<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 2000
REGISTRATION NO. 333-93069
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5
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
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1)(2) SHARE(3) PRICE(3) REGISTRATION FEE(4)
<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) The amount of shares registered also includes any shares initially offered
or sold outside the United States that are thereafter sold or resold in the
United States. Offers and sales of shares outside the United States are
being made pursuant to the exemption afforded by Rule 901 of Regulation S
and this Registration Statement shall not be deemed effective with respect
to such offers and sales.
(3) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act.
(4) 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 FEBRUARY 22, 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. The U.S. underwriters
are offering 8,000,000 shares in the U.S. and internationally, excluding Japan.
The Japanese underwriters are offering 2,000,000 shares in Japan.
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 U.S. 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>
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PAGE
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<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........................ 26
Selected Pro Forma Combined Financial Data.................. 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 28
Business.................................................... 40
Management.................................................. 57
Related Party Transactions.................................. 66
Principal Stockholders...................................... 69
Description of Capital Stock................................ 72
Shares Eligible for Future Sale............................. 75
Underwriting................................................ 77
Legal Matters............................................... 81
Experts..................................................... 81
Where You Can Find Additional Information................... 81
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 1.3 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.
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
1
<PAGE>
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
-------- -------- -------- -------- --------
(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
Gross profit................................................ 5,717 13,220 26,802 41,025 74,825
Operating income (loss)..................................... (8,979) 1,237 (3,390) 3,013 16,719
Net income (loss) applicable to common stockholders......... (9,841) (310) 30 (300) (18,514)
Earnings (loss) per share(1):
Basic..................................................... $ (2.40) $ (0.04) $ 0.00 $ (0.04) $ (2.13)
Diluted................................................... $ (2.40) $ (0.04) $ 0.00 $ 0.00 $ (2.13)
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>
PRO FORMA FOR THE
YEAR ENDED
DECEMBER 31, 1999(4)
---------------------
<S> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $187,516
Gross profit................................................ 74,825
Operating income............................................ 16,103
Loss from continuing operations applicable to common
stockholders.............................................. (17,474)
Pro forma earnings (loss) per share:
Basic..................................................... $ (0.24)
Diluted................................................... $ (0.24)
Shares used in pro forma per share calculations:
Basic..................................................... 72,947
Diluted................................................... 72,947
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents(3)................................ $ 87,364 $206,264
Working capital............................................. 126,637 245,537
Total assets................................................ 271,788 390,688
Total short-term debt....................................... 43,338 43,338
Total stockholders' equity.................................. 165,720 284,620
</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) 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 $13.00 per share, after deducting
the estimated underwriting discount and estimated offering expenses.
(3) Includes restricted cash of $4,550,000 as of December 31, 1999.
(4) 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
and the assumed conversion of all our outstanding preferred stock into
shares of common stock that will be effective upon the closing of our
initial public offering as if such conversion had occurred on January 1,
1999 or at the date of issuance. 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 securities 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.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT
As of December 31, 1999, we had an accumulated deficit of approximately
$34.8 million. We anticipate continuing to incur significant sales and
marketing, research and development and general
5
<PAGE>
and administrative expenses and, as a result, we will need 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.
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
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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 a network access license for our Airstar system.
The evaluation group for access networks under the Ministry of Information
Industry has recommended that the Ministry of Information Industry issue a
license for our Airstar system. However, we do not yet have this network access
license and we cannot provide any assurance that a license will be issued 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 Ministry of Information Industry for sales
we have made or will make during the period an application is pending. However,
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, either of which could have a material adverse effect on
our business and financial condition.
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 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
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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 a problem
occurs, 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 not be able
to obtain independent manufacturing sources on commercially attractive terms if
and when needed.
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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 high quality components and materials in
the quantities required and at the costs specified by us, 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
AND DUTIES 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 and other imported goods used
in the operation of our business are subject to a variety of permit
requirements, approval procedures and import duties. Failure to obtain necessary
permits or approvals, administrative actions by China's government to limit
imports of certain components, or non-payment of required import duties could
subject us to penalties and fines and 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.
In addition, based upon our internal review, we believe that we are likely
to be required to pay import duties and fines of up to approximately $500,000 to
China's custom service for components we imported into China between 1994 and
1997 for which we did not pay the required import duties at the time we brought
these components into China. We are presently seeking resolution of this matter
with China's custom service. We cannot be sure what other action, if any, that
China's custom service may take or whether additional fines or penalties may be
imposed on us or our joint ventures.
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
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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.
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
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board. Moreover, even though we hold a majority of the board seats in the
Zhejiang joint venture, 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.
Multinational companies are required to establish intercompany pricing for
transactions between their separate legal entities operating in different taxing
jurisdictions. These intercompany transactions are subject to audit by taxing
authorities in the jurisdictions in which multinational companies operate. An
additional tax liability may be incurred if it is determined that intercompany
pricing was not done at arm's length. We believe we have adequately estimated
and recorded our liability arising from
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intercompany pricing, but we cannot assure you that an additional tax liability
will not result from audits of our intercompany pricing policies.
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 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 our
results of operations.
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.
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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 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
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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.
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 and results of operations. 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
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limitations on the convertibility of Renminbi, we are limited in our ability to
engage in currency 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 AND REMIT FOREIGN CURRENCY NECESSARY FOR THE
PURCHASE OF IMPORTED COMPONENTS AND MAY LIMIT OUR ABILITY TO OBTAIN AND REMIT
FOREIGN CURRENCY IN EXCHANGE FOR RENMINBI EARNINGS
China's government imposes controls on the convertibility of Renminbi into
foreign currencies and, in certain cases, the remittance of currency out of
China. 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 and remit 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 and remit 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 and make
necessary remittances 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 and remitted out of China 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 and then
remitted out of China. 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 and restrict remittances out of
China. Furthermore, in many circumstances the State Administration of Foreign
Exchange must approve foreign currency conversions and remittances. 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.
15
<PAGE>
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 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.
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<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, manufacture, import or
sell our products in China, or to finance and operate our business 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
17
<PAGE>
resulted in significant fluctuations in general price levels, including periods
of inflation. China's 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. All of our active subsidiaries in China were accredited as
technologically advanced enterprises. 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 and results of operations.
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
18
<PAGE>
apply to domestic companies in China. Although China is increasingly according
foreign companies and 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 trading 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, domestic and international stock markets have recently
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.
Following initial public offerings, the trading prices for stocks of many
Internet, communications equipment and other technology-related companies have
reached levels that bear no relationship to the operating performance of these
companies. These trading prices are generally not sustainable and could
fluctuate significantly. If our common stock trades to high levels following
this offering, it could be followed by a significant decline.
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
19
<PAGE>
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.
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 $10.05 per share. If additional shares are
sold by the U.S. 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 U.S. 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 up to 19,071,213 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.
