August 1999 as Vice
President Finance, Chief Financial Officer and Group President. From 1989
through 1993, Mr. Sophie was Vice President of Finance at Loral Fairchild
Corporation. He holds
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a B.S. degree from California State University, Chico and an M.B.A. from the
University of Santa Clara.
BILL HUANG has been our Chief Technology Officer since September 1999. From
December 1996 to September 1999, he was our Vice President of Strategic Product
Planning. From June 1995 to December 1996, Mr. Huang served as our Vice
President, China Operations. From 1994 to June 1995, Mr. Huang was our Director,
Engineering. From 1992 to 1994, he was a Member of the Technical Staff and
Project Leader at AT&T Systems. Mr. Huang serves on the board of Shenzhen Gin De
(Group) Ltd., a real estate investment company in China. Mr. Huang holds a B.S.
in Electrical Engineering from Huazhong University of Science & Technology, and
an M.S. in Electrical Engineering and Computer Sciences from the University of
Illinois.
SHAO-NING J. CHOU has been our Executive Vice President and Chief Operating
Officer of China Operations since January 1999. From March 1997 to December
1998, he was Vice President of China Operations and from July 1996 to March
1997, he served as Vice President of Engineering. From March 1995 to June 1996,
he was Director of Engineering for wireless systems and software with Lucent
Technologies Microelectronics IC group. From April 1993 to March 1995, he was a
Technical Manager for the Global Wireless product group with AT&T consumer
products where he led multiple development teams for handset and wireless
personal base station products. From July 1985 to April 1993, Mr. Chou was team
leader and a member of the technical staff for advanced digital communication
research in AT&T Bell Laboratories where he led and engaged in data
communication equipment and multimedia product development. Mr. Chou holds a
B.S. in Electrical Engineering from City College of New York, an M.S. in
Engineering from Princeton University and an M.B.A. from the State University of
New Jersey, Rutgers.
PAUL BERKOWITZ has been our Vice President of International Sales since
November 1998. From July 1996 to November 1998, he was our Vice President of
Product Management & Planning, and from December 1995 to June 1996, he served as
our Vice President of Engineering. From 1994 to 1995, Mr. Berkowitz was Director
of Application Software of AT&T Network Systems where he managed, among other
things, an international team in marketing, architecture, and development of
software involving a portfolio of advanced GUI and client-server products for
telecommunications services. Between 1992 and 1994, he led the planning and
development effort for a 1 Gigabit/sec Asynchronous Transfer Mode switch support
Wide Area Network services including TDM and Frame Relay in the AT&T Paradyne
Unit. Mr. Berkowitz has been granted four patents and holds a B.S. and an M.S.
in Electrical Engineering from Columbia University.
GERALD SOLOWAY has been our Vice President of Engineering since January
1999. From April 1998 to January 1999, he served as our Director of Strategic
Marketing. Prior to this, Dr. Soloway worked for Lucent Technologies, formerly
Bell Labs, for 29 years. At Lucent, Dr. Soloway held executive positions in
Consumer Products, Business Terminal Development, PBX Systems Engineering, Key
System Development and Access Systems Development. He holds a Ph.D. from
Polytechnic Institute of New York, an M.S. from New York University, and a B.S.
from Cooper Union, all in Electrical Engineering. Dr. Soloway also holds seven
patents in communications and computer graphics technology.
YOSHITAKA KITAO has been a director since April 1998. Mr. Kitao has served
as Executive Vice President and Chief Financial Officer of SOFTBANK CORP. since
July 1995 and President and Chief Executive Officer of SOFTBANK Contents
Partners Corp. since May 1997. From June 1992 to May 1995, Mr. Kitao was the
general manager of the Corporate Finance and Service department of Nomura
Securities Co., Ltd. Mr. Kitao is a director of INSWEB Corporation and
Ziff-Davis, Inc. Mr. Kitao holds a B.A. in Economics from Keio University and a
B.A. in Economics from Cambridge University.
CHARLES XUE has been our Vice Chairman of the Board of Directors since 1995.
Prior to our acquisition of StarCom Network Systems, Inc., from 1991 to 1995,
Mr. Xue served as our Chairman of
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the Board. Mr. Xue has served as Chairman of the Board and Chief Executive
Officer of C&A Investment, Inc., a real estate investment company, since 1989
and Chairman of the Board and Chief Executive Officer of United Medical
Industrial Group Inc. from 1995 to 1998. Since 1999, Mr. Xue has served as the
chairman of Mt. Everest Holdings, Ltd. Mr. Xue is a director of Asia Pacific
Wire & Cable Corporation Limited.
THOMAS J. TOY has been a director since July 1995. Mr. Toy has served as
managing director of PacRim Venture Partners since March 1999, a professional
venture capital firm specializing in investments in the information technology
sector. Prior to that he was a partner at Technology Funding, a professional
venture capital firm, from January 1987 to March 1999. While at Technology
Funding, Mr. Toy was Managing Director of Corporate Finance and headed the
firm's investment committee. Mr. Toy is also a director of White Electronic
Designs Inc. Mr. Toy holds B.A. and M.M. degrees from Northwestern University.
CHAUNCEY SHEY has been a director since October 1995. Mr. Shey has served as
President of SOFTBANK China Holdings since December 1999 and as President of
DVtown.com, Inc. since July 1999. From October 1995 to July 1999, Mr. Shey was
our Executive Vice President in charge of Research and Development. From
March to October 1995, he was Executive Vice President of StarCom Network
Systems, Inc., where he worked in research and development as well as in
operation and strategy planning. From March 1991 to March 1995, he was Executive
Vice President of StarCom Products, Inc., a consulting business that developed
software products and provided expertise in the fields of computers and
telecommunications. In that position he was responsible for operations,
financial management and marketing. From December 1990 to December 1991,
Mr. Shey was a consultant at Bell Labs. He holds a B.S. in Electrical
Engineering from Shanghai Jiao Tong University and an M.S. in Computer Science
from the State University of New York at New Paltz.
CLASSIFIED BOARD OF DIRECTORS
Our Board of Directors will be divided into three classes of directors who
will serve in staggered three-year terms upon the closing of this offering. As a
result, approximately one-third of the Board of Directors will be elected each
year. Provisions in our bylaws and certificate of incorporation allow the Board
of Directors to fill vacancies on or increase the size of the Board of
Directors. These provisions, along with having a classified board of directors,
may make it difficult for our stockholders to remove incumbent directors and
fill vacancies with their own nominees to gain control of the Board.
Our Board of Directors has designated that Messrs. Toy and Xue will serve as
Class I Directors, whose terms expire at the 2000 annual meeting of
stockholders. Messrs. Kitao and Shey will serve as Class II Directors whose
terms will expire at the 2001 annual meeting of stockholders. Messrs. Lu, Son
and Wu will serve as Class III Directors whose terms will expire at the 2002
annual meeting of stockholders.
BOARD COMMITTEES
Our Board of Directors has established three standing committees: the
Executive Committee, the Audit Committee and the Compensation Committee. The
Executive Committee approves and authorizes material agreements and obligations
up to $3.0 million in value. The Executive Committee consists of Messrs. Lu,
Kitao and Toy.
Among other functions, the Audit Committee makes recommendations to the
Board of Directors regarding the appointment of independent auditors for the
annual audit of our financial statements, reviews the results and scope of the
audit and other services provided by our independent auditors, reviews our
financial statements, and reviews and evaluates our internal audit and control
functions. The Audit Committee consists of Messrs. Kitao, Toy and Xue.
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The Compensation Committee reviews and approves the compensation and
benefits of our executive officers, grants stock options under our stock option
plans and makes recommendations to the Board of Directors regarding these
matters. The Compensation Committee consists of Messrs. Toy and Xue.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Board or the Compensation
Committee and the board of directors or compensation committee of any other
company and no interlocking relationship has existed in the past.
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their service on the Board or any
Committee of the Board. They are entitled to reimbursement of all reasonable
out-of-pocket expenses incurred in connection with their attendance at Board or
Committee meetings. To the extent that a director is an employee, the director
can participate in our 1997 stock plan and, upon stockholder approval, in our
2000 employee stock purchase plan.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation received
during the fiscal years ended December 31, 1998 and December 31, 1999 by our
Chief Executive Officer and each of our other four most highly compensated
executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION NUMBER OF
---------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION(1)
- --------------------------- -------- -------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Hong Liang Lu.................... 1998 $223,176 $ -- $ -- -- $5,475
President and Chief Executive 1999 205,500 -- -- 400,000 5,550
Officer
Ying Wu.......................... 1998 199,833 -- -- -- 7,043
Executive Vice President and 1999 157,250 -- 5,000 80,000 8,127
Chief Executive Officer, China
Operations
Shao-Ning J. Chou................ 1998 158,333 -- -- -- 7,194
Executive Vice President and 1999 155,000 60,000 -- 120,000 8,127
Chief Operating Officer, China
Operations
Gerald Soloway................... 1999 136,913 4,691 -- 164,000 2,629
Vice President, Engineering
Bill Huang....................... 1999 158,587 27,375 -- -- 5,511
Vice President, Chief
Technology Officer
</TABLE>
- ----------
(1) Consists of health insurance premiums paid by us on behalf of the officers.
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STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information for the fiscal year ended
December 31, 1999 with respect to each grant of stock options to each of the
executive officers named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
OPTIONS ASSUMED RATES OF STOCK PRICE
GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------------------
NAME GRANTED 1999(2) SHARE DATE 5% 10%
- ---- -------- ------------ --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Hong Liang Lu............. 400,000 6.6% $4.50 09/01/09 $6,670,252 $11,687,461
Ying Wu................... 80,000 1.3 4.50 04/26/09 1,334,050 2,337,492
Shao-Ning J. Chou......... 120,000 2.0 4.50 02/20/09 2,001,076 3,506,238
Gerald Soloway............ 114,000 1.9 4.50 02/20/09 1,901,022 3,330,926
30,000 0.5 4.50 07/08/09 500,269 876,560
20,000 0.3 9.38 12/27/09 235,913 486,773
Bill Huang................ -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Potential realizable values are computed by (a) multiplying the number of
shares of common stock subject to a given option by an assumed initial
public offering price of $13.00 per share, (b) assuming that the aggregate
stock value derived from that calculation compounds at the annual 5% or 10%
rate shown in the table for the entire ten-year term of the option and
(c) subtracting from that result the aggregate option exercise price. The 5%
and 10% assumed annual rates of stock price appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent our
estimate or projection of future common stock prices.
(2) Based on an aggregate of 6,055,310 shares subject to options granted to our
employees in 1999.
OPTION EXERCISES AND HOLDINGS
The following table sets forth the number of shares of common stock acquired
and the value realized upon exercise of stock options and provides summary
information concerning the shares of our common stock subject to outstanding
stock options held as of December 31, 1999 by each of the executive officers
named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(2)
ACQUIRED ON VALUE --------------------------- -----------------------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Hong Liang Lu............... -- $ -- 200,000 400,000 $ 2,247,320 $ 3,400,000
Ying Wu..................... -- -- 926,480 80,000 11,253,211 680,000
Shao-Ning J. Chou........... -- -- 337,034 166,666 3,946,542 1,572,493
Gerald Soloway.............. -- -- 20,000 192,000 184,999 1,548,400
Bill Huang.................. 217,016 2,637,829 438,996 17,992 5,306,384 232,772
</TABLE>
- ----------
(1) Based on an assumed initial public offering price of $13.00 per share, minus
the per share exercise price, multiplied by the number of shares issued upon
exercise of the option.
(2) The value of unexercised in-the-money options is calculated based on the
difference between an assumed initial public offering price of $13.00 per
share and the exercise price for the shares, multiplied by the number of
shares underlying the option.
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<PAGE>
EMPLOYEE BENEFIT PLANS
1992 OMNIBUS EQUITY INCENTIVE PLAN. On April 12, 1992, the Board of
Directors adopted our 1992 Omnibus Equity Incentive Plan, which our stockholders
ratified on December 9, 1994. Under the 1992 plan, directors, employees and
consultants were eligible to acquire shares of common stock pursuant to options,
stock purchase rights and stock appreciation rights. At the time of adoption,
2,400,000 shares of common stock were reserved for issuance under the 1992 plan.
As of December 31, 1999, there were 1,620,328 shares authorized for issuances
under the 1992 plan, and options to purchase 41,728 shares of common stock were
outstanding. On July 31, 1995, the Board of Directors elected not to grant any
further options under the 1992 plan.
THE 1995 STOCK PLAN. On July 31, 1995, the Board of Directors adopted, and
in October 1995, our stockholders approved, our 1995 Stock Plan. Under the 1995
plan, officers, employees and consultants were eligible to acquire shares of
common stock pursuant to options or stock purchase rights. At the time of
adoption, 3,705,232 shares of common stock were reserved for issuance under the
1995 plan. In 1995 and 1996, our Board and stockholders added an additional
5,400,000 shares to the 1995 plan, raising the total number of authorized shares
reserved under the 1995 plan to 9,105,232. As of December 31, 1999, there were
6,711,744 shares authorized for issuance under the 1995 plan and options to
purchase 6,125,644 shares of common stock were outstanding under the 1995 plan.
On January 31, 1997, the Board of Directors elected not to grant any further
options under the 1995 plan. Upon the adoption of the 1997 plan, all remaining
unissued shares under the 1995 plan not already subject to options or other
awards ceased to be reserved for issuance under the 1995 plan.
THE 1997 STOCK PLAN. On January 31, 1997, the Board of Directors adopted,
and our stockholders approved, our 1997 Stock Plan. Under the 1997 plan,
officers, employees and consultants are eligible to receive options to purchase
shares of common stock and stock purchase rights. In December 1999, the Board of
Directors amended the 1997 plan, which we expect the stockholders to approve
shortly before the closing of this offering. We are currently authorized to
issue up to 8,499,018 shares subject to options. Upon the closing of this
offering, we will be authorized to issue up to 10,524,574 shares subject to
options. During the term of the 1997 plan, the number of shares issuable under
the plan will be increased annually on the first day of each fiscal year
beginning in 2001 by an amount equal to the lesser of 6,000,000 shares or 4% of
the outstanding shares of our common stock on that date, or a lesser amount
determined by the Board. The plan terminates in January 2007, but may be
terminated earlier by the Board of Directors. As of December 31, 1999, there
were options to purchase 8,238,342 shares of common stock outstanding under the
1997 plan. The Compensation Committee administers the 1997 plan.
Options granted under the 1997 plan may be incentive stock options, or ISOs,
which are intended to qualify for favorable federal income tax treatment under
the provisions of Section 422 of the Internal Revenue Code of 1986, as amended,
or non-qualified stock options, or NSOs, which do not so qualify. The
Compensation Committee selects the eligible persons to whom options will be
granted and determines the grant date, amounts, exercise prices, vesting periods
and other relevant terms of the options, including whether the options will be
ISOs or NSOs. The exercise price of ISOs granted under the 1997 plan may not be
less than 100% of the fair market value of our common stock on the grant date,
while the exercise price of NSOs can be determined by the Compensation Committee
in its discretion. Options are generally not transferable during the life of the
optionee.
Options vest and become exercisable as determined by the Compensation
Committee. Options may generally be exercised at any time after they vest and
before their expiration date as determined by the Compensation Committee.
However, no option may be exercised more than 10 years after the grant date.
Options will generally terminate (i) 12 months after the death or permanent
disability of an optionee and (ii) 90 days after termination of employment for
any other reason. The aggregate fair market value of the shares of common stock
represented by ISOs that become exercisable in any calendar year may not exceed
$100,000. Options in excess of this limit are treated as NSOs.
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<PAGE>
In the event we are merged with or into another corporation, or all or
substantially all of our assets are sold, each outstanding option will be
assumed or an equivalent option or right will be substituted by the successor
corporation or its parent or subsidiary. If the successor corporation refuses to
assume or substitute for the option or right, the options or rights will
automatically vest and become exercisable in full for a period of at least
fifteen days, after which time the option will terminate.
Under the 1997 plan, we may grant stock purchase rights to eligible
participants. Any shares purchased pursuant to stock purchase rights will be
subject to a restricted stock purchase agreement. Unless the Compensation
Committee determines otherwise, this agreement will grant us a right to
repurchase the stock upon the voluntary or involuntary termination of the
employee for any reason, including death or disability. The purchase price for
repurchased shares will be the original price paid and may be paid by
cancellation of any indebtedness owed to us. The shares of stock subject to the
right of repurchase lapse over time.
As of December 31, 1999, an aggregate of 16,831,090 shares of common stock
were authorized for issuance under our stock plans, 14,405,714 of which were
subject to outstanding options and 172,243 of which were available for grant.
2000 EMPLOYEE STOCK PURCHASE PLAN. In December 1999, the Board of Directors
adopted the 2000 Employee Stock Purchase Plan. Subject to meeting federal and
state securities law requirements and obtaining stockholder approval, the stock
purchase plan will become effective upon the consummation of this offering, or
as soon as practicable thereafter.
The purpose of the stock purchase plan is to provide a competitive equity
compensation program and to provide our employees with an opportunity and
incentive to acquire an ownership interest in our company, which more closely
aligns the interests of our employees and stockholders. We have reserved
2,000,000 shares of common stock for sale under the stock purchase plan. The
number of shares reserved for sale under the plan will be increased annually on
the first day of each fiscal year beginning in 2001 by an amount equal to the
lesser of 4,000,000 shares or 2% of the outstanding shares of our common stock
on that date, or a lesser amount determined by the Board of Directors. The stock
purchase plan will be administered by the Board or a committee appointed by the
Board.
The stock purchase plan is implemented by offering periods, the duration of
which may not exceed 24 months. Offering periods may contain interim purchase
periods. Shares purchased under the stock purchase plan will be held in separate
accounts for each participant. The first offering period shall begin on the
effective date of this offering and shall end on the last trading day on or
before April 30, 2002.
Employees will be eligible to participate in the stock purchase plan if they
are employed by us for more than 20 hours per week and more than five months in
a calendar year. The stock purchase plan permits eligible employees to purchase
our common stock through payroll deductions, which may not exceed 15% of the
employee's total compensation. Stock may be purchased under the plan at a price
equal to 85% of the fair market value of our stock on either the date of
purchase or the first day of the offering period, whichever is lower. However,
the Board of Directors may in its discretion provide that the price at which
shares of common stock are purchased under the plan shall be 85% of the fair
market value of our shares on the date of purchase. Participants may not
purchase shares of common stock having a value greater than $25,000 during any
calendar year.
Participants may increase or decrease their payroll deductions at any time
during an offering period, subject to limits imposed by the Board of Directors.
If a participant withdraws from the stock purchase plan, any contributions that
have not been used to purchase shares shall be refunded. A participant who has
withdrawn may not participate in the stock purchase plan again until the next
offering period. In the event of retirement or cessation of employment for any
reason, any contributions that have not yet been used to purchase shares will be
refunded to the participant, or to the participant's designated beneficiary in
the case of death, and a certificate will be issued for the full shares in the
participant's account.
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The Board of Directors may terminate or amend the stock purchase plan,
subject to stockholder approval in some circumstances. Unless terminated earlier
by the Board, the stock purchase plan will have a term of 10 years.
EMPLOYMENT AGREEMENTS
Mr. Lu is a party to an employment and non-competition agreement dated
October 6, 1995. Under this agreement, Mr. Lu is to be paid $150,000 annually,
which amount may be increased by the Board of Directors, and is entitled to a
bonus each year as determined by the Board. Although Mr. Lu's employment is "at
will," we must give him 60 days notice of termination for any reason other than
voluntary termination, termination as a result of death of disability or
termination for cause.
Mr. Wu is a party to an employment and non-competition agreement dated
October 6, 1995. Under this agreement, Mr. Wu is to be paid $150,000 annually,
which amount may be increased by the Board of Directors, and is entitled to a
bonus each year as determined by the Board. Although Mr. Wu's employment is "at
will," we must give him 60 days notice of termination for any reason other than
voluntary termination, termination as a result of death of disability or
termination for cause.
Mr. Huang is a party to an employment and non-competition agreement dated
October 6, 1995. Under this agreement, Mr. Huang is to be paid $90,000 annually,
which amount may be increased by the Board of Directors, and is entitled to a
bonus each year as determined by the Board. Although Mr. Huang's employment is
"at will," we must give him 60 days notice of termination for any reason other
than voluntary termination, termination as a result of death of disability or
termination for cause.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
We have adopted provisions in our certificate of incorporation that limit
the personal liability of our directors for monetary damages arising from their
breach of fiduciary duty as directors to the fullest extent permitted by
Delaware law. This limitation of liability does not apply to liabilities arising
under the federal securities laws and does not affect the availability of
equitable remedies such as injunctive relief or recession.
Our certificate of incorporation also authorizes us to indemnify our
officers, directors, employees and agents who are made or threatened to be made
a party to an action or proceeding, whether criminal, civil, administrative or
investigative, to the fullest extent permitted under Delaware law.
As permitted by the Delaware General Corporation Law, our bylaws which will
become effective upon the completion of this offering provide that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law;
- we are required to advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law;
- we may indemnify our other employees and agents to the extent that we
indemnify our officers and directors; and
- the rights to indemnification provided in the bylaws are not exclusive.
We have entered into indemnification agreements with each of our current
directors and some of our executive officers. In addition, we intend to enter
into indemnification agreements with each of our other executive officers. These
agreements provide our directors and executive officers with additional
protection regarding the scope of the indemnification set forth in our
certificate of incorporation and bylaws.
We currently have a directors' and officers' insurance policy. At present,
there is no pending litigation or proceeding involving any director, officer or
employee of ours in which indemnification by us is sought. In addition, we are
not aware of any threatened litigation or proceeding that may result in a claim
for indemnification.
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RELATED PARTY TRANSACTIONS
COMMON STOCK AND PREFERRED STOCK ISSUANCES
Since January 1, 1997, we have issued and sold in private placement
transactions shares of our common stock, preferred stock and warrants for the
purchase of our common stock to our executive officers, directors and/or greater
than 5% stockholders as described below.
From December 1996 to February 1997, we issued and sold 12,209,302 shares of
Series C preferred stock at $3.44 per share and 1,379,754 shares of Series C
preferred stock at $4.13 per share. The investors in the Series C financing
included SOFTBANK Ventures, Inc., a wholly owned subsidiary of SOFTBANK CORP.,
which purchased 2,034,884 shares of Series C preferred stock for $7,000,000 in
cash and SOFTBANK Holdings Inc., a wholly owned subsidiary of SOFTBANK CORP.,
which purchased 10,225,272 shares of Series C preferred stock for $12,718.02 in
cash and $34,987,281.98 payable in accordance with a promissory note. The
promissory note has been paid in full. SOFTBANK Holdings Inc. has subsequently
transferred its shares of Series C preferred stock to SOFTBANK America Inc., a
wholly owned subsidiary of SOFTBANK Holdings Inc. Masayoshi Son, our Chairman of
the Board, is President and Chief Executive Officer of SOFTBANK CORP. and
Yoshitaka Kitao, one of our directors, is Executive Vice President and Chief
Financial Officer of SOFTBANK CORP. SOFTBANK Holdings Inc. has subsequently
transferred its shares of Series B preferred stock to SOFTBANK America Inc., a
wholly owned subsidiary of SOFTBANK Holdings Inc.
In October 1997, the Company issued and sold 8,032,128 shares of Series D
preferred stock at $6.225 per share to SOFTBANK Holdings, which purchased
5,918,410 shares of Series D preferred stock and SOFTBANK Contents Fund, a
Japanese partnership of which SOFTBANK Partners is a managing partner, which
purchased 2,113,718 shares of Series D preferred stock. SOFTBANK Holdings Inc.
and SOFTBANK Contents Fund have subsequently transferred their shares of
Series D preferred stock to SOFTBANK America Inc., a wholly owned subsidiary of
SOFTBANK Holdings Inc.
From October 1997 to March 1998, we issued an aggregate of 30,269,318 shares
of Series E preferred stock in a one-for-one exchange for shares of our common
stock pursuant to an Exchange Agreement and a Regulation S Exchange Agreement.
All of our stockholders were eligible to participate in the exchange on a pro
rata basis. Stockholders who received shares of Series E Preferred stock as part
of the exchange include: Hong Lu, our President, Chief Executive Officer and one
of our directors, who received 3,121,182 shares; Ying Wu, our Vice Chairman of
the Board of Directors, Executive Vice President and Chief Executive Officer,
China Operations, who received 2,971,776 shares; Yalang Wang Wu, the wife of
Mr. Wu, who received 160,000 shares; Chauncey Shey, one of our directors, who
received 2,575,776 shares; Charles Xue, our Vice Chairman of the Board of
Directors and Secretary, who received 2,105,554 shares; Bill Huang, our Vice
President and Chief Technology Officer, who received 256,000 shares; Paul
Berkowitz, our Vice President of International Sales, who received 187,536
shares; William Wittmeyer, then one of our directors, who received 21,328
shares; UT Finance LTD, which received 363,640 shares; and Technology Funding
Ventures IV and V, for which Thomas J. Toy, one of our directors, was a partner,
received an aggregate of 581,824 shares.
Following the Series E share exchange, several of our stockholders sold an
aggregate of 5,459,944 shares of Series E preferred stock at $5.445 per share to
SOFTBANK Holdings, Inc. and SOFTBANK Contents Fund. Stockholders who sold shares
to SOFTBANK Holdings include: Hong Lu, our President, Chief Executive Officer
and one of our directors, who sold 200,000 shares; Ying Wu, our Vice Chairman of
the Board of Directors, Executive Vice President and Chief Executive Officer,
China Operations, who sold 400,000 shares; Chauncey Shey, one of our directors,
who sold 400,000 shares; Charles Xue, our Vice Chairman of the Board of
Directors and Secretary, who sold 300,000 shares; Bill Huang, our Vice President
and Chief Technology Officer, who sold 20,000 shares; William Wittmeyer, then
one of our directors, who sold 21,328 shares; and Technology Funding Ventures IV
and V, which
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sold an aggregate of 581,824 shares. SOFTBANK Holdings and SOFTBANK Contents
Fund later transferred the 5,459,944 shares to SOFTBANK America Inc.
In August 1999, we distributed all of the shares of DirecTouch
Communications Limited, a wholly owned subsidiary, to our stockholders on a pro
rata basis. Stockholders who received this distribution of DirecTouch shares
included: SOFTBANK America Inc., which received 30,177,968 shares; SOFTBANK
Ventures Inc., which received 2,034,884 shares; Hong Lu, who received 3,086,872
shares; Ying Wu, who received 2,745,696 shares; Yalan Wang Wu, Ying Wu's wife,
who received 160,000 shares; Ashley Wu, Mr. Wu's daughter, who received 21,040
shares; Richard Wu, Mr. Wu's son, who received 21,040 shares; Wu Partners, a
California limited partnership, which received 2,200,000 shares; Chauncey Shey,
who received 2,175,776 shares; Qiwei Qiu, Trustee of the Rebecca Shey
Trust--1997 UTA dated December 20, 1997, who received 12,000 shares; Shey
Partners, a California limited partnership, which received 2,740,000 shares;
Bill Huang, who received 433,016 shares; Alexander Huang, Mr. Huang's son, who
received 2,000 shares; Helen Huang, Mr. Huang's daughter, who received 2,000
shares; Paul Berkowitz, who received 45,208 shares; Patricia Berkowitz,
Mr. Berkowitz's wife, who received 61,120 shares; and Paul Berkowitz as
custodian for his children Amy, Karen and Lisa, who received an aggregate of
42,000 shares. In connection with the distribution of DirecTouch shares, we
adopted a 1999 Special Stock Option Plan to distribute options to purchase
shares of DirecTouch common stock to each of our optionees who held vested
options. We distributed options to purchase an aggregate of 7,024,242 shares of
DirecTouch common stock. Optionees who received the vested options to purchase
DirecTouch shares included: Hong Lu, who received options to purchase 133,336
shares; Ying Wu, who received options to purchase 926,480 shares; Chauncey Shey,
who received options to purchase 926,480 shares; Bill Huang, who received
options to purchase 353,334 shares; Shao-Ning J. Chou, who received options to
purchase 288,938 shares; Paul Berkowitz, who received options to purchase
438,924 shares; and Gerald Soloway, who received options to purchase 14,000
shares.
From November 1999 through December 1999, we issued and sold an aggregate of
6,767,316 shares of Series F preferred stock at $8.1273 per share. The investors
that participated in the financing included Intel Pacific, Inc., which purchased
4,921,684 shares of Series F preferred stock for $40,000,000.
In December 1999, we acquired the minority interest of our Wacos, Inc.
subsidiary through a statutory merger. The outstanding shares of Wacos common
stock and preferred stock were converted into shares of our Series G preferred
stock. The Wacos stockholders who received our Series G preferred stock in the
merger included: SOFTBANK America Inc., which received 3,691,534 shares; Hong
Lu, who received 39,582 shares; Ying Wu, who received 35,984 shares; Chauncey
Shey, who received 35,984 shares; Bill Huang, who received 359,844 shares; and
Paul Berkowitz, who received 14,392 shares.
LOANS
In October 1996, we loaned Bill Huang, our Vice President and Chief
Technology Officer and one of our stockholders, the sum of $156,627 to purchase
a house. The loan bears simple interest at the rate of 3% per annum, payable
within ten years. The outstanding balance, including accrued interest, as of
December 31, 1999 was $146,615.
In June 1998, we entered into a loan agreement in which SOFTBANK CORP.
agreed to loan us up to $55.0 million in multiple installments. The first
installment of $25.0 million was made on June 30, 1998. This loan was repaid in
full in 1999.
In February 1999, we loaned Bill Huang $153,453 to allow him to exercise
expiring stock options. The loan is secured by a deed of trust. The loan bears
no interest and is due and payable within three years.
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CERTAIN BUSINESS RELATIONSHIPS
In October 1995, we entered into a Contract on Joint Development of Internet
Services with China Jitong Communications Co., Ltd. This contract was superseded
in June 1998 by the Information Service Project Contract between UTStarcom
(China) Ltd., our subsidiary, and Jitong, whereby we agreed to provide equipment
to Jitong for this project. In connection with this arrangement, we entered into
a Payment Agent Contract with UTStarcom China, Jitong and SOFTBANK, under which
SOFTBANK agreed to provide a support fund of U.S. $10 million for our equipment
and Jitong's construction costs. On August 30, 1999, we entered into a contract
termination agreement with Jitong, SOFTBANK and UTStarcom China under which the
parties agreed to terminate all existing contracts and agreements regarding the
project. Under the termination agreement, Jitong agreed to repay all funds
advanced to Jitong. Jitong has repaid its obligation in full, which totaled the
equivalent of $11.6 million.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors on the Board of Directors, and will be
on terms no less favorable to us than could be obtained from unaffiliated third
parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of December 31, 1999, after giving
effect to the conversion of all outstanding preferred stock into common stock on
a one-for-one basis, and as adjusted to reflect the sale of shares of common
stock offered by this prospectus, by:
- each stockholder who is known by us to beneficially own more than 5% of
our common stock;
- each of our executive officers listed on the Summary Compensation Table
under "Management;"
- each of our directors; and
- all of our executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF SHARES BENEFICIALLY OWNED(1)
BENEFICIALLY --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING
- ------------------------------------ ---------------- --------------- --------------
<S> <C> <C> <C>
Entities affiliated with SOFTBANK CORP.(2)......... 46,686,514 58.9% 52.3%
c/o SOFTBANK CORP.
24-1 Nihonbashi-Hakozakicho
Chuo-ku, Tokyo 103-8501 JAPAN
Masayoshi Son(3)................................... 46,686,514 58.9% 52.3%
c/o SOFTBANK CORP.
24-1 Nihonbashi-Hakozakicho
Chuo-ku, Tokyo 103-8501 JAPAN
Yoshitaka Kitao(4)................................. 46,736,514 58.9% 52.3%
c/o SOFTBANK CORP.
24-1 Nihonbashi-Hakozakicho
Chuo-ku, Tokyo 103-8501 JAPAN
Ying Wu(5)......................................... 6,110,240 7.6% 6.8%
c/o UTStarcom (China) Ltd.
11th Floor, CNT Manhattan Building
No. 6 Chao Yang Men Be Da Jie Street
Beijing, 100027 China
Chauncey Shey(6)................................... 5,517,146 6.9% 6.1%
788 Hong Xu Road, #43
Suite 1501
Shanghai, 201103 China
Intel Pacific, Inc................................. 4,921,684 6.2% 5.5%
2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Hong Lu(7)......................................... 3,326,454 4.2% 3.7%
Charles Xue(8)..................................... 1,977,328 2.5% 2.2%
Thomas J. Toy(9)................................... 50,000 * *
Bill Huang(10)..................................... 1,221,556 1.5% 1.4%
Shao-Ning J. Chou(11).............................. 367,034 * *
Gerald Soloway(12)................................. 50,500 * *
All executive officers and directors as a
group (12 persons)(13)........................... 65,972,682 79.7% 71.1%
</TABLE>
- ----------
* Less than 1%.
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(1) Assumes no exercise of the underwriters' over-allotment option. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting power or investment power
with respect to securities. All shares of common stock subject to options
exercisable within 60 days following December 31, 1999 are deemed to be
outstanding and beneficially owned by the person holding those options for
the purpose of computing the number of shares beneficially owned and the
percentage ownership of that person. They are not, however, deemed to be
outstanding and beneficially owned for the purpose of computing the
percentage ownership of any other person. Accordingly, percent ownership is
based on: (i) before this offering, 79,307,159 shares of common stock
outstanding as of December 31, 1999 plus any shares issuable pursuant to
options held by the person or group in question which may be exercised
within 60 days of December 31, 1999; and (ii) after this offering, an
additional 10,000,000 shares to be issued in the offering. Except as
indicated in the other footnotes to this table and subject to applicable
community property laws, based on information provided by persons named in
the table, each person or entity has sole voting and investment power with
respect to the shares shown as beneficially owned.
(2) Includes 44,651,630 shares registered in the name of SOFTBANK
America, Inc., a Delaware corporation, and 2,034,884 shares registered in
the name of SOFTBANK Ventures, Inc., a Japanese corporation. SOFTBANK
America, Inc., is a wholly owned subsidiary of SOFTBANK Holdings Inc., a
Massachusetts corporation. SOFTBANK Holdings Inc. and SOFTBANK
Ventures, Inc., are wholly owned subsidiaries of SOFTBANK CORP., a Japanese
corporation.
(3) Represents 46,686,514 shares beneficially owned by entities affiliated with
SOFTBANK CORP. Mr. Son is President, Chief Executive Officer and major
stockholder of SOFTBANK CORP. Mr. Son disclaims beneficial ownership of
these shares except to the extent of his proportionate ownership interest
of SOFTBANK CORP.
(4) Includes 46,686,514 shares beneficially owned by entities affiliated with
SOFTBANK CORP. Mr. Kitao is Executive Vice President and Chief Financial
Officer of SOFTBANK CORP. Mr. Kitao disclaims beneficial ownership of these
shares except to the extent of his proportionate ownership interest of
SOFTBANK CORP. Includes 50,000 shares issuable upon exercise of options
that are exercisable within 60 days of December 31, 1999.
(5) Includes 2,200,000 shares registered in the name of Wu Partners, a
California Limited Partnership, of which Mr. Wu is general partner.
Includes 160,000 shares registered in the name of Yalan Wang Wu, 23,774
shares registered in the name of Ashley Wu, and 23,774 shares registered in
the name of Richard Wu. Yalan Wang Wu is Mr. Wu's wife and Ashley Wu and
Richard Wu are Mr. Wu's children. Mr. Wu may be deemed the beneficial owner
of the shares. Includes 926,480 shares issuable upon exercise of options
that are exercisable within 60 days of December 31, 1999.
(6) Includes 2,730,600 shares owned by Shey Partners, a California Limited
Partnership, of which Mr. Shey is a general partner and 16,000 shares
registered in the name of Qiwei Qiu, trustee of the Rebecca Shey
Trust--1997 UTA dated December 20, 1997. Qiwei Qiu, trustee, is Mr. Shey's
wife and Rebecca Shey is Mr. Shey's daughter. Mr. Shey may be deemed the
beneficial owner of the shares. Includes 946,480 shares issuable upon
exercise of options that are exercisable within 60 days of December 31,
1999.
(7) Includes 2,666 shares registered in the name of Brian Lu, 2,666 shares
registered in the name of Benjamin Lu, and 2,666 shares registered in the
name of Melissa Lu. Brian Lu, Benjamin Lu and Melissa Lu are Mr. Lu's
children. Mr. Lu may be deemed the beneficial owner of the shares. Includes
200,000 shares issuable upon exercise of options that are exercisable
within 60 days of December 31, 1999.
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(8) Includes 40,000 shares registered in the name of Ann Hu. Ann Hu is
Mr. Xue's wife. Mr. Xue may be deemed the beneficial owner of the shares.
Includes 20,000 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.
(9) Includes 50,000 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.
(10) Includes 3,300 shares registered in the name of Alexander Huang, and 3,300
shares registered in the name of Helen Huang. Alexander Huang and Helen
Huang are Mr. Huang's children. Mr. Huang may be deemed the beneficial
owner of the shares. Includes 438,996 shares issuable upon exercise of
options that are exercisable within 60 days of December 31, 1999.
(11) Includes 367,034 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.
(12) Includes 50,500 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.
(13) Includes 3,500,080 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 250,000,000 shares of common stock, $0.00125 par value, and 5,000,000 shares
of preferred stock, $0.00125 par value.
The following is a summary of the material terms of our common stock and
preferred stock. Please see our certificate of incorporation, filed as an
exhibit to the registration statement of which this prospectus is a part, for
more detailed information.
COMMON STOCK
As of December 31, 1999, there were 79,307,159 shares of common stock
outstanding held of record by 155 stockholders, after giving effect to the
conversion of all outstanding shares of preferred stock into common stock on a
one-for-one basis. Additionally, options to purchase an aggregate of
14,405,714 shares of common stock were outstanding under our stock plans. The
holders of our common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. Subject to preferences that may be
applicable to outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends as may be declared from time to time
by the Board of Directors out of funds legally available for dividends. If our
company is liquidated, dissolved or wound up, the holders of common stock are
entitled to share ratably in all assets remaining after the payment of
liabilities, subject to prior rights of any outstanding preferred stock. Holders
of common stock have no preemptive, conversion or redemption rights. Each
outstanding share of common stock is, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
non-assessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted on a one-for-one basis into an aggregate of 70,377,322 shares
of common stock. Thereafter, up to 5,000,000 shares of undesignated preferred
stock will be authorized for issuance. Our Board of Directors has the authority,
without further action by our stockholders, to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences and
privileges of any preferred stock it determines to issue. Any or all of these
rights may be greater than the rights of the common stock.
The issuance of preferred stock may have the effect of delaying or
preventing a change in control of our company or make removal of our management
more difficult. Additionally, the issuance of preferred stock could decrease the
amount of earnings and assets available for distribution to the holders of
common stock or could adversely affect the rights and powers, including voting
rights, of the holders of common stock. The issuance of preferred stock could
also cause the market price of our common stock to decline. At present, we have
no plans to issue any shares of preferred stock.
WARRANTS
As of December 31, 1999, warrants to purchase an aggregate of 532,000 shares
of our common stock were outstanding. One warrant is for the purchase of 32,000
shares of common stock at an exercise price of $2.50 per share and expires on
February 5, 2008. The other warrant is for the purchase of 500,000 shares of
common stock at an exercise price of $6.25 per share. The warrant for 500,000
shares expires on the earlier of December 11, 2003 or the closing of this
offering.
REGISTRATION RIGHTS
Under an agreement dated December 31, 1999, the holders of 50,254,952 shares
of common stock and warrants to purchase approximately 532,000 shares of common
stock are entitled to have us register these shares under the Securities Act.
Subject to the terms of the agreement, the holders may
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require us on one occasion to register these securities for public resale at our
expense. Demand for registration may be made by the holders of at least
one-third of the shares that are entitled to this registration. Furthermore, the
holders have the right to require us on not more than two occasions during any
twelve-month period, to register all or a portion of their shares with
registration rights on Form S-3 under the Securities Act. We are also limited
from registering securities for our own account for 90 days after an effective
registration initiated by these holders. In addition, if we intend to register
any of our common stock either for our own account or for the account of other
security holders, holders possessing registration rights must consent to the
offering and can elect to participate in the offering. All registration rights
are subject to conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares included in any
registration.
ANTI-TAKEOVER PROVISIONS UNDER DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers, which prohibits us from engaging in a "business
combination" with an "interested stockholder," for a period of three years after
the date the person became an interested stockholder unless:
- prior to that date, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding shares owned by persons who are directors and also officers,
and employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
- on or subsequent to that date, the business combination is approved by the
Board of Directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
A "business combination" is defined to include mergers, asset or stock sales
and other transactions resulting in financial benefit to a stockholder. Except
as specified in Section 203, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of our outstanding voting stock.
Our certificate of incorporation and bylaws do not exclude us from the
restrictions imposed under Section 203. The existence of Section 203 would be
expected to have the effect of discouraging hostile takeover attempts or
delaying changes in control of our company, which could depress the market price
of our common stock and deprive stockholders of opportunities to realize a
premium on shares of common stock held by them.
CHARTER AND BYLAW PROVISIONS REGARDING ANTI-TAKEOVER PROVISIONS
Some provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a change in control of our company or management
that a stockholder may consider favorable. These provisions include:
- authorizing the Board of Directors to issue additional preferred stock;
- prohibiting cumulative voting in the election of directors;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder action by written consent;
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- creating a classified Board of Directors pursuant to which our directors
are elected for staggered three year terms; and
- establishing advance notice requirements for nominations for election to
the Board of Directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Boston EquiServe
LLP. The transfer agent's telephone number is (781) 575-3010. The transfer
agent's address is 150 Royall Street, Canton, Massachusetts 02021.
LISTING
We expect our common stock to be approved for listing on the Nasdaq National
Market under the trading symbol "UTSI."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been a public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales, could cause the trading price of our
common stock to decrease.
Upon completion of this offering, we will have outstanding 89,307,159 shares
of common stock, assuming no exercise of the underwriters' over-allotment
options and no exercise of outstanding options or warrants to purchase common
stock after December 31, 1999. Of these shares, the 10,000,000 shares sold in
this offering will be freely tradable without restriction, except for shares
purchased by our affiliates, as defined in Rule 144 under the Securities Act,
which would be subject to the limitations and restrictions described below.
The remaining 79,307,159 shares of common stock outstanding upon completion
of this offering will be "restricted securities" as defined in Rule 144. These
shares may be sold in the public market only if registered under the Securities
Act or if they qualify for an exemption from registration under Rules 144 or 701
of the Securities Act, which are summarized below.
Holders of substantially all of these restricted securities, including all
of our officers and directors and the entities affiliated with them, have
entered into lock-up agreements. The agreements provide that, subject to limited
exceptions, the holders will not sell, directly or indirectly, any common stock
for a period of 180 days after the date of this prospectus without the prior
consent of Merrill Lynch.
On the date the lock-up agreement expires, 72,539,843 of the restricted
securities will become eligible for sale pursuant to Rule 144. The remaining
6,767,316 shares of common stock will be eligible for sale under Rule 144 at
varying times after expiration of the lock-up period.
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person, or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year, including
persons who may be deemed to be our "affiliates," would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of our common stock or the
average weekly trading volume of our common stock during the four calendar weeks
before the sale. Sales under Rule 144 are also subject to manner of sale and
notice requirements, as well as the availability of current public information
about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell the
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Shares issued upon exercise of options granted by us prior to the date of
this prospectus will be available for sale in the public market under Rule 701
of the Securities Act. Rule 701 provides that, beginning 90 days after the date
of this prospectus, persons other than affiliates may sell shares of our common
stock acquired from us in connection with our stock option plans, subject only
to the manner of sale provisions of Rule 144. Beginning 90 days after the date
of this prospectus, affiliates may sell these shares of our common stock subject
to all provisions of Rule 144 except the one year minimum holding period.
As of December 31, 1999, options to purchase an aggregate of
14,405,714 shares of common stock were outstanding under our stock option plans.
Shortly after this offering, we intend to file registration statements on
Form S-8 under the Securities Act to register 2,000,000 shares of common stock
reserved for issuance under our employee stock purchase plan and
16,691,946 shares of common stock reserved for issuance under our stock option
plans. Any vested shares registered under these registration statements will be
available for sale in the open market immediately upon effectiveness of the
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registration statement, subject to the expiration of the lock-up period and
Rule 144 volume limitations applicable to our affiliates.
In addition, after this offering, the holders of 50,254,952 shares of common
stock and warrants to purchase 532,000 shares of common stock are entitled to
registration rights. Registration of these shares under the Securities Act would
result in these shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of the registration statement,
subject to the expiration of the lock-up period.
75
<PAGE>
UNDERWRITING
GENERAL
We intend to offer our common stock through a number of underwriters.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities
LLC and U.S. Bancorp Piper Jaffray Inc. are acting as representatives of the
underwriters named below. In addition, a syndicate of Japanese underwriters will
be offering 2,000,000 shares of our common stock in Japan. Subject to the terms
and conditions described in a purchase agreement between us and the
underwriters, and concurrently with the sale of 2,000,000 shares of our common
stock to the Japanese underwriters, we have agreed to sell to the underwriters,
and each of the underwriters severally and not jointly has agreed to purchase
from us, the number of shares of our common stock listed opposite its name
below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
Banc of America Securities LLC..............................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total............................................. 8,000,000
=========
</TABLE>
We have also entered into a purchase agreement with the Japanese
underwriters for the sale of the shares of our common stock in Japan for whom
Merrill Lynch Japan Incorporated and E* Trade Securities Co., Ltd. are acting as
lead managers. Subject to the terms and conditions in the Japanese purchase
agreement, and concurrently with the sale of 8,000,000 shares of our common
stock to the underwriters pursuant to the purchase agreement, we have agreed to
sell to the Japanese underwriters and the Japanese underwriters severally have
agreed to purchase from us 2,000,000 shares of our common stock. The initial
public offering price per share and the total underwriting discount per share of
our common stock are identical under the purchase agreement and the Japanese
purchase agreement.
Subject to the terms and conditions in the purchase agreement and the
Japanese purchase agreement, the underwriters and the Japanese underwriters have
agreed to purchase all of the shares of our common stock being sold pursuant to
each of the purchase agreements if any shares of our common stock are purchased.
If an underwriter or a Japanese underwriter defaults, the purchase agreement and
the Japanese purchase agreement provide that the purchase commitments of the
nondefaulting underwriters and Japanese underwriters may be increased or the
purchase agreements may be terminated; provided, however, that the purchase
commitments of the Japanese underwriters may not be increased if an underwriter
other than a Japanese underwriter defaults. The closings for the sale of shares
of our common stock to be purchased by the underwriters and the Japanese
underwriters are conditioned on one another.
We have agreed to indemnify the underwriters and the Japanese underwriters
against some liabilities, including liabilities under the Securities Act, or to
contribute to payments the underwriters and the Japanese underwriters may be
required to make in respect of those liabilities.
76
<PAGE>
The underwriters and the Japanese underwriters are offering the shares of
our common stock, subject to prior sale, when, as and if issued to and accepted
by them, subject to approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the purchase
agreements, such as the receipt of officer's certificates and legal opinions.
The underwriters and the Japanese underwriters reserve the right to withdraw,
cancel or modify offers to the public and to reject orders in whole or in part.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters of this offering on the Internet.
The underwriters and the Japanese underwriters may agree to allocate a number of
shares to underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the representatives to underwriters
that may make internet distributions on the same basis as other allocations.
COMMISSIONS AND DISCOUNTS
The representatives and the lead managers have advised us that the
underwriters and the Japanese underwriters propose initially to offer the shares
of our common stock to the public at the initial public offering price on the
cover page of this prospectus, and to dealers at that price less a concession
not in excess of $ per share of our common stock. The underwriters may allow,
and the dealers may reallow, a discount not in excess of $ per share of our
common stock to other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the Japanese
underwriters and the proceeds before expenses to us. This information assumes
either no exercise or full exercise by the underwriters of their over-allotment
option.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price..................................... $ $ $
Underwriting discount..................................... $ $ $
Proceeds, before expenses, to UTStarcom................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $2.0 million and are payable by us.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, to purchase up to 1,500,000
additional shares of our common stock at the initial public offering price less
the underwriting discount. The underwriters may exercise this option for
30 days from the date of this prospectus solely to cover any over-allotments. If
the underwriters exercise this option, each underwriter, except the Japanese
underwriters, will be obligated, subject to conditions contained in the purchase
agreement, to purchase a number of additional shares of our common stock
proportionate to that underwriter's initial amount reflected in the table above.
INTERSYNDICATE AGREEMENT
The underwriters and the Japanese underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the Japanese underwriters may sell shares of
our common stock to the underwriters for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the underwriters and any dealer to whom they
sell shares of our common stock will not offer to sell or sell shares of our
common stock to Japanese persons or to persons they believe intend to resell to
Japanese persons. Similarly, the Japanese underwriters and any dealer to
77
<PAGE>
whom they sell shares of our common stock will not offer to sell or sell shares
of our common stock to persons other than Japanese persons or to persons they
believe intend to resell to persons other than Japanese persons, except in the
case of transactions under the intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 500,000 shares, or 5%, of the shares of our common
stock offered by this prospectus for sale to some of our directors, officers and
employees and their family members, and other persons with relationships with
us. The number of shares of our common stock available for sale to the general
public will be reduced to the extent those persons purchase the reserved shares.
Any reserved shares which are not orally confirmed for purchase within one day
of the pricing of this offering will be offered by the underwriters to the
general public on the same terms as the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We, our executive officers, directors and substantially all of our
stockholders, have agreed, with exceptions, not to sell or transfer any shares
of our common stock for 180 days after the date of this prospectus without first
obtaining the written consent of Merrill Lynch. Specifically, we and these other
individuals have agreed not to directly or indirectly:
- offer, pledge, sell or contract to sell any shares of our common stock;
- sell any option or contract to purchase any shares of our common stock;
- purchase any option or contract to sell any shares of our common stock;
- grant any option, right or warrant for the sale of any shares of our
common stock;
- lend or otherwise dispose of or transfer any shares of our common stock;
- request or demand that we file a registration statement related to the
shares of our common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any shares of our common
stock whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to shares of our common stock and to
securities convertible into or exchangeable or exercisable for or repayable with
shares of our common stock. It also applies to shares of our common stock owned
now or acquired later by the person executing the agreement or for which the
person executing the agreement later acquires the power of disposition.
NASDAQ NATIONAL MARKET LISTING
We expect our common stock will be quoted on the Nasdaq National Market
under the symbol "UTSI."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between us, the representatives and the lead managers. In addition to prevailing
market conditions, the factors to be considered in determining the initial
public offering price are:
- the valuation multiples of publicly traded companies that the
representatives and the lead managers believe to be comparable to us;
- our financial information;
78
<PAGE>
- the history of, and the prospects for, our company and the industry in
which we compete;
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues;
- the present state of our development; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares of our common stock may not develop.
It is also possible that after the offering the shares of our common stock will
not trade in the public market at or above the initial public offering price.
The underwriters and the Japanese underwriters do not expect to sell more
than 5% of the shares of our common stock in the aggregate to accounts over
which they exercise discretionary authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares of our common stock is completed,
rules of the Securities and Exchange Commission may limit the underwriters and
the Japanese underwriters and selling group members from bidding for and
purchasing shares of our common stock. However, the representatives and the lead
managers may engage in transactions that stabilize the price of our common
stock, such as bids or purchases to peg, fix or maintain that price.
If the underwriters and the Japanese underwriters create a short position in
our common stock in connection with this offering, i.e., if they sell more
shares of our common stock than are listed on the cover page of this prospectus,
the representatives and the lead managers may reduce that short position by
purchasing shares of our common stock in the open market. The representatives
may also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of shares of our common stock
to stabilize its price or to reduce a short position may cause the price of our
common stock to be higher than it might be in the absence of these purchases.
The representatives and the lead managers may also impose a penalty bid on
the underwriters and the Japanese underwriters and selling group members. This
means that if the representatives or the lead managers purchase shares of our
common stock in the open market to reduce their short position or to stabilize
the price of these shares, they may reclaim the amount of the selling concession
from the underwriters and the Japanese underwriters and selling group members
who sold those shares. The imposition of a penalty bid may also affect the price
of shares of our common stock in that it discourages resales of those shares.
Neither we nor any of the underwriters or the Japanese underwriters makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of shares of our
common stock. In addition, neither we nor any of the underwriters or the
Japanese underwriters makes any representation that the representatives or the
lead managers will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
79
<PAGE>
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for UTStarcom by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Legal matters relating to the laws in China
are being passed upon for UTStarcom by Jun He Law Offices, Beijing, China. The
validity of the common stock offered by this prospectus will be passed upon for
the underwriters by Shearman & Sterling, Menlo Park, California.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1999, and
for each of the three years ended December 31, 1999 have been included in this
prospectus and in the registration statement of which this prospectus is a part
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given upon the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act. 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. Statements made in this prospectus concerning other
documents are not necessarily complete. The registration statement, including
exhibits, financial statements and notes, may be inspected without charge at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, NY 10048, and the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies may be obtained from the Commission upon payment of fees
prescribed by the Commission. Information on the operation of the public
reference room may be obtained by calling the Commission at 1-800-SEC-0330.
These reports and other information about our company may also be inspected
without charge at a Web site maintained by the Commission at http://www.sec.gov.
80
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL INFORMATION
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED)........ F-29
Pro Forma Combined Statement of Operations--Year Ended
December 31, 1999......................................... F-30
Notes to Unaudited Pro Forma Combined Financial
Information............................................... F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of UTStarcom, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
UTStarcom, Inc. and subsidiaries at December 31, 1998 and 1999 and the results
of their operations and their cash flows for each of the three years ended
December 31, 1999 in conformity with generally accepted accounting principles.
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 of these financial statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 2000
F-2
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
------------------- EQUITY AT
1998 1999 DECEMBER 31
-------- -------- 1999
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of
$1,500 and $4,550 at
December 31, 1998 and 1999.............................. $ 17,626 $ 87,364
Accounts receivable, net of allowance for doubtful
accounts of $3,957
and $6,789 at December 31, 1998 and 1999................ 59,995 77,823
Receivable from related parties........................... 24,829 339
Inventories, net of allowance for obsolete inventory of
$2,445 and $6,415 at December 31, 1998 and 1999......... 19,540 55,204
Other..................................................... 2,569 8,326
-------- --------
Total current assets........................................ 124,559 229,056
Property, plant and equipment, net.......................... 8,345 8,168
Investment in affiliated companies.......................... 3,496 5,564
Intangible assets, net...................................... 1,585 17,213
Deferred tax assets......................................... 1,647 4,817
Net assets of discontinued operations....................... 2,146 --
Other....................................................... 343 620
-------- --------
Total assets.............................................. $142,121 $265,438
======== ========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 15,101 $ 21,745
Third party debt.......................................... 10,865 34,593
Debt to shareholder and related parties................... 27,561 8,745
Income taxes payable...................................... 1,297 2,113
Customer deposits......................................... 605 5,249
Other..................................................... 12,818 29,102
-------- --------
Total current liabilities................................... 68,247 101,547
-------- --------
Minority interest in consolidated subsidiaries.............. 1,538 3,649
Stockholders' equity:
Convertible preferred stock: $.00125 par value; authorized:
99,200,000 shares; issued 59,635,754 at December 31, 1998,
and 70,377,322 at December 31, 1999; liquidation value of
$259,608 at
December 31, 1999......................................... 74 88 --
Common stock: $.00125 par value; authorized: 142,800,000
shares; issued and outstanding: 9,172,864 at December 31,
1998, and 8,929,837 at December 31, 1999, including
shares held in treasury................................... 12 13 101
Common stock warrant........................................ 1,983 389 389
Additional paid-in capital.................................. 89,901 187,805 187,805
Deferred stock compensation................................. -- (7,728) (7,728)
Accumulated deficit......................................... (16,307) (19,865) (19,865)
Notes receivable from shareholders.......................... (369) (555) (555)
Cumulative translation adjustment........................... 95 95 95
-------- -------- -------
75,389 160,242 160,242
Less cost of common stock held in treasury, 1,340,694 shares
at December 31, 1998, and 0 shares at December 31,
1999...................................................... (3,053) -- --
-------- -------- -------
Total stockholders' equity.................................. 72,336 160,242 160,242
-------- -------- -------
Total liabilities, minority interest, and stockholders'
equity.................................................. $142,121 265,438
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Net sales................................................... $75,597 $105,167 $187,516
Cost of sales............................................... 48,795 65,246 111,587
------- -------- --------
Gross profit................................................ 26,802 39,921 75,929
Operating expenses:
Selling, general and administrative expenses.............. 21,211 23,233 32,513
Research and development expenses......................... 8,941 14,659 17,364
Amortization of deferred stock compensation............... -- -- 4,491
Amortization of intangible assets......................... 40 120 273
In-process research and development costs................. -- -- 3,992
------- -------- --------
Total operating expenses.................................... 30,192 38,012 58,633
------- -------- --------
Operating income (loss)..................................... (3,390) 1,909 17,296
Interest income............................................. 2,786 1,817 2,010
Interest expense (income)................................... (758) (1,924) (3,057)
Other income (expense)...................................... 5 (1,031) (1,165)
Equity in net income (loss) of affiliated companies......... 73 331 1,348
------- -------- --------
Income (loss) before income taxes and minority interest..... (1,284) 1,102 16,432
Income tax expense (benefit)................................ 400 1,423 157
------- -------- --------
Income (loss) before minority interest...................... (1,684) (321) 16,275
Minority interest in (earnings) loss of consolidated
subsidiaries.............................................. 301 914 (2,110)
------- -------- --------
Income (loss) from continuing operations.................... (1,383) 593 14,165
Income (loss) from discontinued operations.................. 1,413 (893) (1,656)
------- -------- --------
Net income (loss)......................................... 30 (300) 12,509
Beneficial conversion feature of Series F convertible
preferred stock........................................... -- -- (16,067)
------- -------- --------
Net income (loss) applicable to common stockholders....... $ 30 $ (300) $ (3,558)
======= ======== ========
Basic earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.19) $ 0.08 $ (0.22)
Income (loss) from discontinued operations................ 0.19 (0.12) (0.19)
------- -------- --------
Net income (loss)......................................... $ 0.00 $ (0.04) $ (0.41)
======= ======== ========
Diluted earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.19) $ 0.01 $ (0.22)
Income (loss) from discontinued operations................ 0.19 (0.01) (0.19)
------- -------- --------
Net income (loss)......................................... $ 0.00 $ 0.00 $ (0.41)
======= ======== ========
Shares used in per-share calculation:
--Basic................................................. 7,320 7,582 8,678
======= ======== ========
--Diluted............................................... 7,320 77,050 8,678
======= ======== ========
Proforma basic earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.03)
Income (loss) from discontinued operations................ (0.02)
--------
Net income (loss)......................................... $ (0.05)
========
Proforma diluted earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.03)
Income (loss) from discontinued operations................ (0.02)
--------
Net income (loss)......................................... $ (0.05)
========
Proforma shares used in per-share calculation:
--Basic................................................. 68,646
========
--Diluted............................................... 68,646
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
--------------------- ---------------------- PAID-IN ACCUMULATED
ISSUED AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ----------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996.................... 25,055,312 $ 31 $ 12,338 $(11,459)
Exchange of common for preferred stock......... 18,554,132 $23 (18,554,132) $(23)
Common stock issued upon exercise of options... 184,002 210
Common stock dividend.......................... 2,540,000 3 13,825
Reacquired common stock........................