20
<PAGE>
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;
- 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 U.S. 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 U.S. 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 $13.00 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.............................. 218,303 218,303 337,190
Deferred stock compensation............................. (17,792) (17,792) (17,792)
Accumulated deficit..................................... (34,821) (34,821) (34,821)
Notes receivable from stockholders...................... (555) (555) (555)
Cumulative translation adjustment....................... 95 95 95
-------- -------- --------
Total stockholders' equity............................ 165,720 165,720 284,620
-------- -------- --------
Total capitalization................................ $165,720 $165,720 $284,620
======== ======== ========
</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 $144.2 million, or $1.82 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 by us, the pro
forma net tangible book value of our common stock as of December 31, 1999 would
have been approximately $263.1 million, or $2.95 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 $10.05 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.................................................. $ 1.82
Increase per share attributable to new investors........ 1.13
------
Pro forma net tangible book value per share after this
offering.................................................. 2.95
------
Dilution per share to new investors......................... $10.05
======
</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; and
- 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% $245,921,000 65% $ 3.10
New investors....................... 10,000,000 11% 130,000,000 35% $13.00
---------- --- ------------ ---
Total............................. 89,307,159 100% $375,921,000 100%
========== === ============ ===
</TABLE>
The foregoing discussion and table assume that the underwriters do not
exercise their over-allotment option. This table also assumes that no options or
warrants were exercised after December 31, 1999. As of December 31, 1999, there
were 9,164,047 shares of outstanding options which were exercisable within
60 days of December 31, 1999 at a weighted average exercise price of $2.12 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. If all these options and
warrants had been exercised as of December 31, 1999, our net tangible book value
on that date would have been $285,767,000 or $2.89 per share, the increase in
net tangible book value attributable to new investors would have been $1.01 per
share and the dilution in net book value to new investors would have been $10.11
per share. 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 16-19 of Notes to
Consolidated Financial Statements.
25
<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, 1996 and 1997 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 64,142 112,691
-------- -------- -------- -------- --------
Gross profit............................................ 5,717 13,220 26,802 41,025 74,825
Operating expenses:
Selling, general and administrative................... 3,452 8,042 21,211 22,821 30,866
Research and development.............................. 612 3,899 8,941 14,659 17,363
Amortization of deferred stock compensation........... -- -- -- 412 5,553
Amortization of intangible assets..................... 21 42 40 120 332
In-process research and development................... 10,611 -- -- -- 3,992
-------- -------- -------- -------- --------
Total operating expenses............................ 14,696 11,983 30,192 38,012 58,106
-------- -------- -------- -------- --------
Operating income (loss)................................. (8,979) 1,237 (3,390) 3,013 16,719
Interest and other income (expenses).................... 163 858 2,033 (1,138) (2,212)
Equity in net income (loss) of affiliated companies..... -- (291) 73 (773) 1,348
-------- -------- -------- -------- --------
Income (loss) before income taxes and minority
interest................................................ (8,816) 1,804 (1,284) 1,102 15,855
Income tax expense (benefit)............................ 54 575 400 1,423 626
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 13,119
Income (loss) from discontinued operations.............. -- 301 1,413 (893) (1,656)
-------- -------- -------- -------- --------
Net income (loss)....................................... (9,571) 787 30 (300) 11,463
Preferred stock dividend (270) (1,097) -- -- --
Beneficial conversion feature of Series F preferred
stock................................................... -- -- -- -- (29,977)
-------- -------- -------- -------- --------
Net income (loss) applicable to common stock............ $ (9,841) $ (310) $ 30 $ (300) $(18,514)
======== ======== ======== ======== ========
Earnings (loss) per share(1):
Basic................................................. $ (2.40) $ (0.04) $ 0.00 $ (0.04) $ (2.13)
======== ======== ======== ======== ========
Diluted............................................... $ (2.40) $ (0.04) $ 0.00 $ 0.00 $ (2.13)
======== ======== ======== ======== ========
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 57,416 126,637
Total assets................................................ 26,318 49,610 101,097 142,121 271,788
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 72,336 165,720
</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 $1,500,000 at December 31, 1998 and $4,550,000
at December 31, 1999.
26
<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 and the assumed
conversion of all the Company's outstanding preferred stock into shares of the
Company's common stock that will be effective upon the closing of the Company's
initial public offering as if such conversion had occurred on January 1, 1999 or
at the date of issuance. 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............................................... 112,691
--------
Gross profit................................................ 74,825
Operating expenses:
Selling, general and administrative....................... 30,866
Research and development.................................. 17,363
Amortization of deferred stock compensation............... 5,553
Amortization of intangible assets......................... 4,940
--------
Total operating expenses................................ 58,722
--------
Operating income............................................ 16,103
Interest and other income (expense)......................... (2,212)
Equity in net income of affiliated companies................ 1,348
--------
Income before income taxes and minority interest............ 15,239
Income tax expense.......................................... 626
Minority interest in (earnings) loss of consolidated
subsidiaries.............................................. (2,110)
--------
Income from continuing operations........................... 12,503
Beneficial conversion feature of Series F convertible
preferred stock........................................... (29,977)
--------
Loss from continuing operations applicable to common
stockholders.............................................. $(17,474)
========
Pro forma earnings (loss) per share:
Basic..................................................... $ (0.24)
========
Diluted................................................... $ (0.24)
========
Shares used in pro forma per share calculations:
Basic..................................................... 72,947
========
Diluted................................................... 72,947
========
</TABLE>
27
<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.
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 in that country.
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 purchase foreign currency, regulations restrict the ability of our
subsidiaries to transfer funds to us through intercompany loans and advances.
28
<PAGE>
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 $15.9 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. In
connection with grants to non-employees during 1999, we recorded deferred
compensation of $7.4 million. Deferred compensation is presented as a reduction
of stockholders' equity, with amortization recorded over the vesting period of
the option. We recorded amortization of deferred stock compensation of
approximately $5.6 million during 1999. At December 31, 1999, approximately
$17.7 million remained to be amortized. The deferred stock compensation
amortization expense related to option grants to employees and non-employees for
2000, 2001, 2002 and 2003 is expected to be $10.2 million, $4.7 million, $2.2
million and $0.6 million, respectively.
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 1999 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. In 1995 in-process research and development costs resulted from our
acquisition of StarCom Network Systems, Inc. StarCom Network Systems, Inc., at
the time of acquisition, was in the process of developing software to support
additional functionality for telecom service providers' telecom platforms. We
successfully finalized the software development in 1996 resulting in the
introduction of a new component within our integrated product offering. In early
1999 we phased out this software to focus solely on the access equipment market.
Consolidated equity in net income (loss) of affiliated companies comprises
our share of the earnings from our Guangdong manufacturing subsidiary.
29
<PAGE>
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 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 $30.0 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 61.0 60.1
----- ----- -----
Gross profit................................................ 35.5 39.0 39.9
Operating expenses:
Selling, general and administrative....................... 28.1 21.7 16.5
Research and development.................................. 11.8 13.9 9.3
Amortization of deferred stock compensation............... 0.0 0.4 2.9
Amortization of intangible assets......................... 0.1 0.1 0.2
In-process research and development....................... 0.0 0.0 2.1
----- ----- -----
Total operating expenses................................ 40.0 36.1 31.0
----- ----- -----
Operating income (loss)..................................... (4.5) 2.9 8.9
Interest and other income (expenses)........................ 2.7 (1.1) (1.2)
Equity in net income (loss) of affiliated companies......... 0.1 (0.7) 0.7
----- ----- -----
Income (loss) before income taxes and minority interest..... (1.7) 1.1 8.4
Income tax expense (benefit)................................ 0.5 1.4 0.3
Minority interest in (earnings) loss of consolidated
subsidiaries.............................................. 0.4 0.9 (1.1)
----- ----- -----
Income (loss) from continuing operations.................... (1.8) 0.6 7.0
Income (loss) from discontinued operations.................. 1.8 (0.8) (0.9)
----- ----- -----
Net income (loss)........................................... 0.0% (0.2)% 6.1%
===== ===== =====
</TABLE>
30
<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
$41.0 million in 1998 and $74.8 million in 1999. The 1999 gross profit included
net charges for the provision for obsolete inventory that were $4.0 million
higher than in 1998, reflecting inventory growth to support the higher sales
level. The allowance for obsolete inventory as a percentage of inventory
declined from 10.6% at the end of 1998 to 10.4% at the end of 1999 because the
end-1999 inventory contained a larger percentage of recently purchased goods
than the end-1998 inventory. Gross profit, as a percentage of net sales, was 36%
in 1997, 39% in 1998 and 40% 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 $22.8 million in 1998 and
$30.9 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. The increase from 1998 to 1999 was also due
to a $2.8 million increase in the provision for uncollectible accounts,
reflecting an increase in the allowance for doubtful accounts as a percentage of
accounts receivable from 6.2% at the end of 1998 to 8.0% at the end of 1999, to
reflect the credit risk associated with the significant increase in net sales.
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 to $0.4 million in 1998 and $5.6 million
in 1999. This amortization was due to deferred compensation of approximately
$23.3 million related to certain stock option grants to employees and
non-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 $332,000 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.
31
<PAGE>
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 $28.0 million which, based upon an
independent appraisal by Willamette Management Associates 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 $23.6 million of excess purchase price over the fair market values
of the tangible and identified intangible assets, which is being amortized over
periods of three to five years.
The values of Wacos, Inc.'s 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.
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 was $2.0 million in 1997 and
interest expenses were $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 was $5,000 in 1997 and other expenses
were $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
expenses included a $1.0 million loss on asset sales.
EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANIES. Consolidated equity in
net income of affiliated companies was $0.1 million in 1997, consolidated equity
in net loss of affiliated companies was $0.8 million in 1998 and consolidated
equity in net income of affiliated companies was $1.3 million in 1999. Net sales
at our Guangdong manufacturing subsidiary increased from $8.6 million in 1997 to
$11.0 million in 1998 and $16.0 million in 1999. The 28% increase from 1997 to
1998 and the 46% increase from 1998 to 1999 were primarily attributable to
increases in the sales volume of network access systems. Gross profit, as a
percentage of net sales, was 12% in 1997, 19% in 1998 and 15% in 1999. Gross
profit, as a percentage of net sales, fluctuated during 1997, 1998 and 1999
primarily due to changes in the product mix sold. Operating expenses increased
by $0.1 million in 1998 and by $0.2 million in 1999 to support the increased
levels of business. In 1998, net income at our Guangdong manufacturing
subsidiary was reduced by $1.1 million primarily due to purchases of inventory
from other UTStarcom entities which remained unsold at December 31, 1998. In
1999, net income at our
32
<PAGE>
Guangdong manufacturing subsidiary was increased by $0.9 million due to the sale
of the intercompany inventories purchased prior to January 1, 1999.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $0.4 million in 1997,
$1.4 million in 1998 and $0.6 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 from continuing
operations by approximately $0.9 million in 1997, increase net income from
continuing operations by approximately $0.3 million in 1998, and increase net
income from continuing operations 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 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 $29.98 million,
reducing diluted earnings per share by $3.45.
33
<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 62,815
Cost of sales................................. 19,324 16,129 17,952 23,873 31,956 38,910
------- ------- ------- ------- ------- -------
Gross profit.................................. 12,028 9,160 9,599 18,258 23,063 23,905
Operating expenses:
Selling, general and administrative......... 6,216 5,150 5,587 8,292 8,755 8,232
Research and development.................... 3,668 4,200 4,045 4,138 4,307 4,873
Amortization of deferred stock
compensation.............................. -- 412 601 674 2,484 1,794
Amortization of intangible assets........... 22 55 37 37 38 220
In-process research and development......... -- -- -- -- -- 3,992
------- ------- ------- ------- ------- -------
Total operating expenses.................. 9,906 9,817 10,270 13,141 15,584 19,111
------- ------- ------- ------- ------- -------
Operating income (loss)....................... 2,122 (657) (671) 5,117 7,479 4,794
Interest and other income (expenses).......... (370) (910) (220) (489) 22 (1,525)
Equity in income (loss) of affiliated
companies................................... (422) (397) 190 702 92 364
------- ------- ------- ------- ------- -------
Income (loss) before income taxes and minority
interest.................................... 1,330 (1,964) (701) 5,330 7,593 3,633
Income tax expense (benefit).................. 185 586 (28) 213 303 138
Minority interest in (earnings) loss of
consolidated subsidiaries................... 734 612 (486) (103) (644) (877)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations...... 1,879 (1,938) (1,159) 5,014 6,646 2,618
Income (loss) from discontinued operations.... (454) (97) (267) (1,389) -- --
------- ------- ------- ------- ------- -------
Net income (loss)............................. $ 1,425 $(2,035) $(1,426) $ 3,625 $ 6,646 $ 2,618
======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET SALES:
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 61.6 63.8 65.2 56.7 58.1 61.9
------- ------- ------- ------- ------- -------
Gross profit.................................. 38.4 36.2 34.8 43.3 41.9 38.1
Operating expenses:
Selling, general and administrative......... 19.8 20.4 20.3 19.7 15.9 13.1
Research and development.................... 11.7 16.6 14.7 9.8 7.8 7.8
Amortization of deferred stock
compensation.............................. 0.0 1.6 2.1 1.6 4.6 2.8
Amortization of intangible assets........... 0.1 0.2 0.1 0.1 0.1 0.4
In-process research and development......... -- -- -- -- -- 6.4
------- ------- ------- ------- ------- -------
Total operating expenses.................. 31.6 38.8 37.2 31.2 28.4 30.5
------- ------- ------- ------- ------- -------
Operating income (loss)....................... 6.8 (2.6) (2.4) 12.1 13.5 7.6
Interest and other income (expenses).......... (1.2) (3.6) (0.8) (1.2) 0.0 (2.4)
Equity in income (loss) of affiliated
companies................................... (1.3) (1.6) 0.7 1.7 0.2 0.6
------- ------- ------- ------- ------- -------
Income (loss) before income taxes and minority
interest.................................... 4.3 (7.8) (2.5) 12.6 13.7 5.8
Income tax expense (benefit).................. 0.6 2.3 (0.1) 0.5 0.6 0.2
Minority interest in (earnings) loss of
consolidated subsidiaries................... 2.3 2.4 (1.8) (0.2) (1.2) (1.4)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations...... 6.0 (7.7) (4.2) 11.9 11.9 4.2
Income (loss) from discontinued operations.... (1.4) (0.4) (1.0) (3.3) 0.0 0.0
------- ------- ------- ------- ------- -------
Net income (loss)............................. 4.6% (8.1)% (5.2)% 8.6% 11.9% 4.2%
======= ======= ======= ======= ======= =======
</TABLE>
34
<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 absolute dollars 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. 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. The decrease in gross profit, as a
percentage of net sales, from the fourth quarter of 1998 to the first quarter of
1999 was due in part to normal seasonality as well as the continuing effects on
the overall industry due to the restructuring of China's telecommunications
industry. The increase in gross profit, as a percentage of net sales, from the
first quarter of 1999 to the second quarter of 1999 was primarily due to the
significant increases in sales of higher margin network access products and a
shift in product mix toward higher margin network access products. The decreases
in gross profit, as a percentage of net sales, from the second quarter of 1999
to the third quarter of 1999 and from the third quarter of 1999 to the fourth
quarter of 1999 were primarily due to the changes in product mix toward lower
margin network access products, including handsets. Our gross profit, as a
percentage of net sales, has fluctuated in the past and is 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, we believe period to period comparisons are not necessarily
meaningful and should not be relied upon as indicative of future results.
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 percentage 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
35
<PAGE>
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 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 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 $126.6 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, including $5.0 million
resulting from the exercise of an option held by Intel Pacific, Inc. We intend
to use the proceeds from this option exercise for working capital and general
corporate purposes.