Common stock issued upon exercise of
warrants..................................... 581,824 1 199
Accreted dividends on preferred stock.......... 4,578 (4,578)
Reclassification of preferred stock to equity
upon elimination of mandatory redemption
feature...................................... 38,963,936 49 130,544
Contribution from stockholders................. 5,129
Notes receivable from stockholders.............
Translation adjustment.........................
Distribution to stockholders................... (75,830)
Net income..................................... 30
---------- --- ----------- ---- -------- --------
Balances, December 31, 1997.................... 57,518,068 72 9,807,006 12 90,993 (16,007)
Common stock issued upon exercise of options... 483,544 1 479
Stock dividend................................. 945,850 1 54,150
Exchange of common for preferred stock......... 1,171,836 1 (1,171,836) (1)
Non-employee stock compensation................ 412
Stock warrant issued as capital distribution... (1,983)
Reacquired common stock........................
Notes receivable from stockholders.............
Translation adjustment.........................
Net loss....................................... (300)
---------- --- ----------- ---- -------- --------
Balances, December 31, 1998.................... 59,635,754 74 9,172,864 12 89,901 (16,307)
Common stock issued upon exercise of options... 548,219 530
Reacquired common stock........................ 7,692
Stock reclassification......................... (549,448) (1) 549,448 1
Amendment to stock warrant issued as capital
distribution................................. 1,594
Notes receivable from stockholders.............
Deferred compensation related to grant of stock
options...................................... 12,219
Amortization of deferred stock compensation....
Non-employee stock compensation................ 1,648
Distribution to stockholders................... (6,550)
Issuance of preferred stock at $8.127 per
share, net of issuance costs of $41.......... 6,152,106 8 49,951
Issuance of preferred stock for Wacos
acquisition.................................. 4,523,700 6 20,506
Common stock issued upon exercise of options... 615,210 1 4,999
Dividend related to beneficial conversion
feature related to issuance of Series F
preferred stock in December 1999............. 16,067 (16,067)
Retirement of Treasury Stock................... (1,348,386) (3,060)
Net income..................................... 12,509
---------- --- ----------- ---- -------- --------
Balances, December 31, 1999.................... 70,377,322 $88 8,929,837 $ 13 $187,805 $(19,865)
========== === =========== ==== ======== ========
<CAPTION>
DEFERRED NOTES CUMULATIVE COMMON
STOCK RECEIVABLE TRANSLATION STOCK TREASURY
COMPENSATION FROM STOCKHOLDERS ADJUSTMENT WARRANT STOCK
------------- ----------------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996.................... $ 197 $(1,500)
Exchange of common for preferred stock.........
Common stock issued upon exercise of options...
Common stock dividend..........................
Reacquired common stock........................ (1,100)
Common stock issued upon exercise of
warrants.....................................
Accreted dividends on preferred stock..........
Reclassification of preferred stock to equity
upon elimination of mandatory redemption
feature......................................
Contribution from stockholders.................
Notes receivable from stockholders............. (129)
Translation adjustment......................... (25)
Distribution to stockholders...................
Net income.....................................
-------- ----- ----------- ------- -------
Balances, December 31, 1997.................... -- (129) 172 -- (2,600)
Common stock issued upon exercise of options...
Stock dividend.................................
Exchange of common for preferred stock.........
Non-employee stock compensation................
Stock warrant issued as capital distribution... 1,983
Reacquired common stock........................ (453)
Notes receivable from stockholders............. (240)
Translation adjustment......................... (77)
Net loss.......................................
-------- ----- ----------- ------- -------
Balances, December 31, 1998.................... -- (369) 95 1,983 (3,053)
Common stock issued upon exercise of options...
Reacquired common stock........................ (7)
Stock reclassification.........................
Amendment to stock warrant issued as capital
distribution................................. (1,594)
Notes receivable from stockholders............. (186)
Deferred compensation related to grant of stock
options...................................... (12,219)
Amortization of deferred stock compensation.... 4,491
Non-employee stock compensation................
Distribution to stockholders...................
Issuance of preferred stock at $8.127 per
share, net of issuance costs of $41..........
Issuance of preferred stock for Wacos
acquisition..................................
Common stock issued upon exercise of options...
Dividend related to beneficial conversion
feature related to issuance of Series F
preferred stock in December 1999.............
Retirement of Treasury Stock................... 3,060
Net income.....................................
-------- ----- ----------- ------- -------
Balances, December 31, 1999.................... $ (7,728) $(555) $ 95 $ 389 $ --
======== ===== =========== ======= =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balances, December 31, 1996.................... $ (393)
Exchange of common for preferred stock......... --
Common stock issued upon exercise of options... 210
Common stock dividend.......................... 13,828
Reacquired common stock........................ (1,100)
Common stock issued upon exercise of
warrants..................................... 200
Accreted dividends on preferred stock.......... --
Reclassification of preferred stock to equity
upon elimination of mandatory redemption
feature...................................... 130,593
Contribution from stockholders................. 5,129
Notes receivable from stockholders............. (129)
Translation adjustment......................... (25)
Distribution to stockholders................... (75,830)
Net income..................................... 30
--------
Balances, December 31, 1997.................... 72,513
Common stock issued upon exercise of options... 480
Stock dividend................................. 1
Exchange of common for preferred stock......... --
Non-employee stock compensation................ 412
Stock warrant issued as capital distribution... --
Reacquired common stock........................ (453)
Notes receivable from stockholders............. (240)
Translation adjustment......................... (77)
Net loss....................................... (300)
--------
Balances, December 31, 1998.................... 72,336
Common stock issued upon exercise of options... 530
Reacquired common stock........................ (7)
Stock reclassification......................... --
Amendment to stock warrant issued as capital
distribution................................. --
Notes receivable from stockholders............. (186)
Deferred compensation related to grant of stock
options...................................... --
Amortization of deferred stock compensation.... 4,491
Non-employee stock compensation................ 1,648
Distribution to stockholders................... (6,550)
Issuance of preferred stock at $8.127 per
share, net of issuance costs of $41.......... 49,959
Issuance of preferred stock for Wacos
acquisition.................................. 20,512
Common stock issued upon exercise of options... 5,000
Dividend related to beneficial conversion
feature related to issuance of Series F
preferred stock in December 1999............. --
Retirement of Treasury Stock................... --
Net income..................................... 12,509
--------
Balances, December 31, 1999.................... $160,242
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
-------- -------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 30 $ (300) $ 12,509
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
(Income) loss from discontinued opeations................. (1,413) 893 1,656
Depreciation and amortization............................. 1,289 2,486 2,954
Write-off of in-process research and development costs.... 3,992
Net loss on sale of assets................................ -- 73 611
Amortization of deferred stock compensation............... -- -- 4,491
Non-employee stock option expenses........................ -- 411 1,648
Equity in net (income) loss of affiliated companies....... 161 596 (1,348)
Minority interest......................................... (52) (2,084) 2,110
Changes in operating assets and liabilities:
Accounts receivable and receivable from related
parties............................................... (19,742) (51,782) (1,038)
Inventories............................................. (8,923) (4,414) (35,664)
Other current and non-current assets.................... (4,687) (474) (6,726)
Deferred tax assets..................................... (59) (1,194) (2,301)
Accounts payable and payable to related parties......... 2,651 (917) 6,644
Income taxes payable.................................... (151) 930 816
Other current liabilities............................... 4,711 8,562 21,023
Deferred revenue........................................ (475) -- (13)
-------- -------- --------
Net cash (used in) provided by continuing operations........ (26,660) (47,214) 11,364
Net cash (used in) provided by discontinued operations...... 23 207 (530)
-------- -------- --------
Net cash (used in) provided by operating activities......... (26,637) (47,007) 10,834
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.................. (3,745) (2,250) (3,607)
Investment in affiliates, net of cash acquired.............. (998) (1,093) (720)
Proceeds from disposal of property.......................... -- -- 997
-------- -------- --------
Net cash used in continuing operations...................... (4,743) (3,343) (3,330)
Net cash (used in) provided by discontinued operations...... (133) (36) 179
-------- -------- --------
Net cash used in investing activities....................... (4,876) (3,379) (3,151)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock, net of expenses.......................... 61,088 480 55,480
Reacquired common stock..................................... (1,100) (453) --
Distribution of cash to shareholders........................ (50,820) -- --
Proceeds (payments) from borrowing, net..................... 19 8,245 23,729
Payments on shareholder note receivable..................... 35,000 24,939 (17,505)
Advance from affiliate...................................... 4,042 -- --
-------- -------- --------
Net cash provided by financing activities of continuing
operations................................................ 48,229 33,211 61,704
Effects of exchange rates on cash........................... (25) (77) --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 16,691 (17,252) 69,387
Less cash (used in) provided by discontinued operations..... (110) 171 (351)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 16,801 (17,423) 69,738
Cash and cash equivalents at beginning of period............ 18,248 35,049 17,626
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 35,049 $ 17,626 $ 87,364
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION:
UTStarcom, Inc. (the Company), a Delaware corporation, provides
communications equipment including network access systems, optical transmission
products and subscriber terminal products for service providers that operate
wireless and wireline networks. The Company's operations are conducted primarily
by its foreign subsidiaries that manufacture, distribute, and support the
Company's products in international markets, principally the People's Republic
of China (China).
The following lists the Company's active subsidiaries, its percentage
ownership, and business each subsidiary operates as of December 31, 1999:
<TABLE>
<CAPTION>
PERCENTAGE
NAME OWNED TYPE OF OPERATIONS
- ---- ---------- ------------------
<S> <C> <C>
UTStarcom-China (UTSC).............. 100% Marketing and sales of telecom equipment
Hangzhou UTStarcom, Ltd. (HUTS)..... 88% Manufacturing of telecom equipment
Guangdong UTStarcom, Ltd. (GUTS).... 51% Manufacturing of telecom equipment
Wacos, Inc. (Wacos)................. 100% Conducting research & development
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly and majority (50 percent or more) owned subsidiaries,
except for GUTS which is accounted for using the equity method as the Company
does not have voting control over all significant matters. All significant
intercompany accounts and transactions have been eliminated in preparation of
the consolidated financial statements. Minority interest in consolidated
subsidiaries and equity in affiliated companies are shown separately in the
consolidated financial statements. Investments in affiliated companies, of which
none represent greater than 10 percent ownership, are accounted for using the
cost method.
RESTATEMENT AND RECLASSIFICATION:
The consolidated financial statements of the Company have been restated to
reflect the disposition of Nanjing UTStarcom, Ltd. (NUTS) in September 1999.
(See Note 4). Accordingly, the revenues, costs and expenses, assets and
liabilities and cash flows of these discontinued operations have been excluded
from the respective captions in the Consolidated Balance Sheets, Consolidated
Statements of Operations and Consolidated Statements of Cash Flows, and have
been reported through the date of dispositions as "Net assets from discontinued
operations", "Income (loss) from discontinued operations" and "Net cash (used
in) provided by discontinued operations" for all periods presented.
The Company has retroactively accounted for its December 1999 acquisition of
Wacos as if the original investment in Wacos by SOFTBANK in December 1997 had
been made by the Company. (See Note 6).
Certain reclassifications have been made in the prior years financial
statements to conform with the 1999 presentation.
F-7
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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
disclosures 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.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of highly liquid investments with original
maturity of three months or less at date of purchase. Restricted cash at
December 31, 1998 and December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Collateral for letters of credit............................ $ -- $ 640
Cash in escrow.............................................. -- 2,410
Cash collateral............................................. 1,500 1,500
------ ------
$1,500 $4,550
====== ======
</TABLE>
Restricted cash balances are expected to be released within three months of
being recorded and are treated as part of cash and cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost or market, net of allowance for
obsolescence. Cost is computed using standard cost, which approximates to actual
cost on a first-in, first-out basis.
WARRANTY COSTS:
A warranty is provided under the terms of the Company's contract for a
period not greater than one year. The Company provides for these costs at the
time of revenue recognition based upon prior experience.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost and are stated net of
accumulated depreciation. Depreciation is provided for on a straight-line basis
over the estimated useful lives of the related assets, generally ranging from
two to ten years. Leasehold improvements are amortized on a straight-line basis
over the shorter of the useful life of the improvements or the term of the
lease. When assets are disposed of, the cost and related accumulated
depreciation are removed from the
F-8
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
accounts and the resulting gains or losses are included in the results of
operations. The Company generally depreciates its assets over the following
periods:
<TABLE>
<S> <C>
Buildings................................................... 10 years
Leasehold improvements...................................... 2-10 years
Automobiles................................................. 5 years
Equipment and furniture..................................... 2-7 years
</TABLE>
INTANGIBLE ASSETS:
Intangible assets including the excess of costs of acquired companies over
the fair value of net assets acquired (goodwill) and acquired workforce are
amortized on a straight-line basis generally over 3 to 5 years.
IMPAIRMENT OF LONG-LIVED ASSETS:
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), requires that long-lived assets and certain intangible assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If undiscounted expected future
cash flows are less than the carrying value of the assets, an impairment loss is
to be recognized based on the fair value of the assets. The Company considers
the requirements of SFAS 121 on an ongoing basis.
IN-PROCESS RESEARCH AND DEVELOPMENT
The Company recorded a charge for purchased in-process research and
development ("IPR&D") in December 1999 in a manner consistent with widely
recognized appraisal practices at the date of acquisition. Technological
feasibility was not established for the expensed IPR&D, and the expensed IPR&D
had no alternative future use. The portion of the purchase price allocated to
goodwill and other intangible assets includes $240 of assembled workforce, and
$16,528 of goodwill. The purchase price allocation of the acquisition was
determined by an independent appraisal.
STOCK-BASED COMPENSATION
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and has adopted the disclosure-only alternative of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
The value of warrants, options or stock exchanged for services is expensed
over the period benefitted. The warrants and options are valued using the
Black-Scholes option pricing model. To calculate the expense, the Company uses
either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
F-9
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components and is effective for periods beginning after December 15, 1997. The
Company's comprehensive income approximated net income for all periods
presented.
INCOME TAXES:
Deferred income taxes are established based on enacted tax rates. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
The Company does not provide for U.S Federal taxes on undistributed earnings
of its foreign subsidiaries or affiliates as they are considered to be
reinvested for an indefinite period.
REVENUE RECOGNITION:
Revenue from product sales of equipment is recognized when title is passed,
all significant contractual obligations have been satisfied and collection of
the resulting receivable is reasonably assured. Title passes on customer
acceptance.
SEGMENT REPORTING:
Effective May 1, 1998, the Company adopted the Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires that an enterprise report
financial and descriptive information about its reportable operating segments.
Generally, financial information is required to be reported on the basis that is
used internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company has determined that they operate in a single
segment as defined by SFAS 131, providing communications equipment through an
integrated suite of network access systems, optical transmission products and
subscriber terminal products. Adoption of this standard does not affect the
Company's results of operations or financial position.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Financial instruments consist of cash and cash equivalents, accounts
receivable and payable, and debt. The carrying amounts of cash and cash
equivalents, accounts receivable and payable approximate their fair values
because of the short term nature of those instruments. The carrying amounts of
debt approximate their fair values because of either the short maturity or the
variable interest rates of those instruments.
FOREIGN CURRENCY TRANSLATIONS:
Operations of the Company's subsidiaries are conducted primarily in China
and the financial statements of those subsidiaries are translated from China's
Renminbi, as functional currency, into U.S. Dollars in accordance with the
Statement of Financial Accounting Standards No. 52, "Foreign Currency
F-10
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Translation" ("SFAS 52"). Accordingly, all foreign currency assets and
liabilities are translated at period-end exchange rates, while revenue and
expenses are translated at the average exchange rate for the period. The effects
of translating the financial statements of foreign subsidiaries into U.S.
dollars are reported as a cumulative translation adjustment, a separate
component of stockholders' equity. Foreign currency translation gains and losses
have not been material for 1997, 1998 and 1999.
EARNINGS (LOSS) PER SHARE:
The Company computes earnings (loss) per share pursuant to the Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Basic
earnings (loss) per share is computed by dividing income or loss applicable to
common stockholders by the weighted average number of shares of the Company's
common stock outstanding during the period. Diluted earnings (loss) per share is
determined in the same manner as basic earnings (loss) per share except that the
number of shares is increased assuming exercise of dilutive stock options and
warrants using the treasury stock method and conversion of the Company's
convertible preferred stock. (See Note 3)
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1999 is
computed using the weighted average number of shares of Common Stock
outstanding, including the pro forma effects of the automatic conversion of the
Company's Series A, Series B, Series C, Series D, Series E, Series F, and
Series G Convertible Preferred Stock into shares of the Company's Common Stock
effective upon the closing of the Company's initial public offering as if such
conversion occurred at the date of original issuance. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
net loss per share of 59,968,426 for the year ended December 31, 1999. The
calculation of diluted net loss per share excludes potential shares of Common
Stock as their effect would be antidilutive. Pro forma potential Common Stock
consist of unvested Common Stock subject to repurchase rights and incremental
shares of Common Stock issuable upon the exercise of stock options and warrants.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
If the Offering is consummated, all of the convertible preferred stock will
be automatically converted into common stock upon completion of the offering
(see Note 23). Unaudited pro forma stockholders' equity at December 31, 1999, as
adjusted for the assumed conversion of such shares, is disclosed on the balance
sheets.
F-11
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. EARNINGS (LOSS) PER SHARE:
The following table presents the calculation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------------
1997 1998 1999
-------- ----------- ------------
<S> <C> <C> <C>
Numerator:
Income (loss) from continuing operations.................. $(1,383) $ 593 $ 14,165
Beneficial conversion feature of Series F convertible
preferred stock......................................... -- -- (16,067)
------- ----------- ------------
Income (loss) from continuing operations after beneficial
conversion feature of Series F convertible preferred
stock................................................... (1,383) 593 (1,902)
Income (loss) from discontinued operations................ 1,413 (893) (1,656)
------- ----------- ------------
Net income (loss) applicable to common stockholders....... $ 30 $ (300) $ (3,558)
======= =========== ============
Denominator:
Weighted-average shares outstanding....................... 7,320 7,582 8,678
Dilutive warrants......................................... -- 10 --
Dilutive convertible preferred shares..................... -- 63,608 --
Dilutive options.......................................... -- 5,850 --
------- ----------- ------------
7,320 77,050 8,678
======= =========== ============
Basic earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.19) $ 0.18 $ (0.22)
Income (loss) from discontinued operations................ 0.19 (0.12) (0.19)
------- ----------- ------------
$ 0.00 $ 0.04 $ (0.41)
======= =========== ============
Diluted earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.19) $ 0.01 $ (0.22)
Income (loss) from discontinued operations................ 0.19 (0.01) (0.19)
------- ----------- ------------
$ 0.00 $ 0.00 $ (0.41)
======= =========== ============
</TABLE>
4. DISCONTINUED OPERATIONS:
During September 1999, the Company closed NUTS in China. NUTS, which was 100%
owned, was engaged in telephone network and internet network services unrelated
to the remaining Company operations. NUTS sold substantially all of its assets
prior to closure. The close of NUTS was accounted for as a discontinued
operation.
F-12
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. DISCONTINUED OPERATIONS: (CONTINUED)
The Company's previous interests in the net revenues and expenses of NUTS'
operations prior to September 30, 1999 are classified separately as income
(loss) from discontinued operations in the income statements. The components of
the income or loss are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales.......................................... $8,499 $4,457 $ 298
Operating expenses and cost of sales............... 7,029 5,345 1,369
------ ------ -------
Operating income (loss)............................ 1,470 (888) (1,071)
Other income (expenses)............................ (57) (5) (585)
------ ------ -------
Income (loss) from discontinued operations......... $1,413 $ (893) $(1,656)
====== ====== =======
</TABLE>
The Company's previous interest in the net assets and liabilities of NUTS is
classified as net assets from discontinued operations in the Company's balance
sheets. The components of these net assets are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets............................................. $ 2,650 --
Noncurrent assets.......................................... 182 --
Current liabilities........................................ (686) --
------- ------
Net assets from discontinued operations.................... $ 2,146 --
======= ======
</TABLE>
The Company's cash flow statements include separately the cash flows from
discontinued operations.
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the period for:
Interest............................................ $ 184 $ 564 $3,723
Income taxes........................................ $1,654 $1,076 $1,386
</TABLE>
F-13
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: (CONTINUED)
Noncash investing and financing activities were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Exchange of common stock for preferred stock................ $35,253 $ -- --
Share in APIC of minority shareholder in Wacos.............. $ -- $ 2,867 --
Distribution of net assets to shareholders.................. $25,010 $ 1,983 $ 4,956
Issuance of shares upon the Wacos acquisition............... $ -- $ -- $20,843
Payment on shareholders loan................................ $ -- $ -- $ 1,640
Retirement of treasury stock................................ $ -- $ -- $ 3,060
</TABLE>
6. ACQUISITION OF COMPANIES:
During 1996, the Company invested approximately $955 into Zhejiang Unitel
Telecom Equipment, Ltd. (UTL) for an additional 19% ownership interest, thereby
increasing its ownership to 70%. During 1997, the Company merged UTL into HUTS,
thereby owning 86% of the combined new entity. Concurrent with this combination,
the Company acquired approximately a 2% additional interest in the combined
entity for $780 in cash, which increased its ownership interest to 88%. The
purchase of additional interest in the new entity was accounted for as a
purchase resulting in an insignificant excess of the purchase price over the
fair value of the net assets acquired.
In February 1996, the Company purchased a 65% interest in NST for
approximately $1,200. This transaction was accounted for as a purchase resulting
in an intangible asset for the insignificant excess of the purchase price of NST
over the fair value of the net assets. The accounts of NST have been included in
the consolidated financial statements subsequent to February 1996.
In September 1996, the Company purchased a 49% interest in GUTS for
approximately $1,200. In February 1998, the Company acquired an additional 2%
interest in GUTS for $80, increasing its ownership interest to 51%. However,
because the Company does not have voting control over all significant matters of
GUTS, the investment in and results of operations of GUTS are included in the
consolidated financial statements using the equity method of accounting. The
purchase of the additional interest in GUTS has been accounted for as a purchase
resulting in an intangible asset for the insignificant excess of the purchase
price of GUTS over the fair value of the net assets.
In February and October 1997, the Company purchased a total of 49% of the
voting stock of Wacos for approximately $322.
In October and December 1997 SOFTBANK acquired a 40% voting interest in
Wacos for $5,129.
In December 1999 the Company issued 3,691,534 shares of Series G preferred
stock in exchange for SOFTBANK's 4,103,465 shares in Wacos. As a result of the
common control that existed between the Company, SOFTBANK and Wacos during this
period of ownership this exchange of shares was made at historic cost. The
Company has retroactively accounted for its acquisition of Wacos as if the
original investment by SOFTBANK had been made by the Company.
F-14
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. ACQUISITION OF COMPANIES: (CONTINUED)
In December 1999, the Company completed the purchase of the non-affiliated
minority interests in its Wacos, Inc subsidiary with the issuance of 832,182
shares of Series G preferred stock and $9,688 of common stock options valued
using Black-Scholes. The aggregate purchase price of Wacos, Inc. was
approximately $20,843 which, based upon an independent appraisal of all assets
acquired and liabilities assumed, was allocated to the specifically identifiable
tangible and intangible assets acquired. Intangible assets included
approximately $3,992 of in-process research and development which was charged to
operations in December 1999, $240 of assembled workforce and approximately
$16,528 of excess purchase price over the fair market values of the tangible and
identified intangible assets, being amortized over periods of three to five
years.
The values of Wacos' in-process research and development projects were
estimated by an excess income approach. Management revenue and operating expense
projections were reduced by appropriate amounts to reflect a fair return on the
net tangible and collateral intangible assets to be employed in realizing the
forecasted net incomes. The resulting forecasted "excess" income figures were
discounted to present value using a 40% rate of return, reflecting the
technological, market and other risks associated with the subject technologies
and future products. The discounted excess incomes were summed and then, in
accordance with methodology approved by the Securities and Exchange Commission,
reduced by an appropriate percentage completion factor for each project to
account for the anticipated remaining research and development factors.
At the time of the Wacos acquisition, Wacos was engaged in three distinct
in-process research and development projects in relation to its Internet
Protocol based switching system. These projects were in various stages of
development but none had reached the point where technological feasibility had
been established.
<TABLE>
<S> <C>
Purchased research and development.......................... $ 3,992
Fair value of net assets acquired........................... 83
Fair value of identified intangible assets.................. 240
Excess of costs of acquiring Wacos over fair value of net
assets (goodwill)......................................... 16,528
-------
$20,843
=======
</TABLE>
7. DISTRIBUTION TO SHAREHOLDERS:
In August 1999 the Company distributed to its shareholders the net assets of
a previously consolidated yet unrelated business which was acquired in 1997.
This business, which operated in a dissimilar market segment, has been managed
and financed, in all significant respects, as if it were autonomous from the
Company. These financial statements have been prepared as if the acquired
business was distributed on the original date of purchase in 1997. The original
purchase price totalling $75,830 comprised cash of $50,820, notes payable and
other acquisition costs of $11,185, the issuance of 2,540,000 shares of
UTStarcom common stock valued at $13,825 and additional shares of UTStarcom
stock and warrants to be determined based on the post acquisition performance of
the acquired business. Common and Series E preferred stock was issued in 1998
and subsequently amended in 1999. A warrant to purchase common stock with a
Black-Scholes value of $1,983 was issued in 1998 and was subsequently amended in
1999, resulting in a net value of $389 at December 31, 1999.
F-15
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INVENTORIES:
As of December 31, 1998 and 1999 inventories consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Raw materials............................................. $ 9,572 $31,461
Work in process........................................... 6,518 4,356
Finished goods............................................ 5,895 25,802
------- -------
$21,985 $61,619
Less allowance for obsolete inventory..................... 2,445 6,415
------- -------
$19,540 $55,204
======= =======
</TABLE>
9. PROPERTY, PLANT AND EQUIPMENT:
As of December 31, 1998, and 1999 property, plant and equipment consists of
the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Buildings................................................. $ 362 $ 145
Leasehold improvements.................................... 128 1,640
Automobiles............................................... 903 1,173
Equipment and furniture................................... 10,670 11,719
------- -------
12,063 14,677
Less accumulated depreciation............................. 3,718 6,510
------- -------
$ 8,345 $ 8,167
======= =======
</TABLE>
Depreciation expense was $1,215, $2,402 and $2,681 for the years ended
December 31, 1997, 1998 and 1999 respectively.
10. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY:
The Company's interest in its unconsolidated subsidiary, GUTS, was as
follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Investment in GUTS.......................................... $2,070 $3,418
====== ======
</TABLE>
In September 1996, the Company purchased a 49% interest in GUTS. In February
1998, the Company acquired an additional 2% interest in GUTS, increasing its
ownership interest to 51%. However, because the Company does not have voting
control over all significant matters of GUTS, the investment in and results of
operations of GUTS are included in the consolidated financial statements using
the equity method of accounting.
F-16
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY: (CONTINUED)
Condensed combined financial information for the unconsolidated investments
in GUTS is as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Current assets........................................... $ 13,686 $13,738
Noncurrent assets........................................ 1,139 866
Current liabilities...................................... (10,062) (9,071)
Noncurrent liabilities................................... (49) --
-------- -------
Total shareholders' equity............................... 4,714 5,533
Other shareholders' shares of equity..................... 2,310 2,711
-------- -------
UTStarcom's share of equity.............................. 2,404 2,822
Goodwill and other items................................. (334) 596
-------- -------
Investment in unconsolidated subsidiary.................. $ 2,070 $ 3,418
======== =======
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $7,772 $ 10,995 $16,004
Gross profit..................................... 893 8,651 2,366
Operating income (loss).......................... (7) 956 1,067
Net income....................................... 100 652 820
------ -------- -------
UTStarcom's share of net income.................. 49 333 418
Goodwill and others.............................. (285) (285) 645
------ -------- -------
Equity in net income (loss) of subsidiary........ $ (236) $ 48 $ 1,063
====== ======== =======
</TABLE>
Product sales to GUTS for the years ended December 31, 1997, 1998 and 1999
were $5,988, $4,533 and $1,999. There were no purchases from GUTS for the same
period,
11. INTANGIBLE ASSETS:
As of December 31, 1998, and 1999 intangible assets consists of the
following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Excess of purchase price over net assets acquired.......... $1,816 $17,717
Less accumulated amortization.............................. 231 504
------ -------
$1,585 $17,213
====== =======
</TABLE>
Amortization expense was $40, $120 and $273 for the years ended
December 31, 1997, 1998 and 1999 respectively.
F-17
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. RELATED PARTY DEBT:
Payable to related parties and debt to shareholder at December 31, 1998 and
1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Payable to related party(1)............................... $ 1,311 --
======= =======
Debt to shareholder--SOFTBANK CORP.(2).................... $26,250 --
Debt to shareholder--SOFTBANK CORP.(3).................... -- 8,745
------- -------
Total debt to shareholder................................. $26,250 $ 8,745
======= =======
</TABLE>
- ------------------------
(1) Amount bears interest at a rate of 5.5% per annum and has no scheduled
payment terms. As of December 31, 1999, the entire loan was paid off.
(2) In June 1998, the Company entered into a loan agreement with SOFTBANK CORP.
(SOFTBANK), the Company's principal shareholder, for the total amount of
$25,000. As of December 31, 1999, the entire loan was paid off.
(3) Jitong, a company in China with which the Company had a management
consulting agreement, paid UTSC $8,745 for the repayment of a loan made by
SOFTBANK to Jitong. Repayment of this amount to SOFTBANK is planned for the
first quarter of 2000. This payable is a non interest bearing balance.
13. THIRD PARTY DEBT:
The following represents the outstanding borrowings at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
NOTE RATE MATURITY 1998 1999
- ---- ------------------- ----------------- -------- --------
<S> <C> <C> <C> <C>
Bank of China(1).................. From 5.58% to 6.40% From 2/00 to 7/00 $ 9,398 $27,108
Industrial & Commercial Bank of
China(2)........................ 6.57% 2/00 1,446 1,446
Commercial Bank of Hangzhou(3).... 6.44% 10/00 -- 6,024
Other............................. Various Various 21 15
------------------- ----------------- ------- -------
Total debt........................ $10,865 $34,593
======= =======
</TABLE>
- ------------------------
(1) Guaranteed by the Company and the minority shareholder of HUTS. This
represents drawings on the Company's line of credit with the bank. This line
of credit allows for borrowings of up to $48,193; therefore, $21,085 is
available under this facility at December 31, 1999.
(2) Collateralized by $1,500 deposited with the bank. This line of credit allows
for borrowings of up to $1,446 and matures on February 3, 2000.
(3) Guaranteed by HUTS. This line allows for borrowings of up to $12,048 and
matures in October 2000.
F-18
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. OTHER CURRENT LIABILITIES:
Other current liabilities at December 31, 1998 and 1999 consist of the
following:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Accrued contract costs.................................... 7,204 19,373
Accrued compensation and bonus............................ 1,944 3,493
Accrued other taxes....................................... -- 618
Warranty costs............................................ 997 1,236
Other..................................................... 2,673 4,381
------- -------
$12,818 $29,101
======= =======
</TABLE>
15. PROVISION FOR INCOME TAXES:
United States and foreign income (loss) before income taxes, loss on
discontinued operations, and minority interest were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States.................................... $ (123) $(4,928) $(16,190)
Foreign.......................................... (1,161) 6,030 32,622
------- ------- --------
$(1,284) $ 1,102 $ 16,432
======= ======= ========
</TABLE>
Undistributed foreign earnings at December 31, 1999 amounted to $38,355.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CURRENT:
Federal........................................... $ 176 $ 9 $ 266
State............................................. 50 1 493
Foreign........................................... 190 934 1,700
DEFERRED:
Federal........................................... 113 632 (2,024)
State............................................. 15 (239) (34)
Foreign........................................... (144) 86 (244)
----- ------ -------
$ 400 $1,423 $ 157
===== ====== =======
</TABLE>
F-19
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. PROVISION FOR INCOME TAXES: (CONTINUED)
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements. A summary of the components of net deferred tax assets is as
follows:
<TABLE>
<CAPTION>
U.S. CHINA TOTAL
-------- -------- --------
<S> <C> <C> <C>
DECEMBER 31, 1998:
Deferred tax assets:
Net operating loss carryforward................... $ 1,459 $ -- $ 1,459
Allowances and reserves........................... 475 454 929
Tax credit carryforwards.......................... 1,168 -- 1,168
------- ------ -------
Total deferred tax assets....................... 3,102 454 3,556
Deferred tax liabilities:
Accelerated depreciation.......................... (280) -- (280)
------- ------ -------
2,822 454 3,276
Valuation allowance............................... (1,629) -- (1,629)
------- ------ -------
Net deferred tax assets......................... $ 1,193 $ 454 $ 1,647
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
U.S. CHINA TOTAL
-------- -------- --------
<S> <C> <C> <C>
DECEMBER 31, 1999:
Deferred tax assets:
Net operating loss carryforward................... $ 1,363 $ -- $ 1,363
Future period compensation deductions............. $ 1,362 $ -- $ 1,362
Allowances and reserves........................... 1,625 1,222 2,847
Tax credit carryforwards.......................... 2,834 2,834
------- ------ -------
Total deferred tax assets....................... 7,184 1,222 8,406
Deferred tax liabilities:
Accelerated depreciation.......................... (277) -- (277)
------- ------ -------
6,907 1,222 8,129
Valuation allowances.............................. (2,788) (524) (3,312)
------- ------ -------
Net deferred tax assets......................... $ 4,119 $ 698 $ 4,817
======= ====== =======
</TABLE>
Net deferred tax assets are included in other assets on the balance sheet.
As of December 31, 1999, the Company has research and development credit
carryforwards of approximately $1,196 for federal tax purposes expiring in
varying amounts between 2017 and 2019. As of December 31, 1999 the Company has
federal and state net operating loss carryovers of $4,033 and $8,059,
respectively which were acquired from Wacos in a merger on December 14, 1999.
The federal net operating loss carryovers will expire in 2019. The state net
operating loss carryovers will expire in
F-20
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. PROVISION FOR INCOME TAXES: (CONTINUED)
varying amounts between 2002 and 2004. Management believes that the Company's
ability to use their deferred tax assets is limited based on the expectation
that they will not be able to fully utilize either the tax net operating losses
or the research and development credits generated by Company's other research
and development center in the US. Management also believes that the Company's
ability to fully utilize the benefit of certain reserves in UTSC are also
limited. The Company has created a full valuation allowance against all of these
deferred tax assets.
During 1999 the Company recognized and wrote off a deferred tax asset of
$868 for the tax effect of acquired net operating losses utilized in 1999. The
recording of the asset was offset by a corresponding reduction in goodwill
recognized on the acquisition of Wacos. The write off was recorded as a
reduction of the deferred tax benefit recorded for 1999.
UTSC and HUTS were granted tax holidays which started to phase out in 1999.
The net impact of these tax holidays was to decrease net loss by approximately
$871 in 1997, increase net income by approximately $305 for the year ended
December 31, 1998, and increase net income of UTSC and HUTS by approximately
$4,545 for the year ended December 31, 1999. One time tax refunds of $360 were
received during the year ended December 31, 1999.
The difference between the Company's effective income tax rate and the
Federal statutory rate is reconciled below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate...................................... (34)% 34% 34%
State taxes, net of federal income tax benefit.............. 6 (6) (3)
Permanent differences....................................... (4) 9 14
Effect of difference in foreign taxes rates................. (30) (19) (31)
Change in valuation allowance............................... 117 44 15
Other....................................................... (8) 7 (28)
---- --- ---
Effective rate.............................................. 47% 69% 1%
==== === ===
</TABLE>
The high effective tax rate in 1998 reflects the valuation allowances on net
operating losses generated by Wacos for which management expects to receive no
future benefit. The effect of the valuation allowances on the Company's
consolidated effective tax rates in 1997 and 1998 is pronounced because the
Company's income (loss) before taxes and minority interest was relatively small
in comparison to the Wacos net operating losses in those years.
F-21
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. CONVERTIBLE PREFERRED STOCK:
Preferred stock at December 31, 1999 consists of the following:
<TABLE>
<CAPTION>
SHARES
------------------------ LIQUIDATION
SERIES AUTHORIZED OUTSTANDING AMOUNT
- ------ ---------- ----------- -----------
<S> <C> <C> <C>
A......................................... 4,000,000 2,850,000 $ 2,850
B......................................... 16,000,000 14,492,752 30,000
C......................................... 14,000,000 13,589,056 46,746
D......................................... 8,200,000 8,032,128 50,000
E......................................... 38,000,000 20,122,370 38,234
F......................................... 8,000,000 6,767,316 54,999
G......................................... 11,000,000 4,523,700 36,779
---------- ---------- --------
Total................................... 99,200,000 70,377,322 $259,608
========== ========== ========
</TABLE>
Each share of preferred stock is convertible into common stock at the option
of the holder on a one-for-one basis, subject to certain adjustments. Each
series of preferred stock will automatically convert upon the earliest of the
closing date of an underwritten public offering of the Company's common stock
with aggregate proceeds of at least $8,000, or at the option of the holders of
the outstanding shares of such series. The Company has reserved common shares
sufficient to cover any conversion.
Holders of the preferred stock are entitled to one vote for each share of
common stock into which such shares may be converted.
Each share of Series A, Series B, Series C, Series D, Series E, Series F and
Series G preferred stock entitles the holder to receive annual noncumulative
dividends of $0.05, $0.104, $0.172, $0.311, $0.272, $0.406, and $0.407
respectively, in preference to holders of shares of common stock, if and when
declared by the Board of Directors. No dividends have been declared to date.
In the event of any liquidation or dissolution, the holders of Series A,
Series B, Series C, Series D, Series E, Series F and Series G would be entitled
to receive $1.00, $2.07, $3.44, $6.225, $1.90, $8.127 and $8.130 per share,
respectively, plus all declared but unpaid dividends prior and in preference to
any distribution to holders of common stock. After payment has been made to the
holders of the preferred stock, any remaining assets shall be distributed
ratably among the holders of the preferred and common stock based on the number
of shares of common stock held, or, in the case of preferred stock, the number
of shares of common stock which the preferred stock could be converted into. If
the Company's assets are insufficient to provide for a full preference amount
for the preferred stock outstanding, then such assets shall be distributed
ratably among the holders of the preferred stock in proportion to the
preferential amount each such holder would be entitled to receive.
At December 31, 1996, preferred shares and accreted dividends were
classified outside of stockholders' equity because of their mandatory redemption
feature. In December 1997, the shareholders approved the Eighth Amended and
Restated Certificate of Incorporation, which eliminated the mandatory redemption
and cumulative annual dividend features of all outstanding series of preferred
stock. Accordingly, the preferred stock was recorded in stockholders' equity,
and the
F-22
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. CONVERTIBLE PREFERRED STOCK: (CONTINUED)
accreted dividends amounting to $270, $1,097 and $4,578 in 1995, 1996 and 1997,
respectively, were recorded in additional paid-in capital.
During 1997, the Company offered to all its common stockholders the option
of exchanging shares of common stock for shares of Series E preferred stock. As
of December 31, 1999, the exchange had been completed, and the Company had
issued 19,726 shares of Series E preferred stock in connection with this
exchange.
The Series F preferred stock issuance included a beneficial conversion
feature pursuant to which the preferred shares convert into common shares on a
one-for-one basis at a price below the expected offering price upon the
completion of the Company's initial public offering. This resulted in a charge
to net income available to common stockholders in the fiscal period ending
December 31, 1999 of approximately $16,067.
17. STOCKHOLDERS' EQUITY:
In connection with the grant of certain stock options to employees and
members of the Board of Directors, the Company recorded deferred stock
compensation of $12,219 in 1999, representing the difference between the deemed
fair value of common stock for accounting purposes and the option exercise price
of these options at the date of grant. Deferred compensation is presented as a
reduction of stockholders' equity, with amortization recorded over the four year
vesting period. The Company recorded amortization of deferred stock compensation
of approximately $4,491 during the year ended December 31, 1999. At
December 31, 1999 approximately $7,728 remained to be amortized over the
corresponding vesting period of each respective option, generally four years.
The amortization expense relates to options awarded to employees in all
operating expense categories.
18. COMMON STOCK WARRANTS:
In May 1994, the Company issued warrants to purchase 582,000 shares of
common stock at $0.345 per share through May 31, 1999. These warrants were
issued in conjunction with the Company's Series A preferred stock financing. The
warrants were exercised for $200 in October 1997.
In December 1998, the Company issued warrants to purchase 2,000,000 shares
of common stock at $6.25 per share as part of the acquisition and distribution
of assets to the Company's shareholders as discussed in Note 7. The fair value
of the warrants $1,983 was determined using a Black-Scholes model. On
September 30, 1999, the Company amended the distribution value, and the number
of shares which may be issued upon exercise of the warrant was reduced to
500,000 shares. The fair value of the warrants was reduced to $389.
19. STOCK OPTION PLANS:
1992 OMNIBUS EQUITY INCENTIVE PLAN. On April 12, 1992, the Board of
Directors adopted our 1992 Omnibus Equity Incentive Plan, which our stockholders
ratified on December 9, 1994. Under the 1992 plan, directors, employees and
consultants were eligible to acquire shares of common stock pursuant to options,
stock purchase rights and stock appreciation rights. At the time of adoption,
2,400,000 shares of common stock were reserved for issuance under the 1992 plan.
As of December 31, 1999 there were 1,620,328 shares authorized for issuance
under the 1992 plan, and options to purchase 41,728 shares of
F-23
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
19. STOCK OPTION PLANS: (CONTINUED)
common stock were outstanding. On July 31, 1995, the Board of Directors elected
not to grant any further options under the 1992 plan.
THE 1995 STOCK PLAN. On July 31, 1995, the Board of Directors adopted, and
in October 1995, our stockholders approved, our 1995 Stock Plan. Under the 1995
plan, officers, employees and consultants were eligible to acquire shares of
common stock pursuant to options or stock purchase rights. At the time of
adoption, 3,705,232 shares of common stock were reserved for issuance under the
1995 plan. In 1995 and 1996, our Board and stockholders added an additional
5,400,000 shares to the 1995 plan, raising the total number of authorized shares
reserved under the 1995 plan to 9,105,232. As of December 31, 1999, there were
6,711,744 shares authorized for issuance under the 1995 plan and options to
purchase 6,125,644 shares of common stock were outstanding under the 1995 plan.
On January 31, 1997, the Board of Directors elected not to grant any further
options under the 1995 plan. Upon the adoption of the 1997 plan, all remaining
unissued shares under the 1995 plan not already subject to options or other
awards ceased to be reserved for issuance under the 1995 plan.
THE 1997 STOCK PLAN. On January 31, 1997, the Board of Directors adopted,
and our stockholders approved, our 1997 Stock Plan. Under the 1997 plan,
officers, employees and consultants are eligible to receive options to purchase
shares of common stock and stock purchase rights. Under the plan, we are
authorized to issue up to 8,499,018 shares of common stock as of December 31,
1999. As of December 31, 1999, 8,238,342 shares have been issued and are
outstanding. Upon the closing of this offering, the plan will be authorized to
issue up to 10,524,574 shares of common stock. The number of shares issuable
under the plan will be increased annually on the first day of each fiscal year
beginning in 2001 by an amount equal to lesser of 6,000,000 shares or 4% of the
outstanding shares of our common stock on that date, or a lesser amount
determined by the Board.
F-24
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
19. STOCK OPTION PLANS: (CONTINUED)
Options under the Company's stock option plans may be either "Incentive
Stock Options", as defined under Section 422 of the Internal Revenue Code, or
"Nonqualified Options". A summary of activity under the Plans follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
---------------- ---------- --------------
<S> <C> <C> <C>
Options Outstanding December 31, 1996......... 7,257,300 7,759,058 $1.07
Options Granted............................... (1,735,178) 1,735,178 $2.50
Options Exercised............................. -- (184,002) $1.14
Options Forfeited or Expired.................. (1,733,838) (358,886) $2.06
---------- ---------- -----
Options Outstanding December 31, 1997......... 3,788,284 8,951,348 $1.31
Options Granted............................... (2,611,198) 2,611,198 $3.53
Options Exercised............................. -- (483,544) $1.00
Options Forfeited or Expired.................. 1,120,010 (1,424,380) $2.71
---------- ---------- -----
Options Outstanding December 31, 1998......... 2,297,096 9,654,622 $1.72
Options Granted............................... (6,055,310) 6,055,310 $5.65
Options Exercised............................. -- (555,911) $0.95
Options Forfeited or Expired.................. 720,901 (748,307) $3.54
Options authorized during 1999................ 3,209,556 -- --
---------- ---------- -----
Options Outstanding December 31, 1999......... 172,243 14,405,714 $3.25
========== ========== =====
</TABLE>
Options to purchase 8,067,276 shares were exercisable as of December 31,
1999.
The following table summarizes information with respect to stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
RANGE OF EXERCISE SHARES CONTRACTUAL EXERCISE SHARES AVERAGE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ------------ -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.0625 383,418 8.56 $0.0625 163,073 $0.0625
$0.2500-$0.8538 5,258,476 3.73 $0.8260 5,040,940 $0.8508
$0.9375-$2.2768 2,053,798 3.76 $1.8769 1,973,800 $1.9087
$2.500-$4.000 1,866,006 7.77 $3.3347 577,595 $3.3363
$4.0982 21,326 9.03 $4.0982 21,326 $4.0982
$4.5000-$9.3800 4,822,690 9.62 $6.6803 290,542 $8.5395
- --------------------- ---------- ---- ------- --------- -------
$0.0625-$9.3800 14,405,714 6.37 $3.2452 8,067,276 $1.5572
===================== ========== ==== ======= ========= =======
</TABLE>
The Company has elected to account for employee stock-based compensation
under APB 25 and has provided the following information as required by SFAS 123,
"Accounting for Stock-Based Compensation."
F-25
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
19. STOCK OPTION PLANS: (CONTINUED)
The following assumptions were used to calculate the fair value of the
options granted:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Expected remaining term in years................... 2.8 3.51 2.41
Weight average risk-free interest rate............. 5.67% 4.91% 6.10%
Expected dividend rate............................. 0.00% 0.00% 0.00%
</TABLE>
Because the Company does not have actively traded equity securities,
volatility is not considered in determining the fair value of stock-based awards
to employees.
The weighted average fair value per share of those options granted in 1997,
1998 and 1999 was $0.22, $0.82 and $3.25, respectively.
Using the above method and assumptions, the Company's net income (loss)
applicable to common stock and earnings (loss) per share, on a pro forma basis,
would have been:
<TABLE>
<CAPTION>
EARNINGS EARNINGS
(LOSS) (LOSS)
NET INCOME PER SHARE PER SHARE
(LOSS) BASIC DILUTED
---------- --------- ---------
<S> <C> <C> <C>
YEAR ENDED:
DECEMBER 31, 1997:
Actual....................................... $ 30 $ 0.00 $ 0.00
======= ====== ======
Pro forma.................................... $ (317) $(0.04) $(0.04)
======= ====== ======
DECEMBER 31, 1998:
Actual....................................... $ (300) $(0.04) $ 0.00
======= ====== ======
Pro forma.................................... $ (775) $(0.10) $(0.01)
======= ====== ======
DECEMBER 31, 1999:
Actual....................................... $(3,558) $(0.41) $(0.41)
======= ====== ======
Pro forma.................................... $(5,506) $(0.63) $(0.63)
======= ====== ======
</TABLE>
These pro forma results are not necessarily indicative of results which may
be expected in the future as additional grants are made each year and options
vest over several years.
In addition, the Company granted 589,964 options to non-employees in 1999.
The exercise price for all non-employee options ranges from $0.063 to $9.38.
Using a volatility of 40% a compensation expense of $1,648 was calculated using
the Black-Scholes model and was charged to selling, general and administrative
expenses. Non-employees were granted a total of 909,880 options during the four
years ended December 31, 1999 that are required to be remeasured at each balance
sheet date and charged to sales, general, and administrative expense over the
vesting period.
F-26
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
20. COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company and its subsidiaries lease certain facilities under
noncancelable operating leases, which expire at various dates through 2004. The
minimum future lease payments under the leases are December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
<S> <C>
Years ending:
2000...................................................... $1,135
2001...................................................... 1,085
2002...................................................... 982
2003...................................................... 323
2004...................................................... 403
------
Total minimum lease payments.............................. $3,928
======
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 is $1,376,
$1,846, and $1,840, respectively.
LITIGATION:
The Company and its subsidiaries may become involved in legal proceedings,
claims and litigation from time to time arising in the ordinary course of
business. In the opinion of management, the outcome of such current legal
proceedings, claims and litigation will not have a material effect on the
Company's consolidated operating results, cash flows or financial position.
GUARANTEE:
In conjunction with a sale of equipment, HUTS has guaranteed a bank loan
incurred by a UTSC customer. As of December 31, 1999, the total amount of debt
guaranteed by the Company was $1,552. The debt carries an interest rate of
6.993% per annum and is payable in 3 installments with the final installment due
December 30, 2001.
21. 401(k) PLAN:
The Company sponsors a 401(k) plan in which all employees are eligible to
participate immediately upon employment. Matching contributions are at the
discretion of the Company. The Company made no matching contribution to the plan
during 1997, 1998 or 1999.
22. OPERATING RISKS:
FINANCIAL RISKS:
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents and
accounts receivable. The Company places its temporary cash investments with
several financial institutions. Approximately $4,877, $11,444 and $43,635 of the
Company's cash was on deposit in foreign accounts at December 31, 1997, 1998 and
1999, respectively. The Company invests excess cash in highly liquid investments
with original maturity of three months or
F-27
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
22. OPERATING RISKS: (CONTINUED)
less, such as certificates of deposit and money market funds, which the Company
believes have limited exposure to risk.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
No customer in the continuing operations accounted for more than 10% of the
Company's sales during 1997 and 1998. The company's first and second largest
customers accounted for 30% and 11% of the Company's sales and 39% and 6% of the
accounts receivable respectively, as of December 31, 1999. Over 90% of the
Company's sales during 1999 were to entities affiliated with the government of
China or state owned enterprises. Accounts receivable balances from these China
government affiliated entities or state owned enterprises were $83,825 as of
December 31, 1999. The Company extends credit to its customers generally without
requiring collateral. The Company monitors its exposure for credit losses and
maintains allowances for uncollectible accounts.
No vendor accounted for more than 10% of the Company's cost of sales during
1997 and 1998. One vendor, a related party, accounted for 47% of the Company's
cost of sales and 8% of accounts payable as of December 31, 1999.
COUNTRY RISKS:
Over 99% of the Company's sales for 1999 were made in China. Accordingly,
the Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environment in China, and by the
general state of China's economy. The Company's operations in China are subject
to special considerations and significant risks not typically associated with
companies in the United States. These include risks associated with, among
others, the political, economic and legal environments and foreign currency
exchange. The Company's results may be adversely affected by, among other
things, changes in the political, economic and social conditions in China, and
by changes in governmental policies with respect to laws and regulations,
changes in China's telecommunications industry and regulatory rules and
policies, anti-inflationary measures, currency conversion and remittance abroad,
and rates and methods of taxation.
Specifically, remittances from China which are of a capital nature, such as
the repayment of bank loans denominated in foreign currencies, require approval
from appropriate governmental authorities before Renminbi can be used to
purchase foreign currency. Although the payment of cash dividends is permitted
so long as the subsidiaries have sufficient reserves and adequate amounts of
Renminbi to purchase foreign currency, regulations restrict the ability of the
subsidiaries to transfer funds to the Company through intercompany loans and
advances. The Company had net assets at December 31, 1999 of approximately
$63,000 located in China compared to the Company's total net assets of $150,000.
23. SUBSEQUENT EVENTS:
In December 1999, the Board of Directors authorized the management of the
Company to file a Registration Statement with the Securities and Exchange
Commission concerning the proposed sale of the shares of its common stock to the
public. Upon completion of this proposed sale, all outstanding shares of the
Company's convertible preferred stock will automatically convert into common
stock. Unaudited pro forma stockholders' equity, as adjusted for the assumed
conversion of the convertible preferred stock upon the Company's initial public
offering, is disclosed in the accompanying unaudited pro forma stockholders'
equity balance sheet.
F-28
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma information presents the combined results
of operations as if the acquisition of the minority interest in Wacos had
occurred at the beginning of 1999. The pro forma information is not necessarily
indicative of what would have occurred had the acquisition taken place as of
January 1, 1999, nor is it indicative of future results of operations.
See notes to unaudited pro forma combined financial information for further
detail on the accounting treatment.
F-29
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------
PRO FORMA
UTSTARCOM WACOS(A) COMBINED ADJUSTMENTS TOTAL
---------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $187,516 $187,516 $ $187,516
Cost of sales......................................... 111,587 111,587 111,587
-------- -------- -------- ------- --------
Gross profit.......................................... 75,929 75,929 75,929
Operating expenses:
Selling, general and administrative expenses........ 32,513 32,513 32,513
Research and development expenses................... 17,364 17,364 17,364
Amortization of deferred stock compensation......... 4,491 4,491 4,491
Amortization of intangible assets................... 273 273 3,078(1) 3,351
In-process research and development costs........... 3,992 3,992 (3,992)(2) --
-------- -------- -------- ------- --------
Total operating expenses.............................. 58,633 58,633 (914) 57,719
-------- -------- -------- ------- --------
Operating income (loss)............................... 17,296 17,296 914 18,210
Interest income (expenses)............................ (1,047) (1,047) (1,047)
Other income (expenses)............................... (1,165) (1,165) (1,165)
Equity in net income of affiliated companies.......... 1,348 1,348 1,348
-------- -------- -------- ------- --------
Income (loss) before income taxes and minority
interest............................................ 16,432 16,432 914 17,346
Income tax expense (benefit).......................... 157 157 157
-------- -------- -------- ------- --------
Income (loss) before minority interest................ 16,275 16,275 914 17,189
Minority interest in (earnings) loss of consolidated
subsidiaries........................................ (2,110) (2,110) (2,110)
-------- -------- -------- ------- --------
Income (loss) from continuing operations.............. $ 14,165 $ 14,165 $ 914 $ 15,079
======== ======== ======== ======= ========
Loss from discontinued operations..................... (1,656) (1,656) (1,656)
-------- -------- -------- ------- --------
Net income............................................ 12,509 12,509 914 13,426
Beneficial conversion feature of Series F convertible
preferred stock..................................... (16,067) (16,067) (16,067)
-------- -------- -------- ------- --------
Net income (loss) applicable to common stockholders... (3,558) (3,558) 914 (2,644)
======== ======== ======== ======= ========
Earnings per common share--basic...................... $ (0.30)
========
Earnings per common share--diluted.................... $ (0.30)
========
Shares used in pro forma per-share
calculation--basic................................ 8,678
========
Shares used in pro forma per-share
calculation--diluted.............................. 8,678
========
</TABLE>
(A) Wacos statement of operations are consolidated within UTStarcom's statement
of operations and no further adjustment is required.
See accompanying notes to unaudited pro forma combined financial information.
F-30
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pro forma adjustments for the unaudited pro forma statement of operations
for the year ended 1999 are as follows:
(1) Represents the allocation of purchase price for Wacos to goodwill and
other intangible assets, which will be amortized over a period of three
to five years. The intangible assets acquired are assembled workforce and
goodwill;
(2) Represents the in-process research and development charge resulting from
the acquisition of the minority interest in Wacos, Inc., removed from the
pro forma statement of operations as a non-recurring charge; and
The pro forma combined statement of operations data presents our
consolidated results of operations as if our acquisition of Wacos had occurred
as of January 1, 1999. The pro forma information is not necessarily indicative
of what would have occurred had the acquisition been made as of such period, nor
is it indicative of future results of operations.
F-31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
10,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
P R O S P E C T U S
------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
U.S. BANCORP PIPER JAFFRAY
, 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, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
Securities and Exchange Commission registration fee......... $ 42,504
NASD filing fee............................................. 16,600
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 600,000
Accounting fees and expenses................................ 850,000
Blue sky fees and expenses.................................. 10,000
Transfer agent and registrar fees........................... 5,000
Miscellaneous expenses...................................... 180,896
----------
Total....................................................... 2,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, we can indemnify
any person who is, or is threatened to be made, a party to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative other than action by us or on our behalf, by
reason of the fact that such person is or was one of our officers or directors,
or is or was serving at our request as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to our best
interests, and, for criminal proceedings, had no reasonable cause to believe his
or her conduct was illegal. Under Delaware law, we may also indemnify officers
and directors in an action by us or on our behalf under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to us in the performance of his or
her duty. Where an officer or director is successful on the merits or otherwise
in the defense of any action referred to above, we must indemnify him or her
against the expenses which such officer or director actually and reasonably
incurred.
Our certificate of incorporation contains a provision to limit the personal
liability of our directors for violations of their fiduciary duty. This
provision eliminates each director's liability to us or our stockholders for
monetary damages to the fullest extent permitted by Delaware law. The effect of
this provision is to eliminate the personal liability of directors for monetary
damages for actions involving a breach of their fiduciary duty of care,
including any such actions involving gross negligence.
Our bylaws provide for indemnification of our officers and directors to the
fullest extent permitted by applicable law.
We have entered, or concurrently with this offering, will enter, into
indemnification agreements with our directors and officers, a form of which is
attached as Exhibit 10.1 and incorporated by reference to this registration
statement. The indemnification agreements provide indemnification to our
II-1
<PAGE>
directors and officers under certain circumstances for acts or omissions which
may not be covered by directors' and officers' liability insurance. We intend to
obtain directors' and officers' liability insurance, which will insure against
liabilities that our directors or officers may incur in such capacities.
The purchase agreement, a form of which is attached as Exhibit 1.1 to this
registration statement, provides for indemnification by the underwriters of us
and our officers and directors, and by us of the underwriters, for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 1996, we have issued and sold the following securities which
were not registered under the Securities Act:
(i) Between October 1995 and December 1996, we issued and sold
14,492,752 shares of our Series B preferred stock to one investor for an
aggregate purchase price of $29,999,996.64.
(ii) Between December 1996 and January 1997, we issued and sold
13,589,056 shares of our Series C preferred stock to six investors for an
aggregate purchase price of $46,746,352.64.
(iii) In October 1997, we issued and sold 8,032,128 shares of our
Series D preferred stock to two investors for an aggregate purchase price of
$49,999,996.80.
(iv) In October 1997, we issued 13,686,000 shares of our common stock to
an entity in connection with our acquisition of Talent Group
(International), Limited.
(v) In October 1997, we issued and sold 581,824 shares of common stock
to an entity for an aggregate purchase price of $200,002 upon the entity's
exercise of warrants.
(vi) Between October 1997 and March 1998, we issued an aggregate of
30,269,318 shares of our Series E preferred stock in a one-to-one exchange
of our common stock held by participating stockholders.
(vii) In February 1998, we issued a warrant to purchase 32,000 shares of
our common stock at an exercise price of $2.50 per share to one investor.
(viii) In September 1999, we issued a warrant to purchase 500,000 shares
of our common stock at an exercise price of $6.25 per share to one investor.
(ix) Between November 1999 and December 1999, we issued and sold an
aggregate of 6,767,316 shares of our Series F preferred stock to three
investors for an aggregate purchase price of $55,000,000.