We plan to invest $10.0 million in an investment fund to be established by
SOFTBANK 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. We will not be obligated to pay, nor will we receive, any fees in
connection with services provided to the fund. None of the proceeds from this
offering will be invested in the fund. We have not yet entered into written
agreements with SOFTBANK for the creation and operation of 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
36
<PAGE>
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;
- 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.
37
<PAGE>
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.
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.
38
<PAGE>
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.
39
<PAGE>
BUSINESS
OVERVIEW
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 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.
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,
40
<PAGE>
with a population of 1.3 billion, has a teledensity rate of only 7.0% compared
to teledensity rates in 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
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<PAGE>
systems of wireline or wireless connections that link local subscribers to these
backbone networks are 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 strengthened our relationships with the PTAs in some of
China's most modernized and rapidly growing
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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 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 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
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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 in Hong Kong,
India and the Philippines through its worldwide sales organization. We have also
entered into agreements with local distributors in Brazil and Russia for our
AN-2000 system. We have conducted field trials of our products in Colombia, Hong
Kong, India, the Philippines, 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
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handset. The air traffic controller provides wireless traffic-channel and
mobility management throughout the system.
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.
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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;
- 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.
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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 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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<PAGE>
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 885 full-time employees. We
also from time to time employ part-time employees and hire contractors. Of the
total number of full-time employees, 221 are in research and development, 137 in
manufacturing, 405 in marketing, sales and support, and 122 in administration.
We have 724 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
Larry D. Horner........................... 65 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 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. Mr. Kitao is currently President and Chief
Executive Officer of SOFTBANK Finance Corp. 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.
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<PAGE>
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 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. Mr. Xue also served as Chairman of the Board and
Chief Executive Officer of United Medical Industrial Group Inc. from 1995 to
August 1998, and as Director and Co-Chairman of the Board since August 1998.
Since 1998, Mr. Xue has served as the Chairman of E-Vue.com, Ltd. 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.
LARRY D. HORNER has been a director since January 2000. Mr. Horner has
served as Chairman of Pacific USA Holdings Corp. since 1994. He is also Chairman
of the Board and Chief Executive Officer of Asia Pacific Wire & Cable
Corporation Limited, and a director of American General Corp., Phillips
Petroleum Company, Atlantis Plastics, Inc., Laidlaw Holdings Inc. and Newmark
Homes Corp. Mr. Horner formerly served as Chairman and Chief Executive Officer
of KPMG Peat Marwick from 1984 to 1990. Mr. Horner is a Certified Public
Accountant, holds a B.S. from the University of Kansas and is a graduate of the
Stanford Executive Program.
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 2001 annual meeting of
stockholders. Messrs. Horner, Kitao and Shey will serve as Class II Directors
whose terms will expire at the 2002 annual meeting of stockholders. Messrs. Lu,
Son and Wu will serve as Class III Directors whose terms will expire at the 2003
annual meeting of stockholders.
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<PAGE>
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. Horner, Toy and Xue.
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.
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<PAGE>
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.
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.
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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.
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 our stockholders approved in February
2000. We are currently authorized to issue up to 10,878,285 shares subject to
options. Upon the closing of this offering, we will be authorized to issue up to
12,903,841 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
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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.
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. Our stockholders approved the
stock purchase plan in February 2000. Subject to meeting federal and state
securities law requirements, 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.
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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.
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 or 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 or 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 or 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.
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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 40,960,096 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 with SOFTBANK CORP. We
borrowed a total of $25.0 million 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 $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 January 31, 2000, 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).............................. 369,534 * *
Gerald Soloway(12)................................. 53,875 * *
All executive officers and directors as a
group (13 persons)(13)........................... 65,978,974 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 January 31, 2000, 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, 79,308,887 shares of common stock
outstanding as of January 31, 2000 plus any shares issuable pursuant to
options held by the person or group in question which may be exercised
either within 60 days of January 31, 2000, or upon the closing of this
offering; 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 upon the closing of this offering.
(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 January 31, 2000.
(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 926,480 shares issuable upon
exercise of options that are exercisable within 60 days of January 31,
2000. Includes 20,000 shares issuable upon exercise of options that are
exercisable upon the closing of this offering.
(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.
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Includes 200,000 shares issuable upon exercise of options that are
exercisable within 60 days of January 31, 2000.
(8) Includes 40,000 shares registered in the name of Ann Hu. Ann Hu is
Mr. Xue's spouse. Mr. Xue may be deemed the beneficial owner of the shares.
Includes 20,000 shares issuable upon exercise of options that are
exercisable upon the closing of this offering.
(9) Includes 50,000 shares issuable upon exercise of options that are
exercisable upon the closing of this offering.
(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 January 31, 2000.
(11) Includes 369,534 shares issuable upon exercise of options that are
exercisable within 60 days of January 31, 2000.
(12) Includes 53,875 shares issuable upon exercise of options that are
exercisable within 60 days of January 31, 2000.
(13) Includes 3,366,372 shares issuable upon exercise of options that are
exercisable within 60 days of January 31, 2000. Includes 140,000 shares
issuable upon exercise of options that are exercisable upon the closing of
this offering.
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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 152 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 will have 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 14, 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
72
<PAGE>
register these shares under the Securities Act. Subject to the terms of the
agreement, the holders may 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;
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<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 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."
74
<PAGE>
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 up to
19,071,213 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
75
<PAGE>
the 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.
76
<PAGE>
UNDERWRITING
GENERAL
We intend to offer our common stock through a number of U.S. 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
U.S. 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 U.S.
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 U.S.
underwriters, and each of the U.S. 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
U.S. 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 U.S. underwriters pursuant to the U.S. 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 U.S. purchase agreement
and the Japanese purchase agreement.
Subject to the terms and conditions in the U.S. purchase agreement and the
Japanese purchase agreement, the 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
defaults, the U.S. purchase agreement and the Japanese purchase agreement
provide that the purchase commitments of the nondefaulting underwriters may be
increased or the purchase agreements may be terminated. The closings for the
sale of shares of our common stock to be purchased by the U.S. underwriters and
the Japanese underwriters are conditioned on one another.
We have agreed to indemnify the underwriters against some liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
The 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
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<PAGE>
officer's certificates and legal opinions. The 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 Web sites
maintained by one or more of the underwriters of this offering. In particular,
E*TRADE Securities Co., Ltd. intends to make available on its Web site a
Japanese version of the prospectus. E*TRADE Securities Co., Ltd. also intends to
distribute shares of our common stock through the Internet. The other
underwriters also 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 and the lead managers 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 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 proceeds
before expenses to us. This information assumes either no exercise or full
exercise by the U.S. 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 U.S. 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 U.S. underwriters may exercise this
option for 30 days from the date of this prospectus solely to cover any
over-allotments. If the U.S. underwriters exercise this option, each U.S.
underwriter will be obligated, subject to conditions contained in the U.S.
purchase agreement, to purchase a number of additional shares of our common
stock proportionate to that U.S. underwriter's initial amount reflected in the
table above.
INTERSYNDICATE AGREEMENT
The U.S. 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 U.S. 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 U.S. 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 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
78
<PAGE>
persons other than Japanese persons, except in the case of transactions under
the intersyndicate agreement.
RESERVED SHARES
At our request, the U.S. 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 U.S. 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;
79
<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 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
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 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 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 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 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 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.
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<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. Carmen C. Chang, an associate at Wilson
Sonsini Goodrich & Rosati, serves as our Assistant Secretary. 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.