(x) In December 1999, we issued an aggregate of 4,523,700 shares of our
Series G preferred stock in connection with the acquisition of our
subsidiary, Wacos, Inc., through a merger.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, or Regulation D promulgated thereunder,
or Rule 701 promulgated under Section 3(b) of the Securities Act, as
transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensations
as provided under Rule 701. The recipients of securities in each such
transaction represented to us their intention 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 were affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBITS
- ---------------------
<C> <S>
1.1* Form of U.S. Purchase Agreement.
1.2* Form of International Purchase Agreement.
2.1** Distribution Agreement dated July 30, 1999 between
UTStarcom, Inc. and DirecTouch Communications Limited.
2.2** Agreement and Plan of Merger dated December 14, 1999 between
UTStarcom, Inc. and Wacos, Inc.
3.1** Twelfth Amended and Restated Certificate of Incorporation of
UTStarcom, Inc., as currently in effect.
3.2** Form of Thirteenth Amended and Restated Certificate of
Incorporation of UTStarcom, Inc. to be filed following the
closing of the offering pursuant to this registration
statement.
3.3** Bylaws of UTStarcom, Inc. as currently in effect.
3.4** Form of Amended and Restated Bylaws of UTStarcom, Inc. to be
in effect immediately following the closing of the offering
pursuant to this registration statement.
4.1* Specimen Common Stock Certificate.
4.2** Third Amended and Restated Registration Rights Agreement
dated December 14, 1999.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement.
10.2** 1992 Omnibus Equity Incentive Plan and form of related
agreement.
10.3** 1995 Stock Plan and forms of related agreements.
10.4** 1997 Stock Plan, as amended, and forms of related
agreements.
10.5** 2000 Employee Stock Purchase Plan and forms of related
agreements.
10.6** Common Stock Purchase Warrant dated February 5, 1998 between
UTStarcom, Inc. and Lintech Limited.
10.7** Common Stock Purchase Warrant dated September 20, 1999
between UTStarcom, Inc. and Talent Group International, Ltd.
10.8** Employment and Non-Competition Agreement dated October 6,
1995 between UTStarcom, Inc. and Hong Lu.
10.9** Employment and Non-Competition Agreement dated October 6,
1995 between UTStarcom, Inc. and Ying Wu.
10.10**+ Product Manufacture & License Agreement dated May 13, 1997
between UTStarcom, Inc. and Tollgrade Communications, Inc.
10.11**+ Sales Agreement dated February 12, 1999 between UTStarcom
(China) Ltd. and BaoDing Telecommunication Bureau, Hebei
Province.
10.12**+ Sales Contract dated August 23, 1999 between UTStarcom
(China) Ltd. and Xi'an Telecommunication Bureau.
10.13**+ Technical License and Assistance Agreement dated
November 2, 1999 between UTStarcom, Inc. and Mitsubishi
Electric Corporation.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- ---------------------
<C> <S>
10.14**+ Technical Assistance Agreement dated October 1, 1999 between
Matsushita Communication Industrial Co. Ltd. and UTStarcom,
Inc.
10.15**+ Joint Product Development and Marketing Memorandum and
Understanding dated September 2, 1999 between UTStarcom,
Inc. and Matsushita Communication Industrial Co., Ltd.
10.16**+ Joint Patent Filing Agreement dated December 1, 1998 between
UTStarcom, Inc. and Matsushita Communication Industrial Co.,
Ltd.
10.17** Loan Agreement dated June 15, 1998 between UTStarcom, Inc.
and SOFTBANK Corp.
10.18(a)**+ Loan Agreement dated March 9, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(b)**+ Loan Agreement dated June 7, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(c)**+ Loan Agreement dated June 29, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(d)**+ Loan Agreement dated July 7, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(e)**+ Loan Agreement dated July 14, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(f)**+ Loan Agreement dated July 21, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(g)**+ Loan Agreement dated August 5, 1999 between Bank of China
and UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(h)**+ Loan Agreement dated August 17, 1999 between Bank of China
and UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(i)**+ Loan Agreement dated September 2, 1999 between Bank of China
and UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(j)**+ Loan Agreement dated September 17, 1999 between Bank of
China and UTStarcom Hangzhou Telecommunications Co., Ltd.
10.19**+ Joint Venture Agreement dated July 31, 1997 between
UTStarcom, Inc. and Zhejiang Telecommunication Equipment
Factory.
10.20**+ Joint Venture Agreement dated December 8, 1995 between
UTStarcom, Inc. and Chinese Guangdong Nanfeng
Telecommunication Group Co. Ltd.
10.21**+ Joint Venture Agreement dated September 12, 1997 between
UTStarcom, Inc. and Zhejiang Nantian Post and
Telecommunication Development Group Co. Ltd.
10.22** Lease dated December 23, 1997 between UTStarcom, Inc. and
Tech Center Partners.
10.23** Lease Agreement dated April 1995, as amended, between
UTStarcom, Inc. and Metro Park Associates.
10.24** Lease Agreements dated December 31, 1997 and May 14, 1998
between Guangdong UTStarcom Telecom Co., Ltd. and Guangdong
Southern Telecom Group Huizhou Company.
10.25** Lease Contract dated December 15, 1996 between UTStarcom
(Hangzhou) Telecommunications Co., Ltd. and Yile Village,
Gudang Township.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- ---------------------
<C> <S>
10.26+ Purchase Agreement for P.R. China Market dated April 1, 1999
between UTStarcom Inc., Matsushita Electric Industrial Co.,
Ltd. and Matsushita Communication Industrial Co., Ltd.
10.27 Information Service Project Contract dated June 1, 1998
between UTStarcom (China) Ltd. and China Jitong
Communication Co. Ltd.
10.28 Payment Agent Contract dated June 11, 1998 among UTStarcom,
UTStarcom (China) Ltd, Softbank Corporation and Jitong
Communication Co., Ltd.
10.29 Agreement on Termination of Contract dated August 30, 1999
among UTStarcom, Inc., UTStarcom (China) Ltd., Softbank
Corporation and Jitong Communication Co., Ltd.
10.30 Exchange Agreement dated October 15, 1997 between UTStarcom,
Inc. and certain investors.
10.31 Exchange Agreement dated October 15, 1997 between UTStarcom,
Inc. and certain investors.
10.32 Employment and Non-Competition Agreement dated October 6,
1995 between UTStarcom, Inc. and Bill Huang.
10.33 Lease contract on Housing and Vacant Land at Yunshan Post
and Telecommunication Industrial Village dated January 3,
2000 between Guangdong UTStarcom Telecom Co., Ltd. and
Guangdong Nanfang Communication Group, Huizhou Co.
10.34* Loan Agreement dated October 8, 1996 between UTStarcom
(China) Co., Inc. and Bill X. Huang.
10.35* Promissory Note Secured by Deed of Trust dated February 13,
1999 issued to UTStarcom, Inc. by Bill X. Huang and Minnie
Huang.
21.1** List of Subsidiaries of UTStarcom, Inc. (see Note 1 to Notes
to Consolidated Financial Statements).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1** Power of Attorney (see page II-6).
27.1** Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested for certain portions of this
exhibit pursuant to Rule 406 under the Securities Act. In accordance with
Rule 406, these confidential portions have been omitted from this exhibit
and filed separately with the Commission.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, UTStarcom, Inc.
has duly caused this Amendment No. 3 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned thereunto duly authorized, in the City
of Alameda, State of California, on the 31st day of January, 2000.
<TABLE>
<S> <C> <C>
UTSTARCOM, INC.
By: /s/ MICHAEL SOPHIE
-----------------------------------------
Michael Sophie
CHIEF FINANCIAL OFFICER AND ASSISTANT
SECRETARY
</TABLE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
*
--------------------------------- Chairman of the Board of Directors January 31, 2000
Masayoshi Son
* President, Chief Executive Officer and
--------------------------------- Director (Principal Executive January 31, 2000
Hong Liang Lu Officer)
/s/ MICHAEL SOPHIE Chief Financial Officer and Assistant
--------------------------------- Secretary (Principal Financial and January 31, 2000
Michael Sophie Accounting Officer)
*
--------------------------------- Director January 31, 2000
Ying Wu
*
--------------------------------- Director January 31, 2000
Charles Xue
*
--------------------------------- Director January 31, 2000
Yoshitaka Kitao
*
--------------------------------- Director January 31, 2000
Chauncey Shey
*
--------------------------------- Director January 31, 2000
Thomas Toy
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ MICHAEL SOPHIE
--------------------------------------
Michael Sophie
ATTTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
SCHEDULE I
Condensed Financial Information at December 31, 1998 and 1999 and for each
of the three years ended December 31, 1999. All other schedules are omitted
because they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
INDEPENDENT ACCOUNTANTS REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of UTStarcom, Inc.:
Our audits of the consolidated financial statements are referred to in our
report dated January 29, 2000, included an audit of the financial statement
schedule listed in Item F-1 of this Form S-1. In our opinion, this financial
statement schedule presents fairly, in all material respects the information set
forth therein when read in conjunction with the related consolidated financial
statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 2000
S-1
<PAGE>
SCHEDULE I
UTSTARCOM, INC. (UNCONSOLIDATED)
REGISTRANT BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,447 $ 43,729
Accounts receivable....................................... 65,433 42,107
Receivable from related parties........................... -- 339
Inventories............................................... 1,213 11,479
Other..................................................... 218 4,857
-------- --------
Total current assets........................................ 73,312 102,511
Property, plant and equipment, net.......................... 3,453 3,867
Investment in affiliated companies.......................... 28,462 56,075
Intangible assets, net...................................... -- 15,777
Other....................................................... 1,459 3,080
-------- --------
Total assets................................................ $106,686 181,310
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,542 4,501
Third party debt.......................................... 22 15
Debt to shareholder and related parties................... 27,561 --
Income taxes payable...................................... 884 1,255
Customer deposit.......................................... -- 500
Other..................................................... 3,341 14,797
-------- --------
Total current liabilities................................... 34,350 21,068
-------- --------
Stockholders' equity:
Convertible preferred stock: $0.0125 par value; authorized:
99,200,000 shares; issued and outstanding 59,635,754 at
December 31, 1998, and 70,377,322 at December 31, 1999;
liquidation value of $259,608 at December 31, 1999........ 74 88
Common stock: $0.00125 par value; authorized:
142,800,000 shares; issued and outstanding: 9,172,864 at
December 31, 1998, and 8,929,837 December 31, 1999,
including shares held in treasury......................... 12 13
Common stock warrant........................................ 1,983 389
Additional paid-in capital.................................. 89,901 187,805
Deferred stock compensation................................. -- (7,728)
Accumulated deficit......................................... (16,307) (19,865)
Notes receivable from shareholders.......................... (369) (555)
Cumulative translation adjustment........................... 95 95
-------- --------
75,389 160,242
Less cost of common stock held in treasury,
1,340,694 shares at December 31, 1998, and 0 shares at
December 31, 1999......................................... (3,053) --
-------- --------
Total stockholders' equity.................................. 72,336 160,242
-------- --------
Total liabilities and stockholders' equity.................. $106,686 $181,310
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
S-2
<PAGE>
SCHEDULE I
UTSTARCOM, INC. (UNCONSOLIDATED)
CONDENSED INFORMATION AS TO THE
RESULTS OF OPERATIONS
OF THE REGISTRANT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $44,896 $48,458 109,091
Cost of sales............................................... 32,718 36,293 95,854
------- ------- --------
Gross profit................................................ 12,178 12,165 13,237
Operating expenses:
Selling, general and administrative expenses.............. 6,074 5,914 5,641
Research and development expenses......................... 7,500 9,297 11,681
Amortization of intangible assets......................... -- -- 129
Amortization of deferred stock compensation............... -- -- 4,491
In-process research and development costs................. -- -- 3,992
------- ------- --------
Total operating expenses.................................... 13,574 15,211 25,934
------- ------- --------
Operating income (loss)..................................... (1,396) (3,046) (12,697)
Interest income............................................. 1,344 3,754 3,839
Interest expense............................................ 1,587 (1,016) (1,639)
Equity in net income (loss) of affiliated companies......... (2,556) 2,220 23,058
Other income (expenses)..................................... (8) (925) 360
------- ------- --------
Income (loss) before income taxes........................... (1,029) 987 12,867
Income tax expense (benefit)................................ 354 394 (1,298)
Income (loss) from continued operations..................... (1,383) 593 14,165
------- ------- --------
Income (loss) from discontinued operations.................. 1,413 (893) (1,656)
------- ------- --------
Net income (loss)........................................... 30 (300) 12,509
======= ======= ========
Beneficial conversion feature of Series F convertible
preferred stock........................................... -- -- (16,067)
------- ------- --------
Net income (loss) applicable to common stockholders......... -- -- $ (3,558)
======= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
S-3
<PAGE>
SCHEDULE I
UTSTARCOM, INC. (UNCONSOLIDATED)
CONDENSED INFORMATION AS TO THE CASH FLOWS OF THE REGISTRANT
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 30 $ (300) 12,509
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization............................. 519 841 1,199
(Income) loss from discontinued operations................ (1,413) 893 1,656
Write-off of in-process research and development costs.... -- -- 3,992
Equity (income) loss of affiliated companies.............. 2,556 (2,220) (23,058)
Gain (loss) on sale of assets............................. (65) 107 --
Amortization of deferred stock compensation............... -- -- 4,492
Stock option expenses for non-employees................... -- 411 1,649
Provision for doubtful accounts........................... 81 30 (26)
Provision for inventory obsolescence...................... 52 4 1,218
Changes in operating assets and liabilities:
Accounts receivable and receivable from related
parties................................................ (20,965) (35,268) 4,226
Inventories............................................. (432) (384) (11,280)
Other current and non-current assets.................... (168) 496 13
Deferred tax assets..................................... -- (1,235) (2,302)
Accounts payable and payable to related parties......... 392 16,000 (24,359)
Income taxes payable.................................... -- 884 768
Other current liabilities............................... 1,232 2,586 11,273
Deferred revenue........................................ (88) -- 500
-------- -------- --------
Net cash (used in) provided by operating activities......... (18,269) (17,155) (17,530)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.................. (1,456) (2,122) (1,422)
Investment in affiliates, net of cash acquired.............. (13,392) (803) 108
Proceeds from disposal of property.......................... 125 -- 652
-------- -------- --------
Net cash used in investing activities....................... (14,723) (2,925) (662)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock, net of expense........................... 61,088 480 55,481
Reacquired common stock..................................... (1,100) (453) --
Return of investment to shareholders........................ (50,820) -- --
Proceeds (aggregate) from borrowing, net.................... (14) 13 (7)
Payment on shareholder note receivable...................... 35,000 -- --
-------- -------- --------
Net cash provided by financing activities................... 44,154 40 55,474
-------- -------- --------
Effects of exchange rates on cash........................... (11) -- --
-------- -------- --------
Net increase (decrease) in cash............................. 11,151 (20,040) 37,282
Cash and cash equivalents at beginning of period............ 15,336 26,487 6,447
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 26,487 $ 6,447 $ 43,729
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-4
<PAGE>
SCHEDULE I
UTSTARCOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
UTStarcom, Inc., a Delaware corporation, is the parent company of all
UTStarcom, Inc. subsidiaries. The accompanying condensed financial statements
reflect the financial position, results of operations and cash flows of
UTStarcom, Inc. on a separate basis. All subsidiaries of UTStarcom, Inc. are
reflected as investments accounted for using the equity method. Accordingly,
intercompany transactions have not been eliminated. No cash dividends were paid
to UTStarcom, Inc. by its subsidiaries during the three years ended
December 31, 1999. For accounting policies and other information, see the Notes
to Consolidated Financial Statements included elsewhere herein.
S-5
<PAGE>
SCHEDULE II
UTSTARCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS THE PERIOD
- ----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts.................... $ 372 $2,949 $ 9 $3,312
Provision for obsolete inventory................... $ 785 $1,261 $ 267 $1,779
Accrued product warranty costs..................... $ 152 $ 574 $ 178 $ 548
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts.................... $3,312 $ 875 $ 230 $3,957
Provision for obsolete inventory................... $1,779 $1,048 $ 382 $2,445
Accrued product warranty costs..................... $ 548 $ 879 $ 430 $ 997
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts.................... $3,957 $6,006 $3,174 $6,789
Provision for obsolete inventory................... $2,445 $5,695 $1,725 $6,415
Accrued product warranty costs..................... $ 997 $ 481 $ 242 $1,236
</TABLE>
S-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- ---------------------
<C> <S>
1.1* Form of U.S. Purchase Agreement.
1.2* Form of International Purchase Agreement.
2.1** Distribution Agreement dated July 30, 1999 between
UTStarcom, Inc. and DirecTouch Communications Limited.
2.2** Agreement and Plan of Merger dated December 14, 1999 between
UTStarcom, Inc. and Wacos, Inc.
3.1** Twelfth Amended and Restated Certificate of Incorporation of
UTStarcom, Inc., as currently in effect.
3.2** Form of Thirteenth Amended and Restated Certificate of
Incorporation of UTStarcom, Inc. to be filed following the
closing of the offering pursuant to this registration
statement.
3.3** Bylaws of UTStarcom, Inc. as currently in effect.
3.4** Form of Amended and Restated Bylaws of UTStarcom, Inc. to be
in effect immediately following the closing of the offering
pursuant to this registration statement.
4.1* Specimen Common Stock Certificate.
4.2** Third Amended and Restated Registration Rights Agreement
dated December 14, 1999.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement.
10.2** 1992 Omnibus Equity Incentive Plan and form of related
agreement.
10.3** 1995 Stock Plan and forms of related agreements.
10.4** 1997 Stock Plan, as amended, and forms of related
agreements.
10.5** 2000 Employee Stock Purchase Plan and forms of related
agreements.
10.6** Common Stock Purchase Warrant dated February 5, 1998 between
UTStarcom, Inc. and Lintech Limited.
10.7** Common Stock Purchase Warrant dated September 20, 1999
between UTStarcom, Inc. and Talent Group International, Ltd.
10.8** Employment and Non-Competition Agreement dated October 6,
1995 between UTStarcom, Inc. and Hong Lu.
10.9** Employment and Non-Competition Agreement dated October 6,
1995 between UTStarcom, Inc. and Ying Wu.
10.10**+ Product Manufacture & License Agreement dated May 13, 1997
between UTStarcom, Inc. and Tollgrade Communications, Inc.
10.11**+ Sales Agreement dated February 12, 1999 between UTStarcom
(China) Ltd. and BaoDing Telecommunication Bureau, Hebei
Province.
10.12**+ Sales Contract dated August 23, 1999 between UTStarcom
(China) Ltd. and Xi'an Telecommunication Bureau.
10.13**+ Technical License and Assistance Agreement dated
November 2, 1999 between UTStarcom, Inc. and Mitsubishi
Electric Corporation.
10.14**+ Technical Assistance Agreement dated October 1, 1999 between
Matsushita Communication Industrial Co. Ltd. and UTStarcom,
Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- ---------------------
<C> <S>
10.15**+ Joint Product Development and Marketing Memorandum and
Understanding dated September 2, 1999 between UTStarcom,
Inc. and Matsushita Communication Industrial Co., Ltd.
10.16**+ Joint Patent Filing Agreement dated December 1, 1998 between
UTStarcom, Inc. and Matsushita Communication Industrial Co.,
Ltd.
10.17** Loan Agreement dated June 15, 1998 between UTStarcom, Inc.
and SOFTBANK Corp.
10.18(a)**+ Loan Agreement dated March 9, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(b)**+ Loan Agreement dated June 7, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(c)**+ Loan Agreement dated June 29, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(d)**+ Loan Agreement dated July 7, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(e)**+ Loan Agreement dated July 14, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(f)**+ Loan Agreement dated July 21, 1999 between Bank of China and
UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(g)**+ Loan Agreement dated August 5, 1999 between Bank of China
and UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(h)**+ Loan Agreement dated August 17, 1999 between Bank of China
and UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(i)**+ Loan Agreement dated September 2, 1999 between Bank of China
and UTStarcom Hangzhou Telecommunications Co., Ltd.
10.18(j)**+ Loan Agreement dated September 17, 1999 between Bank of
China and UTStarcom Hangzhou Telecommunications Co., Ltd.
10.19**+ Joint Venture Agreement dated July 31, 1997 between
UTStarcom, Inc. and Zhejiang Telecommunication Equipment
Factory.
10.20**+ Joint Venture Agreement dated December 8, 1995 between
UTStarcom, Inc. and Chinese Guangdong Nanfeng
Telecommunication Group Co. Ltd.
10.21**+ Joint Venture Agreement dated September 12, 1997 between
UTStarcom, Inc. and Zhejiang Nantian Post and
Telecommunication Development Group Co. Ltd.
10.22** Lease dated December 23, 1997 between UTStarcom, Inc. and
Tech Center Partners.
10.23** Lease Agreement dated April 1995, as amended, between
UTStarcom, Inc. and Metro Park Associates.
10.24** Lease Agreements dated December 31, 1997 and May 14, 1998
between Guangdong UTStarcom Telecom Co., Ltd. and Guangdong
Southern Telecom Group Huizhou Company.
10.25** Lease Contract dated December 15, 1996 between UTStarcom
(Hangzhou) Telecommunications Co., Ltd. and Yile Village,
Gudang Township.
10.26+ Purchase Agreement for P.R. China Market dated April 1, 1999
between UTStarcom Inc., Matsushita Electric Industrial Co.,
Ltd. and Matsushita Communication Industrial Co., Ltd.
10.27 Information Service Project Contract dated June 1, 1998
between UTStarcom (China) Ltd. and China Jitong
Communication Co. Ltd.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- ---------------------
<C> <S>
10.28 Payment Agent Contract dated June 11, 1998 among UTStarcom,
UTStarcom (China) Ltd, Softbank Corporation and Jitong
Communication Co., Ltd.
10.29 Agreement on Termination of Contract dated August 30, 1999
among UTStarcom, Inc., UTStarcom (China) Ltd., Softbank
Corporation and Jitong Communication Co., Ltd.
10.30 Exchange Agreement dated October 15, 1997 between UTStarcom,
Inc. and certain investors.
10.31 Exchange Agreement dated October 15, 1997 between UTStarcom,
Inc. and certain investors.
10.32 Employment and Non-Competition Agreement dated October 6,
1995 between UTStarcom, Inc. and Bill Huang.
10.33 Lease contract on Housing and Vacant Land at Yunshan Post
and Telecommunication Industrial Village dated January 3,
2000 between Guangdong UTStarcom Telecom Co., Ltd. and
Guangdong Nanfang Communication Group, Huizhou Co.
10.34* Loan Agreement dated October 8, 1996 between UTStarcom
(China) Co., Inc. and Bill X. Huang.
10.35* Promissory Note Secured by Deed of Trust dated February 13,
1999 issued to UTStarcom, Inc. by Bill X. Huang and Minnie
Huang.
21.1** List of Subsidiaries of UTStarcom, Inc. (see Note 1 to Notes
to Consolidated Financial Statements).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1** Power of Attorney (see page II-6).
27.1** Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested for certain portions of this
exhibit pursuant to Rule 406 under the Securities Act. In accordance with
Rule 406, these confidential portions have been omitted from this exhibit
and filed separately with the Commission.
<PAGE>
Exhibit 10.26
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
Agreement for China
CONFIDENTIAL
PURCHASE AGREEMENT FOR P. R. CHINA MARKET
THIS AGREEMENT (this "Agreement") made, effective as of the 1st day of
April, 1999 ("Effective Date"), by and between UTSTARCOM INC., a Delaware
corporation, with its principal place of business at 1275 Harbor Bay Parkway,
Suite 100, Alameda, California 94502, the United States of America ("Buyer") and
MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD., CORPORATE MANAGEMENT DIVISION FOR
CHINA, a corporation organized under the laws of Japan, with its principal place
of business at 3-2, Minamisemba 4-chome, Chuo-ku, Osaka 542-8588, Japan ("MEI")
and MATSUSHITA COMMUNICATION INDUSTRIAL CO., LTD., a corporation organized under
the laws of Japan, with its principal place of business at 4-3-1,
Tsunashima-higashi, Kohoku-ku, Yokohama 223-8639, Japan ("MCI", MEI and MCI are
to be collectively called "Seller").
W I T N E S S E T H:
WHEREAS, Seller wishes to sell to Buyer, and Buyer wishes to buy from
Seller, the Products (as defined below) on an OEM basis and on the terms and
conditions set forth herein so that Buyer connects and integrates the Products
with other products to build up the wireless local loop system, and resells and
installs such system in P. R. China.
NOW THEREFORE, in consideration of the mutual promises herein
contained, the parties agree as follows:
1. DEFINITIONS
SECTION 1.1 DEFINED TERMS. The following terms shall have the meanings
provided below;
(a) "Agreement" means this master purchase agreement and all
exhibits and schedules hereto.
(b) "Agreement Number" means the unique number first as set
forth above which shall be used by the parties to refer to this Agreement.
(c) "Products" means the Radio Port Controller, the Radio Port
and the Personal Station with either Buyer's brand name or no brand name
(designated by Buyer) of which model numbers are described in Exhibit A attached
hereto as an integral part hereof. At any time during the term hereof, models of
the Products may be added or removed by amending Exhibit A in writing. The
specifications of the Products shall be mutually discussed and agreed by the
parties hereto in a separate written instruments.
(d) "Individual Contract" shall mean the individual sale and
purchase contract made hereunder whereby Buyer places purchase order for the
Products in writing and Seller accepts such order in writing in accordance with
Sections 3.2 and 3.3.
<PAGE>
Agreement for China
CONFIDENTIAL
2. PURCHASE AND SALE
SECTION 2.1 AGREEMENT TO BUY AND SELL. (a) Buyer shall purchase from
Seller and Seller shall sell to Buyer such Products as Buyer may elect to
purchase and Seller agrees to sell from time to time during the term of this
Agreement by executing one or more Individual Contract(s), provided that Buyer
may place purchase orders for the Products only after the parties agree on
specifications thereof as provided for in Section 1.1 (c).
(b) Seller may also make available to Buyer, on such terms as
mutually agreed between Buyer and Seller from time to time, Products prototypes
and other early production runs of Products on a sample basis.
(c) Seller agrees that Buyer may cause its subsidiary,
UTStarcom (Hangzhou) Telecom Co., Ltd., 3 Yile Industrial Park, Bldg 2/3, 129,
Wen Yi Road, Hangzhou, 310012, P.R. China to perform certain rights and
obligations of Buyer hereunder, e.g., receipt of the Products and obligations of
Section l4.1, provided that Buyer proves and demonstrates to Seller's
satisfaction that said subsidiary has the license and approval necessary for
such performance of Buyer's rights and obligations, and, upon Seller's request,
provides Seller with copies and other materials showing such license and
approval. In such case, Buyer and such subsidiary shall be severally and jointly
responsible for such obligations of Buyer hereunder, and the performance of the
obligations of Buyer by the said subsidiary shall not release Buyer from
liability for the performance of its obligations hereunder. All the references
to Buyer herein shall include said subsidiary of Buyer where and to the extent
said subsidiary performs Buyer's obligations hereunder.
SECTION 2.2 CONTRACTED MINIMUM QUANTITY. The parties hereto agree to
establish the contracted minimum quantities as to each item/model of Product
which Buyer shall purchase from Seller for P. R. China market during each term
of this Agreement as follows:
<TABLE>
<CAPTION>
Item of Products Contracted Minimum Quantity on Shipment Base
- ------------------------------------- --------------------------------------------
<S> <C>
Radio Port Controller (RPC) [*]
Radio Port (RP) [*]
Personal Station (PS) [*]
</TABLE>
3. DOCUMENTATION AND PURCHASE ORDERS
SECTION 3.1 PRIORITY OF DOCUMENTATION. (a) This Agreement shall constitute a
master purchase agreement for Buyer's purchase of Products from Seller and
exclusively incorporates all the terms and conditions for the anticipated
purchase and sale of such Products. In the event of a conflict between any of
the terms in the body of this Agreement, any Individual Contract or other
documentation issued by Buyer or Seller, the terms and conditions of this
Agreement shall take precedence thereover.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-2-
<PAGE>
Agreement for China
CONFIDENTIAL
(b) The terms and conditions of Individual Contracts,
acknowledgments, invoices or any other business forms submitted by either party
which conflict with or purport to amend the terms and conditions of this
Agreement are hereby specifically objected to by the other party and shall be of
no force or effect.
(c) No additional or different terms proposed by Seller or
Buyer shall become part of the Individual Contract or any transaction
contemplated hereunder without the written agreement of both Buyer and Seller
with the signatures of respective authorized directors.
SECTION 3.2 ORDER PLACEMENT AND ACCEPTANCE. Firm (non-cancelable)
orders for the Products shall be placed by Buyer to Seller, in writing and in
accordance with this Article 3 hereof, [*]. Such orders shall be placed at least
[*] prior to the shipment date requested therein. Seller will consider the
purchase orders from Buyer, and shall have no obligation to accept such orders.
In case of acceptance, Seller shall notify Buyer of the delivery date within
[*] of Seller after the receipt of the relative firm order, and until
such notification is made, no order shall be binding on Seller.
SECTION 3.3 MINIMUM ORDER QUANTITY. The quantities of below mentioned
item of Products under one monthly order shall be the same as or over the
respective minimum order quantities set forth below. In the event Buyer requests
to place a monthly order for any item of Products in the quantities less than
such minimum quantities, Buyer and Seller will have a discussion as to whether
Seller may accept such Buyer's request or not.
<TABLE>
<CAPTION>
ITEM OF PRODUCTS MINIMUM ORDER QUANTITY
-------------------------- -------------------------------
<S> <C>
Radio Port Controller [*]
Radio Port [*]
Personal Station [*]
</TABLE>
4. PRICING
SECTION 4.1 PURCHASE PRICE. The prices of Products shall be separately
discussed and mutually agreed from time to time by the parties hereto based on
the following conditions:
(a) that the prices of all items of Products shall be quoted
on basis of FOB shipment port;
(b) that the prices of all items of Products shall be quoted
in the currency of US Dollar; and
(c) that any price change, if any is agreed by the parties
during its validity, shall be applied only to such Individual Contracts as are
made after the date of such price change.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-3-
<PAGE>
Agreement for China
CONFIDENTIAL
5. PRODUCT DISCONTINUANCE
SECTION 5.1 RIGHT TO DISCONTINUE PRODUCTS (a) Subject to its obligations
under any outstanding Individual Contracts, Seller reserves the right to cease
the manufacture and the offering of any Products to Buyer if such Product is not
made available to any other like customers of Seller.
(b) Seller shall provide Buyer at least [*] notice of any Product
discontinuance.
6. DELIVERY
SECTION 6.1 ROUTING. All delivery of Products shall be made on basis of FOB
Japanese airport, which shall be interpreted in accordance with the latest
INCOTERMS.
SECTION 6.2 DELAY OF SHIPMENT. Seller has the right to delay or withhold
the shipment of the Products if Buyer delays or fails to pay for the Products in
full conformity with the Article 7 hereinbelow. Seller shall bear no
responsibility for the delay of shipment due to and during the period of Buyer's
failure of payment for the Products in full accordance with the Article 7, and
Buyer shall incur any additional costs arising therefrom.
SECTION 6.3 PACKING. The package of the Products shall be at Seller's
standard for exports of goods.
7. PAYMENT SECTION
7.1 PAYMENT. The payment for the Products shall be made by Buyer to Seller
by means of telegraphic transfer of funds to the bank account designated by MEI,
to be made at least [*] prior to the scheduled shipment date of relative
Products, provided that any shipment of the Products should be made by air.
Notwithstanding the foregoing, in case Buyer desires and Seller agrees, the
payment for Radio Ports and Radio Ports Controllers may be made by Buyer to
Seller by means of irrevocable and confirmed letter of credit, negotiable on [*]
after the date of Bill of Lading, to be opened in favor of MEI. In the event
that Buyer requests any specific shipment to be made by boat and Seller accepts
such request, both parties hereto shall from time to time discuss and decide me
date by which Buyer should make payment for the relative Products, provided,
however, that in no event shall such date be later than the date [*] prior to
the scheduled shipment date of relative Products. Such payment for the Products
shall be made in the currency of US Dollar.
SECTION 7.2 SHIPPING INVOICE. Upon shipment of Products to Buyer pursuant
to an Individual Contract, Seller shall submit to Buyer a written shipping
invoice showing: (i) Seller's name and address; (ii) Buyer's purchase order
number and Individual Contract number given by Seller; (iii) description, model
number and quantity of Products shipped; (iv) unit and aggregate price; and (v)
special packing costs, if any. All information on the invoice must be consistent
with the relevant Individual Contract.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-4-
<PAGE>
Agreement for China
CONFIDENTIAL
8. INSPECTION AND ACCEPTANCE
SECTION 8.1 INSPECTION. The inspection of quality, quantity and packing of
the Products at Seller's premises shall be carried out in accordance with
Seller's inspection standards and procedures and shall be deemed as final.
Seller agrees to Buyer's right to send its representative to attend such
inspection at its own cost, and further agrees to send to Buyer data and results
of each inspection of the Products.
9. LIMITED LIABILITY
SECTION 9.1 QUALITY REPORT. Buyer shall submit to Seller a monthly report
detailing the quality problem of Products occurring in market during the term
hereof and [*] after the last delivery of the Products hereunder. Further, Buyer
shall submit samples of Products alleged to be defective upon request of Seller.
SECTION 9.2 WARRANTY. Seller agrees to provide, with no charge to Buyer,
the quantities of each item of the Products equivalent to the percentages
respectively set forth below of the quantities on relative Individual Contract;
<TABLE>
<CAPTION>
ITEM OF PRODUCTS PERCENTAGE
---------------- -----------
<S> <C>
Radio Port Controller [*]
Radio Port [*]
Personal Station [*]
</TABLE>
In the event that the malfunctions or defects in any item of the Products,
which Seller admits to be attributable to the manufacturer thereof such as
defects in design, parts or workmanship of Products based on data on quality
problem of Products occurring in market and Seller's analysis of samples of
Products alleged to be defective, should occur in more than the respective
percentages set forth above of the total quantities of item of the Products
which have been delivered within latest [*], Seller and Buyer will meet and
discuss how to deal with such situation, on condition that Buyer performs its
obligations stipulated in the Section 9.l.
SECTION 9.3 EXCESSIVE FAILURE. In the event that any malfunctions or
defects in a particular model of the Products, which Seller admits to be
attributable to the manufacturer thereof such as defects in design, parts or
workmanship of Products based on data on quality problem of Products occurring
in market and Seller's analysis of samples of Products alleged to be defective,
should occur in identical components or parts by reason of the same cause in
more than [*] of the total number of such particular model of the Products which
have been delivered within latest [*], Seller shall remedy all such malfunctions
or defects in excess of such [*] maximum in the way selected by Seller, on
condition that Buyer performs its obligations stipulated in the Section 9.1.
SECTION 9.4 WARRANTY DISCLAIMERS. EXCEPT FOR THE ABOVE EXPRESS LIMITED
WARRANTY, SELLER MAKES AND BUYER RECEIVES NO WARRANTY ON THE PRODUCTS, EXPRESS
OR IMPLIED, STATUTORY, OR IN ANY OTHER PROVISION OF
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-5-
<PAGE>
Agreement for China
CONFIDENTIAL
THIS AGREEMENT OR COMMUNICATION WITH BUYER, AND SELLER SPECIFICALLY
DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY, NON-INFRINGEMENT OR FITNESS
FOR A PARTICULAR PURPOSE, INCLUDING, WITHOUT LIMITATION, FITNESS FOR COMBINATION
WITH ANY INTERFACE DEVICES TO BUILD UP ANY SYSTEM.
10. SERVICE AFTER SALE
SECTION 10.1 SERVICE AFTER SALE. Repair and other service after sale for
the users of Products shall be at the cost and responsibility of Buyer. Seller
will provide Buyer with the replacement parts for the Products on the terms and
conditions to be mutually agreed upon by the parties from time to time during
the retention period provided for in Exhibit B attached hereto as an integral
part hereof.
SECTION 10.2 SERVICE TRAINING. If the parties agree on a service
training for the Products, Seller will provide that in accordance with the
agreed terms and conditions, provided that Buyer shall reimburse Seller for air
freight, hotel accommodations and meals of Seller's employees conducting the
training, and will pay to Seller for each Seller's employee conducting the
training a [*].
11. BRAND NAME SECTION
11.1 BUYER'S MARK (a) Seller shall affix Buyer's brand name and/or its
trade name designated by Buyer ("Buyer's Mark") on the designated items of
Products.
(b) Seller acknowledges that Buyer has a proprietary interest in the
Buyer's Mark and that no right, interest, ownership or privilege of use of such
Buyer's Mark is accorded to Seller by reason of the relationship herein
established. Buyer warrants and represents that Buyer is a sole and exclusive
owner of Buyer's Mark as applied to the Products.
12. DISCLAIMERS
SECTION 12.1 LIMITATION ON LIABILITY EXCEPT AS EXPRESSLY PROVIDED HEREIN,
EACH PARTY'S LIABILITY FOR ANY LOSS OR DAMAGE ARISING OUT OF OR RESULTING FROM
THESE TERMS AND CONDITIONS OR FROM ITS PERFORMANCE OR BREACH, OR IN CONNECTION
WITH THE PRODUCTS PURCHASED HEREUNDER SHALL IN NO CASE EXCEED THE PURCHASE PRICE
FOR THE SPECIFIC PRODUCTS WHICH GIVE RISE TO THE CLAIM. NEITHER PARTY SHALL BE
LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES (WHETHER FORESEEABLE OR NOT), NOR FOR DAMAGES FOR LOSS OF BUSINESS, LOSS
OF PROFITS, LOSS OF CONTRACTS, OR ANTICIPATED SAVINGS (WHETHER FORESEEABLE OR
NOT), IN CONTRACT, TORT, (INCLUDING NEGLIGENCE), BREACH OF STATUTORY DUTY,
PRODUCT LIABILITY OR OTHERWISE, ARISING FROM THIS AGREEMENT OR INDIVIDUAL
CONTRACTS HEREUNDER, EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-6-
<PAGE>
Agreement for China
CONFIDENTIAL
13. PRODUCT LIABILITY
SECTION 13.1 INDEMNITY AND DEFENSE. (a) Seller agrees to defend, indemnify
and hold Buyer harmless against any liability, loss, expense, damage or cost
found by the court having jurisdiction in P.R. China under the product liability
law or the laws and regulations having the same effect in P.R. China, or agreed
in a settlement agreement between any plaintiffs and/or claimants and Seller,
with respect to personal injury or death or property damage alleged to have been
caused by any defect in the Products or part thereof provided, however, that the
foregoing indemnity and assumption of defense shall not be applied to any
instances where the alleged defect arises out of: (i) Buyer's failure to carry
out proper handling, operating, installation, testing, service and check out of
the Products and/or to follow Seller's reasonable instructions or advice with
respect to any of these matters; (ii) Buyer's utilization of any attachments or
interface devices or any modifications to the Products including any change to
its instruction manuals, installation manuals, service manuals, warranty card
and other related documents ("Related Documents") which are not approved by
Seller in writing and in advance, or Buyer's preparation of such Related
Documents by itself; (iii) Buyer's incorporation of any parts not supplied by
Seller into the Products and/or combination of any equipment not supplied by
Seller with the Products; (iv) Seller's compliance with any request,
instruction, design change, drawing or specification with respect to the
Products and Related Documents imposed on Seller by Buyer; (v) Buyer's wrong
explanation or failure to make necessary warning on the use or installation of
the Products to its customers or end users; or (v) any commission or omission of
Buyer.
(b) Buyer agrees to defend, indemnify and hold Seller harmless against any
liability, loss, expense, damage or cost arising out of personal injury or death
or property damage alleged to have been caused by any of the instances (i),
(ii), (iii), (iv) and/or (v) specified in the above sub-section (a).
14. STATUTORY APPROVAL SECTION
14.1 BUYER'S RESPONSIBILITY. Obtaining import license, type approval or any
other necessary governmental or administrative license or approval and taking
any procedures and steps necessary to comply with the laws and regulations of
the country of destination and resale of the Products shall be at the
responsibility and cost of Buyer.
15. TERM AND TERMINATION
SECTION 15.1 TERM. The term (the "Term") of this Agreement shall commence
on the Effective Date and end one year from such commencing date.
SECTION 15.2 TERMINATION. Either party may, at its option, terminate this
Agreement, if the other party fails to remedy a material breach of this
Agreement within sixty (60) days of written notice from the non-breaching party
thereof.
-7-
<PAGE>
Agreement for China
CONFIDENTIAL
SECTION 15.3 EFFECT OF TERMINATION. (a) In the event of termination of this
Agreement for breach by either party in accordance with Section 15.2 hereof, all
amount owned by the breaching party to the non-breaching party shall become
immediately due and payable.
(b) In the event of termination of this Agreement upon the expiration of
the Term or upon mutual agreement of the parties, all rights and licenses, if
any, granted hereunder to either party shall terminate, provided, however, that
all Individual Contracts that have been accepted prior to such termination shall
be filled in accordance with the terms and conditions of this Agreement.
SECTION 15.4 TERMINATION WITHOUT PREJUDICE. Any termination of this
Agreement by either party for breach shall be without prejudice to the rights or
remedies of that party.
SECTION 15.5 SURVIVAL. The following Articles and Sections and other
Articles and Sections which should survive by their nature shall survive the
termination or expiration of this Agreement: 2.1(c), 8.1, 9.1, 9.2, 9.3, 9.4,
10.1, 11.1, 12.1, 13.1, 14.1, 15.3, 15.4, 15.5, 17.2, 17.3, 17.7, and 17.9.
16. NOTICE
SECTION 16.1 NOTICE. Whenever written notice required under the provision
of this Agreement, such notice shall be deemed sufficiently given if sent by
certified airmail to the other party at the address set forth below, or at such
other address as the party shall have specified by written notice.
<TABLE>
<CAPTION>
<S> <C>
If to Buyer UTStarcom, Inc. If to Seller
1275 Harbor Bay Parkway, (MEI) Matsushita Electric
Suit 100, Alameda, California Industrial Co., Ltd., Corporate
94502, the U. S. A. Management Division for China,
Attention Terry Campbell System Sales Office at 3-2,
Minamisemba 4-chome,
Chuo-ku, Osaka 542-8588, Japan
Attention Director of China/Hong Kong
Sales Office
(MCI) Matsushita Communication
Industrial Co., Ltd.,
Communication Systems Division
4-3-1 Tsunashima-higashi
Kohoku-ku, Yokohama 223-8639,
Japan
Attention General Manager of International
Business Department
</TABLE>
-8-
<PAGE>
Agreement for China
CONFIDENTIAL
17. MISCELLANEOUS
SECTION 17.1 SUPERVISION. The supervision of the installation of Radio Port
Controllers, Radio Ports may be made by Seller upon Buyer's reasonable request
and Seller's acceptance, provided that Buyer shall reimburse Seller for air
freight, hotel accommodations and meals, and will pay to Seller for each
Seller's employee conducting the supervision a [*].
SECTION 17.2 CONFIDENTIAL TREATMENT. The contents of this Agreement shall
in no event be disclosed by either party to third party except as required by
laws.
SECTION 17.3 PUBLICITY. If and when Buyer desires to refer to the business
relationship with Seller herein established on its company profile, catalogues
or any other publicity materials, Buyer shall obtain Seller's prior written
consent thereto.
SECTION 17.4 NO OTHER RIGHTS. This Agreement does not confer upon either
party by implication, estoppel, laches or by any other means any license or any
right other than those expressly granted herein.
SECTION 17.5 INDEPENDENT CONTRACTORS. In making and performing this
Agreement, each party acts and shall act at all times as an independent
contractor, and nothing contained in this Agreement shall be construed or
implied so as to create the relationship of a partnership, agency, joint venture
or employer employee relationship between Buyer and Seller.
SECTION 17.6 EXCUSABLE DELAYS. Neither party shall be liable for any
failure to perform or for any delay in the performance of any obligation under
this Agreement caused by circumstances beyond its reasonable control including,
but not limited to, fire, storm, flood, earthquake, explosion, war, rebellion,
insurrection, sabotage, labor disputes, delays in transportation, acts of God,
acts of any national state, or local government authority, and any judicial
action.
SECTION 17.7 TRANSFERABILITY OF RIGHTS AND OBLIGATIONS. This Agreement is
not assignable by either party without the other party's prior written consent
thereto with the signature of its authorized director. Notwithstanding the
foregoing, any permitted assignment shall be binding upon and inure to the
benefit of the successors of the parties hereto.
SECTION 17.8 GOVERNING LAW, DISPUTE, ETC. (a) This Agreement shall be
interpreted and governed in accordance with the laws of Japan, without reference
to its conflicts of laws principles. The 1980 United Nations Convention on
Contracts for the International Sale of Goods shall not apply to this Agreement.
(b) Any disagreement in connection herewith shall be finally settled by
arbitration. If Seller initiates the arbitration, the arbitration shall be held
in San Francisco, California, the U. S. A. in accordance with the arbitration
rules of American Arbitration Association. If Buyer initiates the arbitration,
the arbitration shall be held in Tokyo, Japan in accordance with the arbitration
rules of Japan Commercial Arbitration Association.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
-9-
<PAGE>
Agreement for China
CONFIDENTIAL
SECTION 17.9 SEVERABILITY. In the event that any provision of this
Agreement is determined by a court of competent jurisdiction to be invalid, void
or unenforceable for any reason, the remaining portions of this Agreement shall
continue in full force and effect.
SECTION 17.10 EXPORT CONTROL. (a) In -no event shall Seller be bound by any
terms and conditions that contravene any export laws, regulations or other
restraints of any relevant countries including but not limited to Japan and the
U. S. A.. All orders are subject to the obtaining of any required licenses under
the said relevant laws. Buyer shall, upon Seller's request, furnish Seller with
all information and documentation necessary for Seller in obtaining and
complying with the required licenses.
(b) In the event that any and all the Products including replacement parts
thereto to be purchased by Buyer from Seller and any technical documents or
technical services to be supplied by Seller to Buyer relating thereto
(hereinafter collectively called "GOODS") are included in and remain the
"restricted subject" whose export is controlled under the Foreign Exchange and
Foreign Trade Control Act and its relevant governmental/administrative
regulations of Japan, Buyer shall provide Seller with the "End-Use Statement"
supplied by Seller and signed by Buyer, which is required for Seller to obtain
approvals of the Japanese Government, and Buyer shall strictly comply with any
and all provisions set forth therein. Specifically, Buyer shall not change the
end-use of GOODS set forth therein nor transfer the GOODS to any country other
than the countries set forth therein. In the event that Buyer is not the
end-user of GOODS, Buyer shall, upon request of Seller, make Buyer's customer(s)
sign such End-Use Statement and make such customer(s) understand and comply with
any and all the provisions therein. Buyer further agrees, upon request of
Seller, to render the assistance necessary for Seller to check and verify the
compliance with provisions of End-Use Statement by Buyer or its customer(s).
(c) During and after the term of this Agreement, Buyer shall not sell,
lease or otherwise dispose of GOODS, directly or indirectly, to any customer who
makes use of, is likely to or intends to make use of GOODS for "Military
Purposes". In this Article, "Military Purposes" means the design, development,
manufacture or use of any weapon including without limitation nuclear weapon,
biological weapon, chemical weapon and missiles.
(d) Buyer shall not export GOODS directly or indirectly through any third
party to any of the countries against which any economic sanction is imposed
under resolutions approved by the Security Council of the United Nations, as
long as such resolutions remain valid and effective and so far as GOODS remain
the "prohibited subject" of which export to such countries is prohibited
thereunder.
(e) In the case of any breach of this Article, Buyer shall be liable to
Seller for any and all direct and indirect damages incurred by Seller arising
from such breach, and Seller may cancel all existing Individual Contracts
hereunder and this Agreement immediately without any liability to Buyer.
Further, Seller shall not obliged to fulfill any Individual Contracts which are
accepted by Seller but subsequently discovered to be an improper end-use,
Military Purpose, and the like, or sale to improper end-user or intermediary.
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<PAGE>
Agreement for China
CONFIDENTIAL
SECTION 17.11 NON-WAIVER. The failure of either party to assert or enforce
any right arising under this Agreement shall not constitute a waiver of such
right, or any other right arising hereunder.
SECTION 17.12 HEADINGS. Headings contained in this Agreement are for ease
of reference only and shall have no legal effect.
SECTION 17.13 TRIPLICATION. This Agreement shall be executed in triplicate,
all of which, take together, shall constitute one single agreement among the
parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers, effective as of the
Effective Date.
BUYER: SELLER:
UTSTARCOM INC. MATSUSHTIA ELECTRIC INDUSTRIAL CO., LTD.,
CORPORATE MANAGEMENT DIVISION FOR CHINA
/s/ Hong Liang Lu /s/ Yukio Shohtoku
- ------------------------------ ------------------------------------------
Signed by: Mr. Hong Liang Lu Signed by: Mr. Yukio Shohtoku
Title: President & CEO Title: Managing Director,
Member of the Board
MATSUSHITA COMMUNICATION INDUSTRIAL CO., LTD.
/s/ M. Akiyama
--------------------------------------------
Signed by: Mr. Masaki Akiyama
Title: Senior Managing Director,
Member of the Board
-11
<PAGE>
Agreement for China
CONFIDENTIAL
EXHIBIT A
APPLICABLE PRODUCTS
-------------------
<TABLE>
<CAPTION>
PRODUCTS
- ------------------------------------------------------------------------------
ITEM MODEL
- --------------------------------- --------------------------------------
<S> <C>
Radio Port Controller
1) Main shelf EC-H11940-A
2) Main Control Card EC - C10967A
3) E1 Interface Card EC-L12998B
4) Radio Port Interface Card EC - L12999B
Outdoor Type Radio Port EA - 7H75B
Indoor Type Radio Port EA-7H74B
200mW Type Radio Port EA-7T56
Joint Box EA 18888AA
Personal Station UTS - 701
Personal Station UTS -702
</TABLE>
<PAGE>
Agreement for China
CONFIDENTIAL
EXHIBIT B
RETENTION PERIOD OF PARTS SUPPLY
<TABLE>
<CAPTION>
ITEM OF PARTS RETENTION PERIOD
- ------------------------------------- ----------------------------------
<S> <C>
Printed matter and packing material [*]
Mechanical parts (Appearance parts
Ie : case, etc.) [*]
Mechanical and functional parts [*]
Electric parts [*]
</TABLE>
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 10.27
INFORMATION SERVICE PROJECT CONTRACT
This contract is signed in Beijing on June 1, 1998, by and between the
two parties as follows:
Party A: China Jitong Communication Co., Ltd.
Party B: UT Starcom (China) Ltd.
Whereas
Party A plans to conduct Internet information service operation in China
and Party B has the experience in the development and construction of Internet
information service, and whereas Party A plans to entrust Party B to carry out
the development and construction of an Internet information service project and
Party B consents to accept this arrangement, the two parties hereby enter into
the following agreement:
I. DESIGN OF THE PROJECT
1. Party A entrusts Party B to develop and construct an
Internet information service project in China. Party A entrusts Party B to
design the said project of providing information service in China and the
technical plan needed for providing the service.
2. Party B shall submit the design of the project on the date
as agreed by both parties. The design shall include the content of information
service and a list of the principal technologies and equipment for the
information service project. The schedule for implementing the project and the
project financial estimates shall be submitted within the date as agreed by both
parties after the design of the project is received.
3. Parties A and B shall decide on the following through
consultations:
(1) The plan of the project, the plan for implementing
the project and the relevant project estimates.
(2) The choice of equipment and software.
II. CONSTRUCTION OF THE PROJECT
1. The construction of the equipment for the project shall be
the responsibility of Party B, while Party A shall provide the necessary
assistance.
2. Party B agrees to entrust Party A to serve as the agent in
importing part of the equipment needed for the construction of the project.
(1) Party A shall do the following:
1) apply for and obtain an Internet
international port.
<PAGE>
2) carry out the initial coordination between
nominated cities or areas, including, for example, the matters relating to VSAT
interfaces.
3) complete the procedures needed to construct,
develop and operate an Internet information service project in the cities or
areas nominated by both parties.
4) organize and coordinate the construction and
implementation of the project.
5) operate the completed project.
6) organize and coordinate the further
development of the project.
(2) Party B shall do the following:
1) draft the plan for the information service
project, the plan for implementing the project and the relevant estimates of the
project.
2) provide the technical support for the
construction, development and operation of the project.
3) provide advanced managerial expertise and
technologies relating to the operation of the project.
4) provide after-sale maintenance and repairs.
III. SUB-CONTRACT
1. Party B shall have the right to sub-contract part of the
work of the project under its charge.
2. Party B agrees to, under equal conditions, select Party A
as the contractor.
IV. ADMINISTRATIVE COMMITTEE
1. Parties A and B shall jointly establish the Administrative
Committee, which shall be the highest organ of power of the project. The
committee shall consist of six persons, with a representative of Party A as
Chairman, a representative of Party B as Vice-Chairman and with two other
members sent by each of the two parties. The Administrative Committee shall
coordinate and decide on the matters relating to the project. A resolution of
the committee shall not become effective unless four or more of its members vote
in favor. The change of members of the committee shall be notified to all the
members in writing in advance.
2. The Administrative Committee shall establish a project
implementation group which shall consist of representatives of Parties A and B.
The group shall take charge of the planning and plan of the project and organize
the construction and development of the project.
-2-
<PAGE>
3. The following issues shall be decided on by the
Administrative Committee through study:
(1) the confirmation of the planning, plan, technical
plan, implementation plan and estimates of the project.
(2) the study of the construction and development of the
project.
(3) the appointment or dismissal of managers.
(4) the revision or termination of the contract
(5) other major issues.
V. ACCEPTANCE INSPECTION
1. After the project is completed, both parties shall jointly
carry out the acceptance inspection.
2. Party B has the obligations to remedy the problems found in
the acceptance inspection.
3. After the acceptance inspection, Party A shall sign the
acceptance certificate of the project.
VI. HAND-OVER OF THE PROJECT
This project is a "turnkey" project, that is, in accordance with the
requirements of Party A, Party B shall turn a complete, good system to Party A
for operation. Thereafter the system shall belong to Party A and is at its
disposal.
VII. PROJECT ENGINEERING FEE
After the project is accepted by both parties, Party A shall pay Party B
the project engineering fee (including the payment for equipment) in the way
specified in the Information Service Project Service Contract.
VIII. AFTER-SALE SERVICE
Parties A and B shall conclude the Internet Information Service Project
Service Contract as an appendix to this contract.
IX. SETTLEMENT OF DISPUTES
Any differences and disputes arising in the process of the construction
and development of the project shall be settled by both parties through
consultations. Should this do not work, the disputes shall be submitted to the
Beijing-based China International Economic and Trade Arbitration
-3-
<PAGE>
Commission for arbitration in accordance with its regulations in Beijing.
The award shall be final and binding for both parties. The loser in the
arbitration shall bear the expenses incurred therein.
X. SECURITY
Both parties shall maintain the security of this contract. If either
party [Party A is Jitong Company and Party B is UT Starcom (China) Ltd. and
Softbank Corporation] leaks any aspect of this contract to a third party without
the consent of both parties, it will be regarded to have violated the contract
and the other party shall have the right to terminate the contract.
XI. VERSION
Done in duplicate, the contract shall come into force upon signature by
both parties.
XII. Both parties agree that this contract and its appendix is the
replacement of the written material relating to this project signed earlier.
The Contract on the Joint Establishment of an Internet Service Network concluded
by Party A and Unitech Telecom Inc. of the United States and Softbank
Corporation of Japan on October 16, 1995, has been nullified.
Signatures of both parties:
Party A: Jitong Communication Co., Ltd.
Legal representative: /s/ Qi Mingqiu
Party B: UT Starcom (China) Ltd.
Legal representative: /s/ signature
Date of conclusion: June 11, 1998
-4-
<PAGE>
EXHIBIT 10.28
PAYMENT AGENT CONTRACT
This contract is signed by the following four parties in Beijing on June
11, 1998:
Party A: Softbank Corporation of Japan
Party B: Jitong Communication Co., Ltd.
Party C: UT Starcom (formerly Unitech Telecom Inc. of the United States)
Party D: UT Starcom (China) Ltd.
Whereas
1. Party B shall entrust Party D to develop and construct an Internet
information service project in China.
2. Party C shall be the supplier of the main exported equipment
needed to develop and construct the Internet information service project of
Party B.
3. Party A shall provide financial support for the development and
construction of the information service project. The concrete means shall be to
provide major financial support for the export of the equipment of Party C.
In order to facilitate the development and construction of the
information service project and ensure a smooth payment, all the parties have
reached, through friendly negotiation, an agreement as follows:
1. Party A shall provide Party C with a support fund of US$10 million
as Party C's seller credit for the equipment Party C exports to Party D and as
the project construction fund.
2. Party A shall designate Party B as the agent of payment of the
support fund.
3. Party D shall entrust Party B to take charge of the import of the
equipment needed for the project.
4. Provided Party B has received the support fund from Party A, Party
B agrees to give direction of payment in accordance with the import order of
equipment submitted by Party D and arrange for the payment of support fund to
Party C. In addition, Party B shall report the payment of the support fund to
Party D so that the latter can know about and supervise the use of the said
fund.
5. All the parties agree that the Contract on the Joint Establishment
of an Internet Service Network concluded by Parties A, B and C on October 16,
1995 shall be terminated on the date when this contract is concluded, and shall
be replaced by the Information Service Project
<PAGE>
Contract, the Internet Information Service Project Service Contract and this
contract concluded by Parties B and D on June 11, 1998.
6. Any differences and disputes arising in the process of the
construction and development of the project shall be settled by both parties
through consultations. Should this do not work, the disputes shall be submitted
to the Beijing-based China International Economic and Trade Arbitration
Commission for arbitration in accordance with its regulations in Beijing. The
award shall be final and binding for both parties. The loser in the arbitration
shall bear the expenses incurred therein.
-2-
<PAGE>
Party A: Softbank Co., Ltd. of Japan
Legal representative: /s/ signature
Party B: Jitong Communication Co., Ltd.
Legal representative: /s/ Qi Mingqiu
Party C: UT Starcom Inc. (formerly Unitech Telecom Inc. of the United States)
Legal representative: /s/ signature
Party D: UT Starcom (China) Ltd.
Legal representative: /s/ signature
Date: June 11, 1998
-3-
<PAGE>
EXHIBIT 10.29
AGREEMENT ON TERMINATION OF CONTRACT
This agreement is made by and among the following four (4) parties on
August 30, 1999 in Beijing:
Party A: Jitong Communication Co., Ltd.
Party B: UTStarcom, Inc. (formerly known as United Telecom Inc. of
the U.S.)
Party C: UTStarcom (China) Ltd.
Party D: Softbank Corporation of Japan
WHEREAS:
1. the parties executed the "Information Service Project Contract",
the "Internet Information Service Project Service Contract" and
the "Payment Agent Contract" ("collectively, hereinafter referred
to as the "Contracts") on June 11, 1998 with an aim of jointly
constructing Internet Service Network (hereinafter referred to as
the "Project"); and
2. Party B has remitted to Party A a total of USD10,000,000 in cash
pursuant to the Contracts;
THEREFORE, in order to standardize the purpose of such Project,
the parties have reached, on the basis of friendly consultations, the
following agreement as to how to effect an overall solution to the
matters relating to the said Project:
1. Party A shall repay the total sum of USD10,000,000 mentioned
above, which is equal to RMB96,280,000 YUAN in cash (Ninety-six
Million Two Hundred Eighty Thousand YUAN).