Summary information relating to the independent appraisal of Wacos, Inc.
performed in connection with our acquisition of the non-affiliated minority
interest of Wacos has been included in this prospectus and in the registration
statement of which this prospectus is a part in reliance on the report of
Willamette Management Associates, independent appraisers, given upon the
authority of said firm as experts in valuation.
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.
81
<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-30
Unaudited Pro Forma Combined Statements of Operations--Year
Ended December 31, 1999................................... F-31
Notes to Unaudited Pro Forma Combined Financial
Information............................................... F-32
</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
February 18, 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
(UNAUDITED)
<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......... 20,644 55,204
Other..................................................... 2,569 8,326
-------- --------
Total current assets........................................ 125,663 229,056
Property, plant and equipment, net.......................... 8,345 8,168
Investment in affiliated companies.......................... 2,392 4,460
Intangible assets, net...................................... 1,585 25,132
Deferred tax assets......................................... 1,647 4,352
Net assets of discontinued operations....................... 2,146 --
Other....................................................... 343 620
-------- --------
Total assets.............................................. $142,121 $271,788
======== ========
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 2,985
Customer deposits......................................... 605 5,249
Other..................................................... 12,818 29,102
-------- --------
Total current liabilities................................... 68,247 102,419
-------- --------
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.................................. 89,918 218,303 218,303
Deferred stock compensation................................. (17) (17,792) (17,792)
Accumulated deficit......................................... (16,307) (34,821) (34,821)
Notes receivable from shareholders.......................... (369) (555) (555)
Cumulative translation adjustment........................... 95 95 95
-------- -------- --------
75,389 165,720 165,720
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.................................. 72,336 165,720 $165,720
-------- -------- ========
Total liabilities, minority interest, and stockholders'
equity.................................................. $142,121 $271,788
======== ========
</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 64,142 112,691
------- -------- --------
Gross profit................................................ 26,802 41,025 74,825
Operating expenses:
Selling, general and administrative expenses.............. 21,211 22,821 30,866
Research and development expenses......................... 8,941 14,659 17,363
Amortization of deferred stock compensation............... -- 412 5,553
Amortization of intangible assets......................... 40 120 332
In-process research and development costs................. -- -- 3,992
------- -------- --------
Total operating expenses.................................... 30,192 38,012 58,106
------- -------- --------
Operating income (loss)..................................... (3,390) 3,013 16,719
Interest income............................................. 2,786 1,817 2,010
Interest expense............................................ (758) (1,924) (3,057)
Other income (expense)...................................... 5 (1,031) (1,165)
Equity in net income (loss) of affiliated companies......... 73 (773) 1,348
------- -------- --------
Income (loss) before income taxes and minority interest..... (1,284) 1,102 15,855
Income tax expense (benefit)................................ 400 1,423 626
------- -------- --------
Income (loss) before minority interest...................... (1,684) (321) 15,229
Minority interest in (earnings) loss of consolidated
subsidiaries.............................................. 301 914 (2,110)
------- -------- --------
Income (loss) from continuing operations.................... (1,383) 593 13,119
Income (loss) from discontinued operations.................. 1,413 (893) (1,656)
------- -------- --------
Net income (loss)......................................... 30 (300) 11,463
Beneficial conversion feature of Series F convertible
preferred stock........................................... -- -- (29,977)
------- -------- --------
Net income (loss) applicable to common stockholders....... $ 30 $ (300) $(18,514)
======= ======== ========
Basic earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.19) $ 0.08 $ (1.94)
Income (loss) from discontinued operations................ 0.19 (0.12) (0.19)
------- -------- --------
Net income (loss)......................................... $ 0.00 $ (0.04) $ (2.13)
======= ======== ========
Diluted earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.19) $ 0.01 $ (1.94)
Income (loss) from discontinued operations................ 0.19 (0.01) (0.19)
------- -------- --------
Net income (loss)......................................... $ 0.00 $ 0.00 $ (2.13)
======= ======== ========
Shares used in per-share calculation:
--Basic................................................. 7,320 7,582 8,678
======= ======== ========
--Diluted............................................... 7,320 77,050 8,678
======= ======== ========
</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)
Deferred stock compensation related to grant of
stock options to non-employees............... 1,041
Cancellation of non-employee stock options..... (612)
Amortization of deferred stock compensation
related to grant of stock options to
non-employees................................
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 89,918 (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 stock compensation related to grant of
stock options to employees................... 15,937
Amortization of deferred stock compensation
related to grant of stock options to
employees....................................
Deferred stock compensation related to grant of
stock options to non-employees............... 7,391
Amortization of deferred stock compensation
related to grant of stock options to
non-employees................................
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 27,616
Common stock issued upon exercise of options... 615,210 1 4,999
Dividend related to beneficial conversion
feature pursuant to issuance of Series F
preferred stock in December 1999............. 29,977 (29,977)
Retirement of Treasury Stock................... (1,348,386) (3,060)
Net income..................................... 11,463
---------- --- ----------- ---- -------- --------
Balances, December 31, 1999.................... 70,377,322 $88 8,929,837 $ 13 $218,303 $(34,821)
========== === =========== ==== ======== ========
<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.........
Deferred stock compensation related to grant of
stock options to non-employees............... $ (1,041)
Cancellation of non-employee stock options..... 612
Amortization of deferred stock compensation
related to grant of stock options to
non-employees................................ 412
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.................... (17) (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 stock compensation related to grant of
stock options to employees................... (15,937)
Amortization of deferred stock compensation
related to grant of stock options to
employees.................................... 2,862
Deferred stock compensation related to grant of
stock options to non-employees............... (7,391)
Amortization of deferred stock compensation
related to grant of stock options to
non-employees................................ 2,691
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 pursuant to issuance of Series F
preferred stock in December 1999.............
Retirement of Treasury Stock................... 3,060
Net income.....................................