2. Party A undertakes to repay Party B the said sum at its earliest
convenience and in good faith. The parties agree to the following
schedule of payment: on or prior to September 30, 1999, Party A
shall pay Party B RMB50,000,000 YUAN (Fifty Million), and then on
or prior to December 31, 1999, Party A shall pay Party B RMB
46,280,000 YUAN (Forty-six Million Two Hundred Eighty Thousand
YUAN.
3. The parties agree that Party A shall make its first installment of
payment to Party B, i.e. prior to September 30, 1999, Party A
shall remit a sum of RMB50,000,000 YUAN to a bank account
designated by Party B. All the contracts and agreements executed
by the parties prior to the execution of this Agreement shall be
terminated as of the date when Party A shall make
-1-
<PAGE>
the foregoing payment and present a valid certificate of such
payment by the bank, which include but are not limited to the
"Cooperative Agreement") executed by and between Party A and
UTStarcom, Inc. of the U.S. on September 12, 1995, the
"Contract to Jointly Construct Internet Service Network
Contract" executed by and among Party A, Party D and Party B on
October 16, 1995, the "Information Service Project Contract",
the "Internet Information Service Project Service Contract" and
the "Payment Agent Contract" executed on June 11, 1998 and the
"Framework Agreement" executed by and between Party A and Party
B on August 23, 1999. With the exception of Party A's
obligations of repayment under this Agreement, all the matters
that are related to this Project shall automatically come to an
end, and there will exist no more relationship of rights and
obligations between Party A on the one hand and Parties B, C
and D on the other.
4. If Party A fails to honor its obligations of repayment pursuant to
the schedule set forth in this Agreement, Party A shall pay an
overdue fine at an interest rate of 12% per annum.
5. If the exchange rate between US dollars and Renminbi is higher
than 1: 8:715 after December 31, 1999, the amount unpaid and the
overdue fine on the part of Party A shall be calculated in the
following formula: the total of the unpaid amount and the overdue
fine shall be divided by 8.3 and then multiply by the intermediate
price of the exchange rate between the US dollars and Renminbi
announced by the People's Bank of China on the day of Party A's
payment.
6. This Agreement shall come into force upon execution by the
parties.
7. This Agreement shall have four (4) original copies, with each
party in possession of one copy.
Jitong Communication Co., Ltd.
/s/ Signature
Legal Representative (or Authorized Representative)
Date: August 30, 1999
UTStarcom, Inc. (formerly known as United Telecom Inc. of the U.S.)
/s/ Signature
Legal Representative (or Authorized Representative)
Date: August 30, 1999
-2-
<PAGE>
UTStarcom (China) Ltd.
/s/ Signature
Legal Representative (or Authorized Representative)
Date: August 30, 1999
Softbank Corporation of Japan
/s/ Signature
Legal Representative (or Authorized Representative)
Date: August 30, 1999
-3-
<PAGE>
EXHIBIT 10.30
EXCHANGE AGREEMENT
October 15, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Exchange and Issuance of Series E Preferred Stock.........................1
1.1 Exchange of Common Stock............................................1
1.2 Closing.............................................................1
2. Representations and Warranties of the Company.............................2
2.1 Organization Good Standing and Qualification........................2
2.2 Authorization.......................................................2
2.3 Governmental Consents...............................................2
3. Representations and Warranties of the Purchasers..........................3
3.1 Authorization.......................................................3
3.2 Purchase Entirely for Own Account...................................3
3.3 Disclosure of Information...........................................3
3.4 Investment Experience; Economic Risk................................3
3.5 Restricted Securities...............................................4
3.6 No Public Market....................................................4
3.7 Legends.............................................................4
3.8 Tax Liability; Legal Representation.................................5
3.9 Risk Factors........................................................5
4. Post-Closing Covenants of the Company and the Purchasers..................5
4.1 Market Standoff Agreement. ........................................5
4.2 Stop Transfer Instructions..........................................5
5. Miscellaneous.............................................................6
5.1 Transfer; Successors and Assigns....................................6
5.2 Governing Law.......................................................6
5.3 Counterparts........................................................6
5.4 Titles and Subtitles................................................6
5.5 Notices.............................................................6
5.6 Amendments and Waivers..............................................7
5.7 Severability........................................................7
5.8 Delays or Omissions.................................................7
5.9 Entire Agreement....................................................7
Exhibit A Schedule of Purchasers
</TABLE>
-i-
<PAGE>
Exhibit B Form of Amended and Restated Articles of Incorporation
-ii-
<PAGE>
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (the "AGREEMENT") is made as of the 15th day of
October, 1997 by and between UTStarcom, Inc., a Delaware corporation (the
"COMPANY") and the investors listed on EXHIBIT A attached hereto (each a
"PURCHASER" and together the "PURCHASERS").
In consideration of the mutual covenants and agreements contained herein,
including the consideration exchanged between the parties, the receipt and
sufficiency of which is hereby acknowledged, each of the parties agrees as
follows:
1. EXCHANGE AND ISSUANCE OF SERIES E PREFERRED STOCK.
1.1 EXCHANGE OF COMMON STOCK.
(a) The Company shall file with the Secretary of State of Delaware
on or before the Closing (as defined below), the Seventh Amended and Restated
Articles of Incorporation in the form attached hereto as EXHIBIT B (the
"RESTATED ARTICLES") which shall, among other things, create a new class of
Series E Preferred Stock consisting of 19,000,000 shares (hereinafter referred
to as "SERIES E PREFERRED" or "STOCK") with rights, preferences and privileges
as set forth in the Restated Articles.
(b) Subject to the terms and conditions of this Agreement, each
Purchaser agrees to exchange at the Closing (as defined below) the shares of
Common Stock then held by it for shares of Series E Preferred in accordance with
the chart set forth on EXHIBIT A attached hereto and the Company agrees to
accept such shares of Common Stock and to issue to each Purchaser shares of
Series E Preferred.
1.2 CLOSING. The exchange of the shares of Common Stock for the Series
E Preferred Stock, in accordance with the chart set forth in EXHIBIT A attached
hereto, shall take place at the offices of Wilson, Sonsini, Goodrich & Rosati,
650 Page Mill Road, Palo Alto, California, at 10:00 a.m., on October 15, 1997 or
at such other time and place as the Company and the Purchasers mutually agree
upon, orally or in writing (which time and place are designated as the
"CLOSING"). At the Closing, each Purchaser shall surrender to the Company all
certificates of Common Stock then held by it and the Company shall deliver to
each such Purchaser a certificate representing the Series E Preferred Stock and
another certificate representing Common Stock (collectively, the "EXCHANGE").
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Purchaser as follows:
2.1 ORGANIZATION GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure so to qualify would have a material adverse
effect on its business or properties.
2.2 AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of the
Company hereunder and the authorization, issuance and delivery of the Stock and
the Common Stock issuable upon conversion of the Stock (the "CONVERSION SHARES")
has been taken or will be taken prior to the Closing, and this Agreement,
constitutes a valid and legally binding obligation of the Company, enforceable
against the Company in accordance with its respective terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and other laws of general application affecting enforcement of
creditor's rights generally, as limited by laws relating to the availability of
specific performance, injunctive relief, or other equitable remedies. The Stock
and the Conversion Shares, when issued in compliance with the provisions of this
Agreement, will be validly issued and will be fully paid and nonassessable and
will have the rights, preferences and privileges described in the Restated
Articles. The shares of Common Stock issuable upon conversion of the Stock have
been duly and validly reserved and, when issued in compliance with the
provisions of this Agreement and the Restated Articles will be validly issued,
fully paid and nonassessable, and the Conversion Shares and the Stock will be
free of any liens or encumbrances other than those created by or imposed upon
the holders thereof through no action of the Company, and the Conversion Shares
and the Stock will be free of restrictions on transfer other than the
restrictions on transfer under this Agreement and under the applicable state and
federal securities laws.
2.3 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company is
required in connection with the consummation of the transactions contemplated by
this Agreement, except (i) the filing of the Restated Articles with the
Secretary of State of Delaware and (ii) such filings as may be required under
applicable state and federal securities laws, which filings will be timely filed
within the applicable periods therefor.
-2-
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby
represents and warrants to the Company that:
3.1 AUTHORIZATION. This Agreement, when executed and delivered by the
Purchaser will constitute a valid and legally binding obligation of the
Purchaser, enforceable in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the
Purchaser in reliance upon the Purchaser's representation to the Company, which
by the Purchaser's execution of this Agreement the Purchaser hereby confirms,
that Stock or Conversion Shares to be acquired by the Purchaser will be acquired
for investment for the Purchaser's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof and that the
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Purchaser
further represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Stock or the Conversion Shares. The Purchaser understands that the Conversion
Shares and the Stock have not been, and will not be, registered under the
Securities Act by reason of a specific exemption from the registration
provisions of the Securities Act which depends upon, among other things, the
bona fide nature of the investment intent and the accuracy of the Purchaser's
representations as expressed herein. The Purchaser has not been formed for the
specific purpose of acquiring the Stock and the Conversion Shares.
3.3 DISCLOSURE OF INFORMATION. The Purchaser believes it has received
all the information it considers necessary or appropriate for deciding whether
to consummate the Exchange. The Purchaser further represents that it has had an
opportunity to ask questions and receive answers from the Company regarding the
terms and conditions of the Exchange. The Purchaser's decision to acquire the
Stock is based in part on the answers to such questions as the Purchaser and its
representatives have raised concerning the transaction and on its own evaluation
of the risks and merits of the purchase and the Company's proposed business
activities. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the
Purchaser to rely thereon.
3.4 INVESTMENT EXPERIENCE; ECONOMIC RISK. The Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company, so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. The Purchaser understands that the
Exchange is a speculative investment which involves a high degree of risk of
loss of the Purchaser's investment therein. The Purchaser is able to bear the
economic risks of its investment in the Stock for an indefinite period of time,
including the risks of a complete loss of the Purchaser's investment in such
securities. The foregoing does not, however, limit or modify the representations
and
-3-
<PAGE>
warranties of the Company set forth in Section 2 of this Agreement, or the
right of the Purchasers to rely thereon.
3.5 RESTRICTED SECURITIES. The Purchaser understands that the
Conversion Shares and the Stock are characterized as "RESTRICTED SECURITIES"
under the federal securities laws inasmuch as they are being acquired from
the Company in a transaction not involving a public offering and that under
such laws and applicable regulations such Conversion Shares and Stock may be
resold without registration under the Securities Act only in certain limited
circumstances. The Purchaser acknowledges that the Conversion Shares and the
Stock must be held indefinitely unless subsequently registered under the
Securities Act or an exemption from such registration is available. The
Purchaser is aware of the provisions of Rule 144 promulgated under the
Securities Act which permit limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things, the existence of a public market for the shares, the
availability of certain current public information about the Company, the
resale occurring not less than two years after a party has purchased and paid
for the security to be sold, the sale being effected through a "BROKER'S
TRANSACTION" or in transactions directly with a "MARKET MAKER" (as provided
by Rule 144(f)) and the number of shares being sold during any three-month
period not exceeding specified limitations.
3.6 NO PUBLIC MARKET. The Purchaser understands that no public market
now exists for any of the securities issued by the Company, that the Company has
made no assurances that a public market will ever exist for the Conversion
Shares or the Stock or the underlying Common Stock and that, even if such a
public market exists at some future time, the Company may not then be satisfying
the current public information requirements of Rule 144.
3.7 LEGENDS. The Purchaser understands that the Stock (and the Common
Stock issuable upon conversion thereof), and any securities issued in respect
thereof or exchange therefor, may bear one or all of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF FIRST REFUSAL AND MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF CERTAIN DOCUMENTS, COPIES OF
WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY."
(b) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED
OR HYPOTHECATED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT COVERING SUCH SECURITIES, (B) THE SALE IS MADE IN ACCORDANCE WITH RULE
144 OR 701 UNDER THE ACT OR (C) THE CORPORATION RECEIVES AN OPINION OF COUNSEL
FOR THE HOLDER OF THE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING
THAT SUCH SALE IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT."
-4-
<PAGE>
(c) Any legend required by the laws of the State of California.
(d) Any legend required by the Blue Sky laws of any other state to
the extent such laws are applicable to the shares represented by the certificate
so legended.
3.8 TAX LIABILITY; LEGAL REPRESENTATION. They have reviewed with their
own tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. They have relied
solely on such advisors and not on any statements or representations of the
Company or any of its agents. They understand that they (and not the Company)
shall be responsible for their own tax liability that may arise as a result of
this investment or the transactions contemplated by this Agreement. Wilson
Sonsini Goodrich & Rosati ("WSGR") is counsel for the Company only and is not
acting as counsel for the Purchasers. WSGR has not conducted an independent
inquiry to determine the accuracy of any of the representations of the Company.
Each Purchaser is advised to consult with their own legal counsel.
3.9 RISK FACTORS. The Purchaser realizes that the acquisition of the
Stock will be a highly speculative investment and involves a high degree of
risk, and the Purchaser is able, without impairing his financial condition, to
hold the Stock for an indefinite period of time and to suffer a complete loss of
the Purchaser's investment.
4. POST-CLOSING COVENANTS OF THE COMPANY AND THE PURCHASERS.
4.1 MARKET STANDOFF AGREEMENT. Each Purchaser hereby agrees that it
shall not, to the extent requested by the Company or an underwriter of
securities of the Company, sell or otherwise transfer or dispose of any capital
stock then owned by such Holder (other than to donees or partners of the
Purchaser who agree to be similarly bound) for up to 180 days following the
effective date of a registration statement of the Company filed under the
Securities Act of 1933, as amended; PROVIDED, HOWEVER, that all officers and
directors of the Company then holding Common Stock of the Company enter into
similar agreements.
4.2 STOP TRANSFER INSTRUCTIONS. The Purchasers agree, to ensure
compliance with the restrictions referred to herein, that the Company may issue
appropriate "STOP TRANSFER" certificates or instructions and that, if the
Company transfers its own securities, it may make appropriate notations to the
same effect in its records.
-5-
<PAGE>
5. MISCELLANEOUS.
5.1 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except at expressly provided
in this Agreement. Notwithstanding any other provision of this Agreement to the
contrary, the right and obligations of this Agreement may be expressly
transferred to any Purchaser's affiliate which acquires Shares and which shall
be subject to all limitations set forth herein.
5.2 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California.
5.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.5 NOTICES.
(a) All notices, requests, demands and other communications under
this Agreement or in connection herewith shall be given to or made upon (i) the
Purchasers at each such Purchaser's address as shown on the books of the
Company; and (ii) the Company at 1275 Harbor Bay Parkway, Suite 100, Alameda,
California 94502, attention: Chief Financial Officer with a copy to Wilson,
Sonsini, Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California
94304, attention: David Drummond.
(b) All notices, requests, demands and other communications given
or made in accordance with the provisions of this Agreement shall be in writing,
and shall be sent by airmail, return receipt requested, or by facsimile with
confirmation of receipt, and shall be deemed to be given or made when receipt is
so confirmed.
(c) Any party may, by written notice to the other, alter its
address or respondent, and such notice shall be considered to have been given
three (3) days after the airmailing or faxing thereof.
-6-
<PAGE>
5.6 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
with the written consent of the Company and the holders of at least a majority
of the Common Stock issued or issuable upon conversion of the Stock. Any
amendment or waiver effected in accordance with this Section 5.6 shall be
binding upon the Purchasers and each transferee of the Stock (or the Common
Stock issuable upon conversion thereof), each future holder of all such
securities, and the Company.
5.7 SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
5.8 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any holder of any of the Stock, upon any breach or
default of the Company under this Agreement shall impair any such right, power
or remedy of such holder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any holder of any breach or default under this
Agreement, or any waiver on the part of any holder of any provisions or
conditions of this agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any holder shall be cumulative
and not alternative.
5.9 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements,
including without limitation, all prior agreements for the purchase of capital
stock of the Company existing between the parties hereto are expressly canceled
and shall be of no further force and effect.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: /s/ Hong Lu By:
----------------------------- --------------------------------
Name: Hong Lu Name:
--------------------------- ------------------------------
Title: Title:
-------------------------- -----------------------------
Number of Shares of Common Stock to
be Exchanged:
-----------------------------------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Chauncey Xue
----------------------------- --------------------------------
Name: Name: Chauncey Xue
--------------------------- ------------------------------
Title: Title:
-------------------------- -----------------------------
Number of Shares of Common Stock to
be Exchanged:
2,544,796
---------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
TECHNOLOGY FUNDING VENTURE PARTNERS IV,
UTSTARCOM, INC. AN AGRESSIVE GROWTH FUND, L.P.
By Technology Funding Inc., Managing
General Partner
By: By: /s/ Thomas J. Toy
----------------------------- --------------------------------
Name: Name: Thomas J. Toy
--------------------------- ------------------------------
Title: Title: Vice President
-------------------------- -----------------------------
Number of Shares of Common Stock to
be Exchanged:
145,456
-----------------------------------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC. TECHNOLOGY FUNDING VENTURE
PARTNERS V, AN AGGRESSIVE
GROWTH FUND, L.P.
By Technology Funding Inc.,
Managing General Partner
By: By: /s/ Thomas J. Toy
---------------------------- --------------------------------
Name: Name: Thomas J. Toy
-------------------------- ------------------------------
Title: Title: Vice President
------------------------- -----------------------------
Number of Shares of Common Stock to be
Exchanged:
145,456
-----------------------------------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Shudan Zhang
---------------------------- --------------------------------
Name: Name: Shudan Zhang
-------------------------- ------------------------------
Title: Title: V.P UTStarcom (China)
------------------------- -----------------------------
Number of Shares of Common Stock to be
Exchanged:
740,052
-------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Charles Xue
------------------------------ --------------------------------
Name: Name: Charles Xue
--------------------------------
Title: Title:
---------------------------- --------------------------------
Number of Shares of Common Stock to be
Exchanged:
1,052,777
-----------------------------------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Sam Chen
------------------------------ --------------------------------
Name: Name: Sam Chen
---------------------------- --------------------------------
Title: Title:
---------------------------- --------------------------------
Number of Shares of Common Stock to be
Exchanged:
432,780
-------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Ying Wu
------------------------------ --------------------------------
Name: Name: Ying Wu
---------------------------- --------------------------------
Title: Title: E. VP
---------------------------- --------------------------------
Number of Shares of Common Stock to be
Exchanged:
2,558,091
---------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Hong Lu
------------------------------ --------------------------------
Name: Name: Hong Lu
---------------------------- --------------------------------
Title: Title: CEO
---------------------------- --------------------------------
Number of Shares of Common Stock to be
Exchanged:
1,560,591
---------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Terry Campbell
------------------------------ --------------------------------
Name: Name: Terry Campbell
---------------------------- --------------------------------
Title: Title:
---------------------------- --------------------------------
Number of Shares of Common Stock to be
Exchanged:
50,000
------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Peter Wang
------------------------------ --------------------------------
Name: Name: Peter Wang
---------------------------- --------------------------------
Title: Title:
---------------------------- --------------------------------
Number of Shares of Common Stock to be
Exchanged:
436,314
-------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ William Wittmeyer
--------------------------- ------------------------------------
Name: Name: William Wittmeyer
------------------------ ---------------------------------
Title: Title:
------------------------ ---------------------------------
Number of Shares of Common Stock to be
Exchanged:
10,664
------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Marilyn Weissman
--------------------------- ------------------------------------
Name: Name: Marilyn Weissman
------------------------ ---------------------------------
Title: Title:
------------------------ ---------------------------------
Number of Shares of Common Stock to be
Exchanged:
40,000
------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Bill Huang
--------------------------- ------------------------------------
Name: Name: Bill Huang
------------------------ ---------------------------------
Title: Title: VP
------------------------ ---------------------------------
Number of Shares of Common Stock to be
Exchanged:
128,000
-------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Denny Wang
--------------------------- ------------------------------------
Name: Name: Denny Wang
------------------------ ---------------------------------
Title: Title:
------------------------ ---------------------------------
Number of Shares of Common Stock to be
Exchanged:
31,200
------
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Harry Yang
--------------------------- ------------------------------------
Name: Name: Harry Yang
------------------------ ---------------------------------
Title: Title:
------------------------ ---------------------------------
Number of Shares of Common Stock to be
Exchanged:
32,000
------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By:
--------------------------- ------------------------------------
Name: Name: Yoh Chie Lu
------------------------ ---------------------------------
Title: Title: [illegible]
------------------------ ---------------------------------
Number of Shares of Common Stock to be
Exchanged:
100,000
-------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
UTSTARCOM, INC.
By: By: /s/ Li Zhang
--------------------------- ------------------------------------
Name: Name: Li Zhang
------------------------ ---------------------------------
Title: Title:
------------------------ ---------------------------------
Number of Shares of Common Stock to be
Exchanged:
36,000
------
*** EXCHANGE AGREEMENT ***
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
Technology Funding Venture Partners IV
Technology Funding Venture Partners V
Shudan Zhang
Chauncey Xue
Ying Wu
Charles Xue
Sam Chen
Hong Lu
Terry Campbell
Peter Wang
Bill Wittmeyer
Marilyn Weissman
Bill Huang
Denny Wang
Harry Yang
Yoh Chie Lu
Li Zhang
<PAGE>
EXHIBIT B
SEVENTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
<PAGE>
EXHIBIT 10.31
EXCHANGE AGREEMENT
October 15, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Exchange and Issuance of Series E Preferred Stock........................1
1.1 Exchange of Common Stock...........................................1
1.2 Closing............................................................1
2. Representations and Warranties of the Company............................2
2.1 Organization Good Standing and Qualification.......................2
2.2 Authorization......................................................2
2.3 Governmental Consents..............................................2
3. Representations and Warranties of the Purchasers.........................3
3.1 Authorization......................................................3
3.2 Safe Harbor........................................................3
3.3 Definition - United States and U.S. Person.........................3
3.4 No Offers to Buy or Sell...........................................4
3.5 No Directed Selling Efforts........................................4
3.6 Purchaser..........................................................4
3.7 Purchaser Located Outside the U.S..................................4
3.8 Purchase for Own Account...........................................4
3.9 No Distributor or Dealer...........................................4
3.10 Consents, Approvals and Authorizations.............................4
3.11 Disclosure of Information..........................................4
3.12 Restricted Securities..............................................5
3.13 No Public Market...................................................5
3.14 Legends............................................................5
4. Post-Closing Covenants of the Company and the Purchasers.................6
4.1 Market Standoff Agreement. .......................................6
4.2 Stop Transfer Instructions.........................................6
5. Miscellaneous............................................................6
-i-
<PAGE>
5.1 Transfer; Successors and Assigns...................................6
5.2 Governing Law......................................................6
5.3 Counterparts.......................................................6
5.4 Titles and Subtitles...............................................6
5.5 Notices............................................................7
5.6 Amendments and Waivers.............................................7
5.7 Severability.......................................................7
5.8 Delays or Omissions................................................7
5.9 Entire Agreement...................................................8
</TABLE>
-ii-
<PAGE>
Exhibit A Schedule of Purchasers
Exhibit B Form of Amended and Restated Articles of Incorporation
-iii-
<PAGE>
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (the "AGREEMENT") is made as of the 15th day of
October, 1997 by and between UTStarcom, Inc., a Delaware corporation (the
"COMPANY") and the investors listed on EXHIBIT A attached hereto (each a
"PURCHASER" and together the "PURCHASERS").
In consideration of the mutual covenants and agreements contained herein,
including the consideration exchanged between the parties, the receipt and
sufficiency of which is hereby acknowledged, each of the parties agrees as
follows:
1. EXCHANGE AND ISSUANCE OF SERIES E PREFERRED STOCK.
1.1 EXCHANGE OF COMMON STOCK.
(a) The Company shall file with the Secretary of State of Delaware
on or before the Closing (as defined below), the Seventh Amended and Restated
Articles of Incorporation in the form attached hereto as EXHIBIT B (the
"RESTATED ARTICLES") which shall, among other things, create a new class of
Series E Preferred Stock consisting of 19,000,000 shares (hereinafter referred
to as "SERIES E PREFERRED" or "STOCK") with rights, preferences and privileges
as set forth in the Restated Articles, with rights, preferences and privileges
as set forth in the Restated Articles.
(b) Subject to the terms and conditions of this Agreement, each
Purchaser agrees to exchange at the Closing (as defined below) the shares of
Common Stock then held by it for shares of Series E Preferred in accordance with
the chart set forth on EXHIBIT A attached hereto and the Company agrees to
accept such shares of Common Stock and to issue to each Purchaser shares of
Series E Preferred.
1.2 CLOSING. The exchange of the shares of Common Stock for the Series
E Preferred Stock, in accordance with the chart set forth in EXHIBIT A attached
hereto, shall take place at the offices of Wilson, Sonsini, Goodrich & Rosati,
650 Page Mill Road, Palo Alto, California, at 10:00 a.m., on October 15, 1997 or
at such other time and place as the Company and the Purchasers mutually agree
upon, orally or in writing (which time and place are designated as the
"CLOSING"). At the Closing, each Purchaser shall surrender to the Company all
certificates of Common Stock then held by it and the Company shall deliver to
each such Purchaser a certificate representing the Series E Preferred Stock
being issued and another certificate representing Common Stock (collectively,
the "EXCHANGE"). The date of the Exchange is referred to herein as the "CLOSING
DATE."
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Purchaser as follows:
2.1 ORGANIZATION GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure so to qualify would have a material adverse
effect on its business or properties.
2.2 AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of the
Company hereunder and the authorization, issuance and delivery of the Stock and
the Common Stock issuable upon conversion of the Stock (the "CONVERSION SHARES")
has been taken or will be taken prior to the Closing, and this Agreement,
constitutes a valid and legally binding obligation of the Company, enforceable
against the Company in accordance with its respective terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and other laws of general application affecting enforcement of
creditor's rights generally, as limited by laws relating to the availability of
specific performance, injunctive relief, or other equitable remedies. The Stock
and the Conversion Shares, when issued in compliance with the provisions of this
Agreement, will be validly issued and will be fully paid and nonassessable and
will have the rights, preferences and privileges described in the Restated
Articles. The shares of Common Stock issuable upon conversion of the Stock have
been duly and validly reserved and, when issued in compliance with the
provisions of this Agreement and the Restated Articles will be validly issued,
fully paid and nonassessable, and the Conversion Shares and the Stock will be
free of any liens or encumbrances other than those created by or imposed upon
the holders thereof through no action of the Company, and the Conversion Shares
and the Stock will be free of restrictions on transfer other than the
restrictions on transfer under this Agreement and under the applicable state and
federal securities laws.
2.3 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company is
required in connection with the consummation of the transactions contemplated by
this Agreement, except (i) the filing of the Restated Articles with the
Secretary of State of Delaware and (ii) such filings as may be required under
applicable state and federal securities laws, which filings will be timely filed
within the applicable periods therefor.
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<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby
represents and warrants to the Company that:
3.1 AUTHORIZATION. This Agreement, when executed and delivered by the
Purchaser will constitute a valid and legally binding obligation of the
Purchaser, enforceable in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies.
3.2 SAFE HARBOR. Purchaser has been advised and acknowledges: (i) that
the Stock has not been, and such Stock, when issued, will not be registered
under the Act, the securities laws of any state of the United States or the
securities laws of any other country; (ii) that in issuing and selling the Stock
to Purchaser pursuant hereto, the Company is relying upon the "safe harbor"
provided by Regulation S promulgated under the Act by the U.S. Securities and
Exchange Commission ("SEC") for offers and sales of securities occurring outside
the United States ("Regulation S") and/or on Section 4(2) under the Act; (iii)
that it is a condition to the availability of the Regulation S safe harbor that
the Stock not be offered or sold in the United States or to a U.S. Person until
the expiration of a period of one year following the Closing Date; (iv) that,
notwithstanding the foregoing, prior to the expiration of one year after the
Closing Date (the "Restricted Period"), the Stock may be offered and sold by the
holder thereof only if such offer and sale is made in compliance with the terms
of this Agreement and either: (A) if the offer or sale is within the United
States or to or for the account of a U.S. Person (as such terms are defined in
Regulation S), the securities are offered and sold pursuant to an effective
registration statement or pursuant to Rule 144 under the Act; or (B) the offer
and sale is outside the United States and to other than a U.S. Person. The
foregoing restrictions are binding upon subsequent transferees of the Stock,
except for transferees pursuant to an effective registration statement.
3.3 DEFINITION - UNITED STATES AND U.S. PERSON. As used herein, the
term "United States" means and includes the United States of America, its
territories and possessions, any State of the United States, and the District of
Columbia, and the term "U.S. Person" means: (i) a natural person (regardless of
citizenship) resident in the United States; (ii) any partnership or corporation
organized or incorporated under the laws of the United States; (iii) any estate
or trust of which any executor, administrator or trustee is a U.S. Person; (iv)
any agency or branch of a foreign entity located in the United States; (v) any
nondiscretionary or similar account (other than an estate or trust) held by a
dealer or other fiduciary for the benefit or account of a U.S. Person (whether
or not the dealer or other fiduciary is a U.S. Person); (vi) any discretionary
or similar account (other than an estate or trust) held by a dealer or other
fiduciary organized, incorporated and (if an individual) resident in the United
States; and (vii) a corporation or partnership organized under the laws of any
jurisdiction other than the United States by a U.S. Person principally for the
purpose of investing in securities that have not been registered under the Act,
unless organized or incorporated and owned entirely by accredited investors (as
defined in Rule 501(a) under the Act) who are not natural persons, estates or
trusts;
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<PAGE>
3.4 NO OFFERS TO BUY OR SELL. Purchaser agrees that with respect to the
Stock, until the expiration of the Restricted Period: (i) Purchaser nor any
agent or representative of Purchaser has not and will not solicit offers to buy,
offer for sale or sell any of the Stock or any other shares of Preferred Stock
of the Company, or any beneficial interest therein in the United States or to or
for the account of a U.S. Person;
3.5 NO DIRECTED SELLING EFFORTS. Purchaser has not engaged, nor is it
aware that any party has engaged, and Purchaser will not engage or cause any
third party to engage in any directed selling efforts (as such term is defined
in Regulation S) in the United States with respect to the Stock;
3.6 PURCHASER. Purchaser: (i) is domiciled and has its principal place
of business outside the United States; and (ii) certifies it is not a U.S.