-------- ----- ----------- ------- -------
Balances, December 31, 1999.................... $(17,792) $(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......... --
Deferred stock compensation related to grant of
stock options to non-employees............... --
Cancellation of non-employee stock options..... --
Amortization of deferred stock compensation
related to grant of stock options to
non-employees................................ 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 stock compensation related to grant of
stock options to employees................... --
Amortization of deferred stock compensation
related to grant of stock options to
employees.................................... 2,862
Deferred stock compensation related to grant of
stock options to non-employees............... --
Amortization of deferred stock compensation
related to grant of stock options to
non-employees................................ 2,691
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.................................. 27,622
Common stock issued upon exercise of options... 5,000
Dividend related to beneficial conversion
feature pursuant to issuance of Series F
preferred stock in December 1999............. --
Retirement of Treasury Stock................... --
Net income..................................... 11,463
--------
Balances, December 31, 1999.................... $165,720
========
</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) $ 11,463
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
(Income) loss from discontinued operations................ (1,413) 893 1,656
Depreciation and amortization............................. 1,289 2,486 3,013
Write-off of in-process research and development costs.... -- -- 3,992
Net loss on sale of assets................................ -- 73 611
Amortization of deferred stock compensation............... -- 412 5,553
Equity in net (income) loss of affiliated companies....... 161 1,700 (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) (5,518) (34,560)
Other current and non-current assets.................... (4,687) (474) (6,726)
Deferred tax assets..................................... (59) (1,194) (2,144)
Accounts payable and payable to related parties......... 2,651 (917) 6,644
Income taxes payable.................................... (151) 930 1,127
Other current liabilities............................... 4,711 8,561 21,024
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
Proceeds (payments) from shareholder notes.................. 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 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
intangible assets includes $240 of assembled workforce, and $23,638 of excess of
costs over fair value of net assets acquired. 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)
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 $ 13,119
Beneficial conversion feature of Series F convertible
preferred stock......................................... -- -- (29,977)
------- ----------- ------------
Income (loss) from continuing operations after beneficial
conversion feature of Series F convertible preferred
stock................................................... (1,383) 593 (16,858)
Income (loss) from discontinued operations................ 1,413 (893) (1,656)
------- ----------- ------------
Net income (loss) applicable to common stockholders....... $ 30 $ (300) $ (18,514)
======= =========== ============
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) $ 0.08 $ (1.94)
Income (loss) from discontinued operations................ 0.19 (0.12) (0.19)
------- ----------- ------------
$ 0.00 $ (0.04) $ (2.13)
======= =========== ============
Diluted earnings (loss) per share:
Income (loss) from continuing operations.................. $ (0.19) $ 0.01 $ (1.94)
Income (loss) from discontinued operations................ 0.19 (0.01) (0.19)
------- ----------- ------------
$ 0.00 $ 0.00 $ (2.13)
======= =========== ============
</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............... $ -- $ -- $27,953
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 subsidiary with the issuance of 832,166 shares
of Series G preferred stock and $9,688 of common stock options valued using
Black-Scholes. The aggregate purchase price of Wacos was approximately $27,953
which, based upon an independent appraisal by Willamette Management Associates
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 $23,638 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.................................................... 23,638
-------
$27,953
=======
</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............................................. $10,676 $31,461
Work in process........................................... 6,518 4,356
Finished goods............................................ 5,895 25,802
------- -------
$23,089 $61,619
Less allowance for obsolete inventory..................... 2,445 6,415
------- -------
$20,644 $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 11,720
------- -------
12,063 14,678
Less accumulated depreciation............................. 3,718 6,510
------- -------
$ 8,345 $ 8,168
======= =======
</TABLE>
Depreciation expense was $1,249, $2,366 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.......................................... $966 $2,314
==== ======
</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
Elimination of intercompany profit....................... (1,438) (508)
-------- -------
Investment in unconsolidated subsidiary.................. $ 966 $ 2,314
======== =======
</TABLE>
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $8,597 $ 10,995 $16,004
Gross profit..................................... 999 2,123 2,366
Operating income (loss).......................... 29 1,040 1,067
Net income....................................... 336 734 820
------ -------- -------
UTStarcom's share of net income.................. 165 374 418
Elimination of intercompany profit............... (92) (1,147) 930
------ -------- -------
Equity in net income (loss) of subsidiary........ $ 73 $ (773) $ 1,348
====== ======== =======
</TABLE>
Product sales to GUTS for the years ended December 31, 1997, 1998 and 1999
were $6,242, $5,631 and $8,394, respectively. Product purchases from GUTS for
the years ended December 31, 1997, 1998 and 1999 were $5,529, $8,903 and $7,897,
respectively.
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 $25,695
Less accumulated amortization.............................. 231 563
------ -------
$1,585 $25,132
====== =======
</TABLE>
Amortization expense was $40, $120 and $332 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 4,382
------- -------
$12,818 $29,102
======= =======
</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) $(15,664)
Foreign.......................................... (1,161) 6,030 31,519
------- ------- --------
$(1,284) $ 1,102 $ 15,855
======= ======= ========
</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 $ 1,100
State............................................. 50 1 533
Foreign........................................... 190 934 1,700
DEFERRED:
Federal........................................... 113 632 (2,453)
State............................................. 15 (239) (10)
Foreign........................................... (144) 86 (244)
----- ------ -------
$ 400 $1,423 $ 626
===== ====== =======
</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................... $ 2,231 $ -- $ 2,231
Future period compensation deductions............. 1,205 -- 1,205
Allowances and reserves........................... 1,638 1,222 2,860
Tax credit carryforwards.......................... 2,513 2,513
------- ------ -------
Total deferred tax assets....................... 7,587 1,222 8,809
Deferred tax liabilities:
Accelerated depreciation.......................... (277) -- (277)
------- ------ -------
7,310 1,222 8,532
Valuation allowances.............................. (3,656) (524) (4,180)
------- ------ -------
Net deferred tax assets......................... $ 3,654 $ 698 $ 4,352
======= ====== =======
</TABLE>
As of December 31, 1999, the Company has research and development credit
carryforwards of approximately $890 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 $5,967 and $10,516, 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 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
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)
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.
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 from continuing
operations by approximately $871 in 1997, increase net income from continuing
operations by approximately $305 for the year ended December 31, 1998, and
increase net income from continuing operations 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.............. 4 (11) (3)
Permanent differences....................................... (3) 17 15
Effect of difference in foreign taxes rates................. (30) (19) (31)
Change in valuation allowance............................... 89 110 11
Other....................................................... 5 (3) (22)
--- --- ---
Effective rate.............................................. 31% 128% 4%
=== === ===
</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.
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>
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: (CONTINUED)
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 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 19,725,968 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 $29,977.
17. STOCKHOLDERS' EQUITY:
In connection with the grant of certain stock options to employees,
non-employees and members of the Board of Directors, the Company recorded
deferred stock compensation of $23,328 in 1999,
F-22
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17. STOCKHOLDERS' EQUITY: (CONTINUED)
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
$5,553 during the year ended December 31, 1999. At December 31, 1999
approximately $17,792 remained to be amortized over the corresponding vesting
period of each respective option, generally four years. The deferred stock
compensation amortization expense for 2000, 2001, 2002 and 2003 is expected to
be $10,218, $4,726, $2,214 and $634, respectively.
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 the 1992 Omnibus Equity Incentive Plan, which the Company's
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 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, the Company's stockholders approved, the 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, the Company's 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 the Company's stockholders approved, the 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
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)
the plan, the Company is 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 the initial public offering
(see note 23), the Company will be authorized to issue up to 12,903,841 shares
of common stock under the 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 lesser of 6,000,000 shares or 4% of the outstanding
shares of the Company's common stock on that date, or a lesser amount determined
by the Board.
2000 EMPLOYEE STOCK PURCHASE PLAN. In December 1999, the Board of Directors
adopted the 2000 Employee Stock Purchase Plan. The Company's stockholders
approved the stock purchase plan in February 2000. Subject to meeting federal
and state securities law requirements, the stock purchase plan will become
effective upon the consummation of the initial public offering (see note 23), or
as soon as practicable thereafter.
The Company has 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.
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.
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)
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."
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.
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)
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....................................... $(18,514) $(2.13) $(2.13)
======== ====== ======
Pro forma.................................... $(21,395) $(2.47) $(2.47)
======== ====== ======
</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.
During 1999, the Company granted 334,332 options to purchase Common Stock at
$0.8538 to $4.50 per share to non-employees for services previously rendered.
The options were fully vested upon grant date. The Company recorded the fair
value of the stock as determined using the Black-Scholes pricing model and
recognized stock-based compensation expense of $2,340.
During 1996, 1997, 1998 and 1999, the Company granted options to purchase
11,332, 7,998, 68,742, and 508,798 shares, respectively, of the Company's Common
Stock in exchange for services rendered. The options vest over four years. These
options are subject to variable plan accounting, with fair value remeasurement
at the end of each quarterly reporting period. The Company recorded $0, $1,041
and $5,051 of deferred stock compensation and recognized stock-based
compensation expense of $0, $412, and $351 in 1997, 1998 and 1999, respectively
related to these grants. As of December 31, 1999 574,238 of these options remain
outstanding.
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 2003. The
minimum future lease payments under the leases at 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...................................................... --
------
Total minimum lease payments.............................. $3,525
======
</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 $11,444 and $43,635 of the
Company's cash was on deposit in foreign accounts at December 31, 1998 and 1999,
respectively. The Company invests excess cash in highly liquid investments with
original maturity of three months or less,
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)
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 $166,000.