Person and is not acquiring the Stock for the account or benefit of any U.S.
Person; and (iii) at the time of the closing, the Purchaser or persons acting on
Purchaser's behalf in connection therewith will be located outside the United
States;
3.7 PURCHASER LOCATED OUTSIDE THE U.S.. At the time of Exchange and
communication of Purchaser's order to acquire the Stock and at the time of
Purchaser's execution of this Agreement, the Purchaser or persons acting on
Purchaser's behalf in connection therewith were located outside the United
States;
3.8 PURCHASE FOR OWN ACCOUNT. Purchaser is acquiring the Stock either:
(i) for its own account; or (ii) for the account and benefit of clients of whom
none is a U.S. Person and for whom the Purchaser has, and for the entire
Restricted Period will continue to have, full investment discretion with respect
to the purchase, holding and disposition of the Shares;
3.9 NO DISTRIBUTOR OR DEALER. Purchaser is not a "distributor" (as
defined in Regulation S) or a "dealer" (as defined in the Act);
3.10 CONSENTS, APPROVALS AND AUTHORIZATIONS. Purchaser has full power
and lawful authority and all necessary consents, approvals and authorizations,
whether corporate, shareholder, governmental or otherwise, as may be required to
execute and deliver this Agreement and all other agreements attached as Exhibits
hereto (collectively and unless otherwise stated, the "Agreements"), and to
purchase the Shares in accordance with the terms hereof, and the Agreements
constitute the legally valid and binding agreements of Purchaser;
3.11 DISCLOSURE OF INFORMATION. Purchaser, in making the decision to
consummate the Exchange, has relied upon independent investigations made by it
and has not relied on any information or representations made by third parties.
Purchaser acknowledges that it has received all the information that it has
requested and considers necessary or appropriate for deciding whether to
exchange the Shares. Purchaser further represents that it has had an opportunity
to ask questions and receive answers from the Company regarding the terms and
conditions of the Exchange. Purchaser acknowledges that it is able to fend for
itself, can bear the economic risk of its investment, and has
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<PAGE>
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the Exchange and the Purchaser
is an "accredited investor" within the meaning of Rule 501 of Regulation D
promulgated under the Act as presently in effect; and
3.12 RESTRICTED SECURITIES. Purchaser understands that the Stock is
being exchanged in reliance on specific provisions of federal and state
securities laws and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments and understandings
of Purchaser set forth herein in order to determine the applicability of such
provisions. Accordingly, Purchaser agrees to notify the Company of any events
which would cause the representations and warranties of Purchaser to be untrue
or breached at any time after the execution of this Agreement by Purchaser and
prior to the expiration of the Restricted Period.
3.13 NO PUBLIC MARKET. The Purchaser understands that no public market
now exists for any of the securities issued by the Company, that the Company has
made no assurances that a public market will ever exist for the Conversion
Shares or the Stock or the underlying Common Stock and that, even if such a
public market exists at some future time, the Company may not then be satisfying
the current public information requirements of Rule 144.
3.14 LEGENDS. The Purchaser understands that the Stock (and the Common
Stock issuable upon conversion thereof), and any securities issued in respect
thereof or exchange therefor, may bear one or all of the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF FIRST REFUSAL AND MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF CERTAIN DOCUMENTS, COPIES OF
WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY."
(b) "THE SHARES OF PREFERRED STOCK BEING OFFERED HEREBY MAY NOT BE
OFFERED AND SOLD BY THE HOLDER HEREOF EXCEPT: (A) IF THE OFFER OR SALE IS WITHIN
THE UNITED STATES OR TO OR FOR THE ACCOUNT OF A U.S. PERSON (AS SUCH TERMS ARE
DEFINED IN REGULATION S UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT")), THE SECURITIES ARE OFFERED AND SOLD PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT OR PURSUANT TO RULE 144 UNDER THE ACT; OR (B) IF THE
OFFER OR SALE IS OUTSIDE THE UNITED STATES AND TO OR FOR THE ACCOUNT OF OTHER
THAN A U.S. PERSON."
(c) Any legend required by the laws of the State of California.
(d) Any legend required by the Blue Sky laws of any other state to
the extent such laws are applicable to the shares represented by the certificate
so legended.
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<PAGE>
4. POST-CLOSING COVENANTS OF THE COMPANY AND THE PURCHASERS.
4.1 MARKET STANDOFF AGREEMENT. Each Purchaser hereby agrees that it
shall not, to the extent requested by the Company or an underwriter of
securities of the Company, sell or otherwise transfer or dispose of any capital
stock then owned by such Holder (other than to donees or partners of the
Purchaser who agree to be similarly bound) for up to 180 days following the
effective date of a registration statement of the Company filed under the
Securities Act of 1933, as amended; PROVIDED, HOWEVER, that all officers and
directors of the Company then holding Common Stock of the Company enter into
similar agreements.
4.2 STOP TRANSFER INSTRUCTIONS. The Purchasers agree, to ensure
compliance with the restrictions referred to herein, that the Company may issue
appropriate "STOP TRANSFER" certificates or instructions and that, if the
Company transfers its own securities, it may make appropriate notations to the
same effect in its records.
5. MISCELLANEOUS.
5.1 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except at expressly provided
int his Agreement. Notwithstanding any other provision of this Agreement to the
contrary, the right and obligations of this Agreement may be expressly
transferred to any Purchaser's affiliate which acquires Shares and which shall
be subject to all limitations set forth herein.
5.2 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California.
5.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
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<PAGE>
5.5 NOTICES.
(a) All notices, requests, demands and other communications under
this Agreement or in connection herewith shall be given to or made upon (i) the
Purchasers at each such Purchaser's address as shown on the books of the
Company; and (ii) the Company at 1275 Harbor Bay Parkway, Suite 100, Alameda,
California 94502, attention: Chief Financial Officer with a copy to Wilson,
Sonsini, Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California
94304, attention: David Drummond.
(b) All notices, requests, demands and other communications given
or made in accordance with the provisions of this Agreement shall be in writing,
and shall be sent by airmail, return receipt requested, or by facsimile with
confirmation of receipt, and shall be deemed to be given or made when receipt is
so confirmed.
(c) Any party may, by written notice to the other, alter its
address or respondent, and such notice shall be considered to have been given
three (3) days after the airmailing or faxing thereof.
5.6 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
with the written consent of the Company and the holders of at least a majority
of the Common Stock issued or issuable upon conversion of the Stock. Any
amendment or waiver effected in accordance with this Section 5.6 shall be
binding upon the Purchasers and each transferee of the Stock (or the Common
Stock issuable upon conversion thereof), each future holder of all such
securities, and the Company.
5.7 SEVERABILITY. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
5.8 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any holder of any of the Stock, upon any breach or
default of the Company under this Agreement shall impair any such right, power
or remedy of such holder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any holder of any breach or default under this
Agreement, or any waiver on the part of any holder of any provisions or
conditions of this agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any holder shall be cumulative
and not alternative.
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<PAGE>
5.9 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements,
including without limitation, all prior agreements for the purchase of capital
stock of the Company existing between the parties hereto are expressly canceled
and shall be of no further force and effect.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
- ----------- ---------
UTSTARCOM, INC.
By: /s/ Hong Lu By:
----------------------------- --------------------------------
Name: Hong Lu Name:
--------------------------- ------------------------------
Title: Title:
-------------------------- -----------------------------
Number of Shares of Common Stock to be
Exchanged:
-----------------------------------
*** EXCHANGE AGREEMENT ***
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Exchange and
Rights Agreement as of the date first above written.
THE COMPANY: PURCHASER:
- ----------- ---------
UTSTARCOM, INC. Talent Group International
By: By: /s/ Li Kwong
----------------------------- --------------------------------
Name: Name: Li Kwong
--------------------------- ------------------------------
Title: Title: Director
-------------------------- -----------------------------
Number of Shares of Common Stock to be
Exchanged:
1,270,000
---------
*** EXCHANGE AGREEMENT ***
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
Talent Group International Ltd.
<PAGE>
EXHIBIT B
SEVENTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
<PAGE>
EXHIBIT 10.32
UNITECH TELECOM, INC.
EMPLOYMENT AND NON-COMPETITION AGREEMENT
This EMPLOYMENT AND NON-COMPETITION AGREEMENT ("Agreement"), dated as of
the 6th day of October, 1995, is entered into by and between Unitech Telecom,
Inc., a Delaware corporation ("Unitech"), and Bill Huang ("Employee").
RECITALS
A. Employee has been employed as an employee of Unitech Telecom, Inc.,
a Delaware corporation("Unitech"); and
B. Unitech, StarCom and certain other parties have entered into an
Agreement and Plan of Reorganization, dated as of September 28, 1995, (the
"Reorganization Agreement"), which requires, among other things, that
Employee enter into this Agreement in connection with the merger of a wholly
owned subsidiary of Unitech into StarCom (the "Merger") pursuant to which
StarCom will be the surviving corporation in the Merger and a wholly owned
subsidiary of Unitech (such surviving corporation being hereinafter referred
to as "StarCom"), all as more fully described in the Reorganization Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED by and between the parties hereto as
follows:
1. EMPLOYMENT.
(a) EMPLOYMENT. During the Employment Term (as hereinafter defined)
Unitech hereby employs Employee as its VP China Operations upon and subject
to the terms and conditions set forth in this Agreement. Employee hereby agrees
to accept such employment, upon and subject to the terms and conditions set
forth in this Agreement.
(b) DUTIES. Effective upon the date hereof, Employee will perform all
of the services customarily associated with the position of VP China
Operations during the Employment Term, subject to the policies established by
and the direction of the Board of Directors and Chief Executive Officer of
Unitech. Employee also agrees to perform such other duties and
responsibilities consistent with such position as the Board of Directors or
the Chief Executive Officer of Unitech may assign to him from time to time
during the Employment Term. During his Employment Term (as defined in
subsection (c) below), Employee shall carry out his duties
<PAGE>
and responsibilities hereunder in a diligent and competent manner and shall
devote substantially all of his business time, attention and energy thereto.
(c) EMPLOYMENT TERM. Employee's employment hereunder (the "Employment
Term") shall commence on the date hereof. Such employment shall be "at will"
employment pursuant to applicable law. If Employee's employment terminates for
any reason other than (i) voluntary termination by Employee, (ii) termination as
a result of death or disability, or (iii) termination for Cause (as defined in
Section 5(a)), Employee shall be entitled to sixty (60) days notice of
termination.
(d) PLACE OF EMPLOYMENT. During the Employment Term, Employee shall
render his services at a Unitech facility. Employee shall do such traveling
as shall be reasonably necessary in connection with his duties and
responsibilities hereunder.
(e) Employee agrees to devote substantially all of his business time,
attention and energy to the performance of his duties under this Agreement
during the Employment Term and shall perform such duties diligently, in good
faith and consistent with the best interests of Unitech.
2. COMPENSATION.
(a) SALARY. During the Employment Term, Employee will receive a salary
of not less than $7,500 per month ($90,000 per annum), which shall be paid in
accordance with Unitech's normal payroll practice and shall be subject to
review based upon Unitech's normal performance review practices. Unless
otherwise specified herein, Unitech will make such deductions, withholdings
and other payments from all sums payable pursuant to this Agreement which
Employee requests or which are required by applicable law for taxes and other
charges. Unitech shall, in addition to Employee's salary, reimburse Employee
for all ordinary and necessary out-of-pocket expenses incurred by him in the
performance of his services under this Agreement, subject to and upon receipt
by Unitech of invoices or other documentation in support thereof in
accordance with Unitech's policies regarding reimbursement of expenses.
Employee shall be entitled to receive such bonus as shall be approved by the
Board of Directors of Unitech in each year during the Employment Term.
(b) BENEFIT PLANS. Employee will be entitled to participate in or
receive benefits under Unitech's employee benefit plans and policies as in
effect from time to time in which Employee is eligible to participate,
subject to the applicable
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<PAGE>
terms and conditions of the particular benefit plan. These benefit plans may
include health care, life insurance, accidental death and disability, short-
and long-term disability, stock options, savings and/or bonus plans provided
by, through or on behalf of Unitech. Unitech may change, amend, modify or
terminate any benefit or bonus plan from time to time.
3. CONFIDENTIALITY AND PROPRIETARY INFORMATION AGREEMENT. Concurrently
with the execution of this Agreement, Unitech and Employee will execute the
Confidentiality and Proprietary Information Agreement ("Confidentiality
Agreement") in the form attached hereto as Attachment 1.
4. COVENANT NOT TO COMPETE.
(a) NON-COMPETE. In consideration of his employment, Employee
agrees that so long as he is an Employee of Unitech and, in the case of
Employee's termination of employment with Unitech, two (2) years from the
date of termination, Employee will not directly or indirectly engage in
(whether as an employee, consultant, proprietor, partner, director or
otherwise), or have any ownership interest in, or participate in the
financing, operation, management or control of, any person, firm, corporation
or business that engages in a "Restricted Business" in a "Restricted
Territory" (as such terms are herein defined). It is agreed that ownership
of no more than 1% of the outstanding voting stock of a publicly traded
corporation shall not constitute a violation of this provision. It is also
agreed that this provision shall not apply if the Employee's termination of
employment with Unitech is due to (i) a breach by Unitech of the terms of
this Agreement as adjudicated by a court of competent jurisdiction (except
for a failure of Unitech to pay Employee's salary as provided in Section 2(a)
hereof which, for these purposes, will not require such adjudication) or (ii)
a final adjudication of Unitech as a bankrupt under any federal or state law.
(b) NON-SOLICIT. Employee agrees that until the later to occur of
(i) the termination of Employee's agreement not to compete pursuant to
Section 4(a) above (ii) 2 years following the termination of Employee's
employment with Unitech, Employee shall not solicit, encourage, or take any
other action which is intended to induce any other employee of Unitech or
StarCom to terminate his employment with Unitech.
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<PAGE>
(c) SEVERABILITY. The parties intend that the covenants contained in
the preceding paragraphs shall be construed as a series of separate covenants,
one for each county, city, state and other political subdivision of the
Restricted Territory. Except for geographic coverage, each such separate
covenant shall be deemed identical in terms to the covenant contained in the
preceding paragraphs. If, in any judicial proceeding, a court shall refuse to
enforce any of the separate covenants (or any part thereof) deemed included in
said paragraphs, then such unenforceable covenant (or such part) shall be deemed
eliminated from this Agreement for the purpose of those proceedings to the
extent necessary to permit the remaining separate covenants (or portions
thereof) to be enforced by such court. It is the intent of the parties that the
covenants set forth herein be enforced to the maximum degree permitted by
applicable law.
(d) REFORMATION. In the event that the provisions of this Section 4
should ever be deemed to exceed the scope, time or geographic limitations of
applicable law regarding covenants not to compete, then such provisions shall be
reformed to the maximum scope, time or geographic limitations, as the case may
be, permitted by applicable laws.
(e) REMEDIES. The Employee hereby acknowledges that the covenants
and restrictions contained in this Section 4 are necessary for the protection
of Unitech's business and goodwill and are considered by the Employee to be
reasonable. Accordingly, the Employee hereby acknowledges and agrees that
any actual or threatened breach of any of the provisions of such Paragraph 4
may cause irreparable harm to Unitech and may not be remediable by an action
at law for damages and, therefore, Unitech shall be entitled to seek, as a
non-exclusive remedy, in any court of competent jurisdiction, all equitable
remedies therefor, including, without limitation, a temporary or permanent
injunction or specific performance of the provisions hereof, without the
necessity of showing any actual damage or that monetary damages would not
provide an adequate remedy at law or posting a bond therefor.
The Employee covenants and agrees that, if the Employee shall
violate the foregoing non-compete covenant, Unitech shall be entitled to an
accounting and repayment of all profits, compensation, commissions,
remunerations, benefits or other payments which the Employee directly or
indirectly has realized and/or may realize as a result of, growing out of or
in connection with any such violation. Such remedy shall be in addition to
and not in limitation of any injunctive relief or other rights or remedies to
which Unitech may be entitled at law or in equity or under this Agreement.
5. Employee agrees that he shall not knowingly and intentionally
interfere in any manner with the contractual or employment relationship
between Unitech or StarCom and any employee, supplier or customer of Unitech.
6. DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
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<PAGE>
(a) "Cause" shall mean:
(i) Employee's continued failure to perform his duties and
responsibilities in good faith to the best of his ability after notice thereof
from Unitech to Employee;
(ii) Employee personally engaging in knowing and intentional
illegal conduct;
(iii) Employee being convicted of a felony, or
committing an act of dishonesty or fraud or misappropriating property;
(iv) Employee knowingly and intentionally breaching in any
material respect the terms of this Agreement or the Confidentiality Agreement;
or
(v) Employee's commencement of employment with another
employer while he is an employee of Unitech.
(b) "Restricted Business" shall mean PHS-based wireless local loop,
optical multiplexers, and the intelligent networking business, including
products and/or services related to the StarCom Network Systems intelligent
services platform. Notwithstanding the foregoing, the Restricted Business shall
apply only to products and services relating to such businesses which are in
direct competition with Unitech and/or StarCom.
(c) "Restricted Territory" shall mean the counties, cities and states
of the United States of America and the country of and each political
subdivision of Canada, Australia, Japan, Taiwan, People's Republic of China,
Hong Kong, Korea, Singapore, Thailand, each member nation of the European
Community or the European Free Trade Association, and all other geographic areas
throughout the world.
7. REPRESENTATIONS OF EMPLOYEE. Employee represents that:
(a) he (i) is familiar with the covenants not to compete and not to
solicit set forth in this Agreement, (ii) is fully aware of his obligations
hereunder, including, without limitation, the length of time, scope and
geographic coverage of these covenants, (iii) finds the length of time, scope
and geographic coverage of these covenants to be reasonable, and (iv) is
receiving specific, bargained-for consideration for his covenants not to compete
and not to solicit;
(b) the execution of this Agreement and the Confidentiality and
Proprietary Information Agreement, and the performance of Employee's obligations
hereunder and there-
-5-
<PAGE>
under, will not conflict with, or result in a violation or breach of, any
other agreement to which Employee is a party or any judgment, order or decree
to which Employee is subject.
8. ASSIGNMENT. This Agreement may not be assigned by Employee without
the written consent of Unitech. This Agreement may not be assigned by Unitech
without the written consent of Employee, except to an assignee who acquires all
or substantially all of the business of Unitech, whether by merger,
consolidation, sale of assets or otherwise. Unitech will require, as a
condition of any such assignment, that any such assignee assume and agree in
writing to perform this Agreement in the same manner and to the same extent that
Unitech would be required to perform if no such succession had taken place.
9. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
understanding between Employee and Unitech with respect to the subject matter
hereof, and supersedes any other negotiations, agreements, understandings,
representations or past or future practices, whether written or oral.
10. NOTICES. Any notice, report or other communication required or
permitted to be given hereunder shall be in writing to the other party and shall
be deemed given on the date of delivery, if delivered, or five days after
mailing, if mailed first-class mail, certified, postage prepaid, to the
following addresses:
(a) If to Unitech:
Unitech Telecom, Inc.
333 Hegenberger Road, Suite 328
Oakland, CA 94621
Attention: President
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Marcia K. Sterling, Esq.
(b) If to Employee:
_____________________________________
_____________________________________
_____________________________________
-6-
<PAGE>
(c) With a copy to:
_____________________________________
_____________________________________
_____________________________________
(or to such other address as any party hereto may designate by notice given as
herein provided).
11. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California without giving
effect to principles regarding conflict of laws.
12. AMENDMENTS. This Agreement shall not be changed or modified in whole
or in part except by an instrument in writing signed by each party hereto, nor
shall any covenant or provision of this Agreement be waived except by an
instrument in writing signed by the party against whom enforcement of such
waiver is sought.
13. EFFECTIVE DATE. This Agreement shall become effective upon the
Effective Time of the Merger.
14. ATTORNEYS' FEES. In the event of any legal action or proceeding to
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
15. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
16. EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
17. DEFINITIONS. All capitalized terms used herein shall have the meaning
defined in the Reorganization Agreement, unless otherwise defined herein.
18. DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to either party upon any breach or default of the other
party hereto shall impair any such right, power or remedy of such non-defaulting
party, nor shall it be construed to be a waiver of any such breach or default,
nor an acquiescence therein, nor of nor in any similar breach or default
thereafter occurring; nor shall any waiver, single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring.
-7-
<PAGE>
19. INDEMNIFICATION. During and after the Employment Term, Unitech shall
defend, indemnify and hold Employee harmless from any claims, causes of action,
liabilities, damages, costs or expenses incurred by Employee based upon or in
connection with the performance of his services under this Agreement to the
fullest extent permitted by the laws of the State of Delaware and of the By-Laws
of Unitech (and of any such subsidiary). This provision will survive the
expiration or termination of the Employment Term.
20. BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors, heirs, personal representatives and
permitted assigns, but, except as otherwise specifically provided herein,
neither this Agreement nor any of the rights, interests or obligations of the
parties hereto may be assigned by any of the parties hereto without prior
written consent of the other.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
EMPLOYEE UNITECH TELECOM, INC.
By: /s/ Bill Huang By: /s/ Hong Liang Lu
-------------------------------- ------------------------------------
Name:
----------------------------------
Title: President
---------------------------------
** UNITECH EMPLOYMENT AND NON-COMPETITION AGREEMENT **
-9-
<PAGE>
EXHIBIT 10.33
LEASE CONTRACT ON HOUSING AND VACANT LAND
AT YUNSHAN POST AND TELECOMMUNICATION INDUSTRIAL VILLAGE
Lessor: Guangdong Nanfang Communication Group, Huizhou Co. (hereinafter
referred to as "Party A")
Lessee: Guangdong UTStarcom Telecom Co. Ltd. (hereinafter referred to as
"Party B")
In accordance with the "Law of People's Republic of China on Economic
Contracts" and other relevant provisions, and also based on the principle of
equality, fairness, rationality and reaching a unanimity through consultation,
this contract is made by and between Party A and Party B to define the their
rights and obligations:
I. Location and address of the leased housing: No. 4, Yunshan Road
II. Name, area, unit price and monthly rent of the leased properties
(see the chart below)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------------------- ----------- --------------- -------------------- ----------------------------------
NAME OF THE LEASED AREA UNIT PRICE MONTHLY RENT REMARKS
PROPERTIES (M(2)) (YUAN/ M(2)) (YUAN)
- --------------------------- ----------- --------------- -------------------- ----------------------------------
1st to 4th floors of 4,293 9.00 38,637.00
Building No. 2
- --------------------------- ----------- --------------- -------------------- ----------------------------------
Suites of Building No. 4 743 9.00 6,687.00 of which the lease of 93 M(2)
shall start as of February
- --------------------------- ----------- --------------- -------------------- ----------------------------------
Staff and Workers' 1766 9.00 15,894.00
Dormitories of Building
No. 6
- --------------------------- ----------- --------------- -------------------- ----------------------------------
- --------------------------- ----------- --------------- -------------------- ----------------------------------
Total: the total housing area comes to 680 M(2); there is no vacant land, and the total amount of rent is
61,218.00 yuan.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
III. Use of the Leased Housing: Factory premises and staff and
workers' dormitories.
IV. Lease Term:
The lease term is set for one (1) year, from January 1, 2000
to December 31, 2000.
Party A shall turn over the leased housing to Party B for use in a
timely manner pursuant to the schedule set forth in the Contract.
If any of the following circumstances occurs on the part of the Lessee,
the Lessor may cancel the Contract and take back the housing:
<PAGE>
1. when the Lessee subleases, transfers or sub-loans the housing or
vacant land without authorization;
2. when the Lessee uses the leased housing to conduct illegal activities
detrimental to the public interests;
3. when the Lessee delays payment of rent for two (2) consecutive months;
4. when the Lessee demolishes or remodels the structure or changes the
use of the leased housing without authorization; and
5. when the authorities in charge of Party A are, for some special
reasons, in need of the housing or vacant land leased to Party B.
If Party B fails to move out when the term of this lease contract
expires, Party A has the right to bring an action against Party B at the
people's court and apply for enforcement, and Party B shall be liable for
any losses sustained by Party A therefore.
Upon expiration of the Contract, Party B shall have the right of first
refusal under the same terms on the ground that Party A will continue to lease
the said housing.
V. Rent and Term of Payment:
Party B shall pay rent to Party A once a month, and the monthly rent
is set at RMB61,218.00 yuan. Party B shall make one-time payment of the month
before the 10th of each month. If it fails to pay in time or in full amount,
a fine will be imposed on Party B at an interest rate of 1% per day for the
due amount. Party A shall present a receipt of payment. The place for such
payment is at Party A's office.
VI. Replacement of Lessor or Lessee
1. If Party A transfers its ownership of the housing to a third
party during the lease period, it does not require consent
from Party B; however, Party B should be notified. After the
transfer of the ownership of the housing to the third party,
the said party will automatically replace Party A of this
Contract, enjoy the rights and undertake the obligations of
the former Party A under the Contract.
2. If, subject to Party A's approval, Party B subleases the
housing to a third party during the lease period, the third
party will automatically replace Party B of this Contract,
enjoy the rights and undertake the obligations of the former
Party B under the Contract.
VII. Party A's Responsibilities:
<PAGE>
1. If, during the lease period, the leased housing appears to
have the danger of inclination or collapse because of natural
conditions, Party A shall be responsible to repair or maintain
it. If natural calamities cause leakage or cracks on the roofs
of the leased housing, Party A shall be responsible for such
repair.
2. Party A shall be responsible for the property tax and the
land use fees of the leased housing.
3. If, during the lease period, Party A, indeed, needs to take
back the housing, it shall notify Party B in writing for the
cancellation of the Contract two months ahead of time, and a
fine shall be paid by Party A to Party B, which is calculated
at 20% of the total rent for the remaining period.
4. During the lease period, Party A shall do a good job of the
security at the entrance gate, conduct security checkup
periodically, keep on guard and maintain security.
5. During the lease period, Party A shall be responsible for the
supply of water and electricity other than water and
electricity meters, maintain the equipment of public utilities
and make repairs of those parts damaged by natural elements.
VIII. Party B's Responsibilities:
1. Party B shall not change the use of the leased housing, which
would be regard as breach of the Contract. In case of such
breach, a fine equal to 20% of the rent during the period of
breach will be imposed on Party B.
2. During the lease period, Party B shall bear the management
fees as well as water and electricity cost. Party B shall make
monthly payment in time and in full amount.
3. If, during the lease period, Party B is, indeed, in need of
returning the leased housing on certain special circumstances,
it shall notify Party A in writing to cancel the Contract two
months ahead of time, and a fine shall be paid to Party A,
which is calculated at 20% of the total sum of rent for the
remaining period.
4. If, during the lease period, it changes the structure and the
use of the housing without authorization, such as causing
damages to the leased housing or equipment intentionally or by
negligence, Party B shall be responsible to restore the status
quo ante and compensate for the economic losses; if Party B
needs to fix up or modify water or electricity supply
equipment, it needs to obtain Party A's prior approval and
complete all the
<PAGE>
necessary formalities before such construction begins.
Party B shall not remove the fixtures made during the
leased period when it moves out. Party B shall be
responsible for the interior renovation of the housing and
maintenance of the water and electricity supply equipment.
5. Party B shall remove all its belongings in a timely manner
when the lease expires or the Contract is terminated. Any
leftover ten days after it moves out, Party B shall be
regarded as having waived its right of ownership over such
leftover, which will be up to Party A for disposal.
6. If, during the lease period, Party B's personnel are found to
have damaged public utilities within the industrial village,
Party B shall be responsible to provide fund to repair them.
IX. In case of force majeure resulting in the destruction of the
leased housing, this Contract will be terminated
automatically, and no party shall be held liable.
X. Any dispute arising out of or in connection with the
performance of this Contract shall be solved through
consultations. In case such consultations cannot resolve the
dispute, any party may apply for an arbitration at Huizhou
Arbitration Committee.
XI. Supplementary agreements shall be concluded through
consultations for matters that are not dealt with in this
Contract. The supplementary agreements shall be equally
authentic as this Contract.
Supplementary Provisions: This Contract is executed in four (4)
originals, with each party in possession of one copy, and the remaining two
originals shall be handed over to the Housing Administration Bureau for
records and to the authorities in charge of Party A, respectively. Each
original has the same legal power.
This lease contract is executed on January 3, 2000 in Huizhou.
Party A: Party B:
Representative: /s/ signature Representative: /s/ signature
<PAGE>
CERTIFICATE OF HOUSING LEASE PERMIT
Huizhou Housing Rent Permit No. 00083
Lessor: Guangdong Nanfang Communication Group, Huizhou Co.
Location of the Housing: No. 4 Shandong Road, Huizhou, Inside Yunshan
Industrial Village
Lessee: Guangdong UTStarcom Telecom Co. Ltd.
Purpose of the Leased Housing: Factory Premises and Dormitories (a total of
6,802 M(2))
Upon review and examination, the said housing is in compliance with the
housing lease standards and lease terms as set forth in "the Implementing Rules
of Huizhou for Housing Lease and Administration"; therefore, this certificate of
permit is hereby issued for such lease.
Authorities of Issuance:
Huizhou Housing Administration Bureau
Date: January 1, 2000
Term of Validity: From January 1, 2000 to December 31, 2000
Annual Review and Examination Date: December, 2000
<PAGE>
EXHIBIT 23.1
CONSENT OF PRICEWATERHOUSECOOPERS LLP
We hereby consent to the use in this registration statement on Form S-1 of
our reports dated January 29, 2000, relating to the financial statements and
financial statement schedule of UTStarcom, Inc. which appear in such
registration statement. We also consent to the references to our firm under the
heading "Experts."
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Francisco, California
January 31, 2000