23. INITIAL PUBLIC OFFERING
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
F-28
<PAGE>
UTSTARCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
23. INITIAL PUBLIC OFFERING (CONTINUED)
preferred stock upon the Company's initial public offering, is disclosed in the
accompanying unaudited pro forma stockholders' equity on the balance sheet.
24. SUBSEQUENT EVENTS
In January and February 2000, the Company granted to employees 535,820
options to purchase common stock at an exercise price of $13 per share to vest
over four years.
In February 2000, the stockholders approved an increase in the number of
options, to purchase shares of common stock, authorized to be issued under the
1997 Stock Plan from 8,499,018 shares to 10,878,285 shares.
F-29
<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-30
<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......................................... 112,691 112,691 112,691
-------- -------- -------- ------- --------
Gross profit.......................................... 74,825 74,825 74,825
Operating expenses:
Selling, general and administrative expenses........ 30,866 30,866 30,866
Research and development expenses................... 17,363 17,363 17,363
Amortization of deferred stock compensation......... 5,553 5,553 5,553
Amortization of intangible assets................... 332 332 $ 4,608(1) 4,940
In-process research and development costs........... 3,992 3,992 (3,992)(2) --
-------- -------- -------- ------- --------
Total operating expenses.............................. 58,106 58,106 616 58,722
-------- -------- -------- ------- --------
Operating income (loss)............................... 16,719 16,719 (616) 16,103
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............................................ 15,855 15,855 (616) 15,239
Income tax expense (benefit).......................... 626 626 626
-------- -------- -------- ------- --------
Income (loss) before minority interest................ 15,229 15,229 (616) 14,613
Minority interest in (earnings) loss of consolidated
subsidiaries........................................ (2,110) (2,110) (2,110)
-------- -------- -------- ------- --------
Income (loss) from continuing operations.............. 13,119 13,119 (616) 12,503
Beneficial conversion feature of Series F convertible
preferred stock..................................... (29,977) (29,977) (29,977)
-------- -------- -------- ------- --------
Income (loss) from continuing operations applicable to
common stockholders................................. $(16,858) $(16,858) $ (616) $(17,474)
======== ======== ======== ======= ========
Earnings per common share--basic...................... $ (0.24)
========
Earnings per common share--diluted.................... $ (0.24)
========
Shares used in pro forma per-share
calculation--basic................................ 72,947
========
Shares used in pro forma per-share
calculation--diluted.............................. 72,947
========
</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-31
<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 assembled
workforce and the excess of costs of acquiring Wacos over the fair value
of net assets acquired, which will be amortized over a period of three to
five years; and
(2) Represents the in-process research and development charge resulting from
the acquisition of the minority interest in Wacos, removed from the pro
forma statement of operations as a non-recurring charge.
The pro forma combined statement of operations data presents the Company's
consolidated results of operations as if the Company's acquisition of Wacos had
occurred as of January 1, 1999 and the assumed conversion of all the Company's
outstanding preferred stock into shares of the Company's common stock that will
be effective upon the closing of the Company's initial public offering as if
such conversion had occurred on January 1, 1999 or at the date of issuance. 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-32
<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 Japanese 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.
10.13(a)+ Amendment to No. 1 Technical License and Assistance
Agreement dated February 21, 2000 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.
10.14(a) Addendum dated February 18, 2000 to the 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.
10.20(a)**+ Amendment Agreement to the Contract and Articles of
Association of Guangdong UTStarcom Communications Co. Ltd.
dated December 11, 1997.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- ---------------------
<C> <S>
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.
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.
10.36+ Supply Agreement dated February 18, 2000 between
UTStarcom, Inc. and Matsushita Electric Industrial
Co., Ltd.
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).
23.3** Consent of Willamette Management Associates.
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. 5 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 22nd day of February, 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. 5 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 February 22, 2000
Masayoshi Son
* President, Chief Executive Officer and
--------------------------------- Director (Principal Executive February 22, 2000
Hong Liang Lu Officer)
/s/ MICHAEL SOPHIE Chief Financial Officer and Assistant
--------------------------------- Secretary (Principal Financial and February 22, 2000
Michael Sophie Accounting Officer)
*
--------------------------------- Director February 22, 2000
Ying Wu
*
--------------------------------- Director February 22, 2000
Charles Xue
*
--------------------------------- Director February 22, 2000
Yoshitaka Kitao
*
--------------------------------- Director February 22, 2000
Chauncey Shey
*
--------------------------------- Director February 22, 2000
Thomas Toy
--------------------------------- Director
Larry D. Horner
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ MICHAEL SOPHIE
--------------------------------------
Michael Sophie
ATTTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
Condensed Financial Information at December 31, 1998 and 1999 and for each
of the three years ended December 31, 1999.
INDEPENDENT ACCOUNTANTS REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of UTStarcom, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 18, 2000, included an audit of the financial statement
schedules of this Form S-1. In our opinion, these financial statement schedules
present 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
February 18, 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..................................................... 219 3,679
-------- --------
Total current assets........................................ 73,312 101,333
Property, plant and equipment, net.......................... 3,453 3,867
Investment in affiliated companies.......................... 28,462 54,971
Intangible assets, net...................................... -- 23,696
Deferred tax assets......................................... 1,193 3,654
Other....................................................... 266 139
-------- --------
Total assets................................................ $106,686 $187,660
======== ========
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 2,127
Customer deposit.......................................... -- 500
Other..................................................... 3,341 14,797
-------- --------
Total current liabilities................................... 34,350 21,940
-------- --------
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.................................. 89,918 218,303
Deferred stock compensation................................. (17) (17,792)
Accumulated deficit......................................... (16,307) (34,821)
Notes receivable from shareholders.......................... (369) (555)
Cumulative translation adjustment........................... 95 95
-------- --------
75,389 165,720
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.................................. 72,336 165,720
-------- --------
Total liabilities and stockholders' equity.................. $106,686 $187,660
======== ========
</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 5,502 3,993
Research and development expenses......................... 7,500 9,297 11,681
Amortization of deferred stock compensation............... -- 412 5,553
Amortization of intangible assets......................... -- -- 188
In-process research and development costs................. -- -- 3,992
------- ------- --------
Total operating expenses.................................... 13,574 15,211 25,407
------- ------- --------
Operating income (loss)..................................... (1,396) (3,046) (12,170)
Interest income............................................. 2,931 3,754 3,839
Interest expense............................................ -- (1,016) (1,693)
Equity in net income (loss) of affiliated companies......... (2,556) 2,220 21,954
Other income (expenses)..................................... (8) (925) 360
------- ------- --------
Income (loss) before income taxes........................... (1,029) 987 12,290
Income tax expense (benefit)................................ 354 394 (829)
------- ------- --------
Income (loss) from continuing operations.................... (1,383) 593 13,119
Income (loss) from discontinued operations.................. 1,413 (893) (1,656)
------- ------- --------
Net income (loss)........................................... 30 (300) 11,463
------- ------- --------
Beneficial conversion feature of Series F convertible
preferred stock........................................... -- -- (29,977)
------- ------- --------
Net income (loss) applicable to common stockholders......... $ 30 $ (300) $(18,514)
======= ======= ========
</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) $ 11,463
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
(Income) loss from discontinued operations................ (1,413) 893 1,656
Depreciation and amortization............................. 519 841 1,258
Write-off of in-process research and development costs.... -- -- 3,992
Net gain (loss) on sale of assets......................... (65) 107 --
Amortization of deferred stock compensation............... -- 412 5,553
Equity (income) loss of affiliated companies.............. 2,556 (2,220) (21,954)
Changes in operating assets and liabilities:
Accounts receivable and receivable from related
parties................................................ (20,884) (35,238) 4,200
Inventories............................................. (380) (380) (10,062)
Other current and non-current assets.................... (168) 496 13
Deferred tax assets..................................... -- (1,235) (2,144)
Accounts payable and payable to related parties......... 392 16,000 (24,359)
Income taxes payable.................................... -- 884 1,079
Other current liabilities............................... 1,232 2,585 11,275
Deferred revenue........................................ (88) -- 500
-------- -------- --------
Net cash used in 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 (payments) 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 Japanese 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.
10.13(a)+ Amendment to No. 1 Technical License and Assistance
Agreement dated February 21, 2000 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>
10.14(a) Addendum dated February 18, 2000 to the 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.
10.20(a)**+ Amendment Agreement to the Contract and Articles of
Association of Guangdong UTStarcom Communications Co. Ltd.
dated December 11, 1997.
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>
<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.
10.36+ Supply Agreement dated February 18, 2000 between
UTStarcom, Inc. and Matsushita Electric Industrial
Co., Ltd.
21.1 List of Subsidiaries of UTStarcom, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.3** Consent of Willamette Management Associates.
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>
==============================================================================
UTSTARCOM, INC.
(a Delaware corporation)
8,000,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: _______ __, 2000
==============================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . .2
(a) Representations and Warranties by the Company . . . . . . . . . .3
(i) Compliance with Registration Requirements. . . . . . . .3
(ii) Independent Accountants. . . . . . . . . . . . . . . . .4
(iii) Financial Statements . . . . . . . . . . . . . . . . . .4
(iv) No Material Adverse Change in Business . . . . . . . . .5
(v) Good Standing of the Company . . . . . . . . . . . . . .5
(vi) Good Standing of Subsidiaries. . . . . . . . . . . . . .5
(vii) Good Standing of Joint Ventures. . . . . . . . . . . . .6
(viii) Capitalization . . . . . . . . . . . . . . . . . . . . .6
(ix) Authorization of Agreement . . . . . . . . . . . . . . .6
(x) Authorization and Description of Securities. . . . . . .6
(xi) Absence of Defaults and Conflicts. . . . . . . . . . . .7
(xii) Absence of Labor Dispute . . . . . . . . . . . . . . . .7
(xiii) Absence of Proceedings . . . . . . . . . . . . . . . . .8
(xiv) Accuracy of Exhibits . . . . . . . . . . . . . . . . . .8
(xv) Possession of Intellectual Property. . . . . . . . . . .8
(xvi) Absence of Further Requirements. . . . . . . . . . . . .8
(xvii) Possession of Licenses and Permits . . . . . . . . . . .9
(xviii) Title to Property. . . . . . . . . . . . . . . . . . . .9
(xix) Repatriation of Dividends and other Distributions. . . .9
(xx) PRC Taxes . . . . . . . . . . . . . . . . . . . . . . .10
(xxi) Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 10
(xxii) [Sovereign Immunity. . . . . . . . . . . . . . . . . . 10
(xxiii) [Choice of Law . . . . . . . . . . . . . . . . . . . . 10
(xxiv) Compliance with Cuba Act . . . . . . . . . . . . . . . 11
(xxv) Investment Company Act . . . . . . . . . . . . . . . . 11
(xxvi) [Passive Foreign Investment Company. . . . . . . . . . 11
(xxvii) Environmental Laws . . . . . . . . . . . . . . . . . . 11
(xxviii) Year 2000. . . . . . . . . . . . . . . . . . . . . . . 12
(xxix) Foreign Corrupt Practices Act. . . . . . . . . . . . . 12
(xxx) Registration Rights. . . . . . . . . . . . . . . . . . 12
(b) Officer's Certificates. . . . . . . . . . . . . . . . . . . . . 12
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING. . . . . . . . . . . 13
(a) Initial Securities . . . . . . . . . . . . . . . . . . . . . . 13
(b) Option Securities. . . . . . . . . . . . . . . . . . . . . . . .13
(c) Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
(d) Denominations; Registration . . . . . . . . . . . . . . . . . . 14
SECTION 3. COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . 14
(a) Compliance with Securities Regulations and Commission Requests. 14
(b) Filing of Amendments. . . . . . . . . . . . . . . . . . . . . . 15
(c) Delivery of Registration Statements . . . . . . . . . . . . . . 15
(d) Delivery of Prospectuses. . . . . . . . . . . . . . . . . . . . 15
(e) Continued Compliance with Securities Laws . . . . . . . . . . . 15
<PAGE>
(f) Blue Sky Qualifications . . . . . . . . . . . . . . . . . . . . 16
(g) Rule 158. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(h) Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . .16
(i) Listing. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
(j) Restriction on Sale of Securities . . . . . . . . . . . . . . . 16
(k) Reporting Requirements. . . . . . . . . . . . . . . . . . . . . 17
[(l) Compliance with NASD Rules. . . . . . . . . . . . . . . . . . . 17
[(m) Compliance with Rule 463. . . . . . . . . . . . . . . . . . . . 17
SECTION 4. PAYMENT AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . 18
(a) Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(b) Termination of Agreement. . . . . . . . . . . . . . . . . . . . 18
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS . . . . . . . . . . . . 18
(a) Effectiveness of Registration Statement . . . . . . . . . . . . 18
(b) Opinion of Counsel for the Company. . . . . . . . . . . . . . . 19
(c) Opinion of PRC Counsel for the Company. . . .ERROR! BOOKMARK NOT DEFINED.
(d) Opinion of Counsel for the Underwriters . . . . . . . . . . . . 19
(e) Opinion of PRC Counsel for the Underwriters. . .ERROR! BOOKMARK NOT DEFINED.
(f) Officers' Certificate. . . . . . . . . . . . . . . . . . . . . .19
(g) Accountant's Comfort Letter . . . . . . . . . . . . . . . . . . 20
(h) Bring-down Comfort Letter . . . . . . . . . . . . . . . . . . . 20
(i) Approval of Listing . . . . . . . . . . . . . . . . . . . . . . 20
(j) No Objection. . . . . . . . . . . . . . . . . . . . . . . . . . .20
(k) Lock-up Agreements. . . . . . . . . . . . . . . . . . . . . . . .20
(l) Conditions to Purchase of Option Securities. . . . . . . . . . . 20
(m) Additional Documents . . . . . . . . . . . . . . . . . . . . . . 21
(n) Termination of Agreement . . . . . . . . . . . . . . . . . . . . 21
SECTION 6. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . .22
(a) Indemnification of Underwriters . . . . . . . . . . . . . . . . .22
(b) Indemnification of Company, Directors and Officers . . . . . . . 23
(c) Actions against Parties; Notification. . . . . . . . . . . . . . 23
(d) Settlement without Consent if Failure to Reimburse . . . . . . . 24
[(e) Indemnification for Reserved Securities. . . . . . . . . . . . . 24
SECTION 7. CONTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. 26
SECTION 9. TERMINATION OF AGREEMENT. . . . . . . . . . . . . . . . . . . . 26
(a) Termination; General . . . . . . . . . . . . . . . . . . . . . . 26
(b) Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS . . . . . . . . . . 27
SECTION 11. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2
<PAGE>
SECTION 12. PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 13. GOVERNING LAW AND TIME . . . . . . . . . . . . . . . . . . . . 28
SECTION 14. EFFECTS OF HEADINGS. . . . . . . . . . . . . . . . . . . . . . 28
SCHEDULES
Schedule A - List of Underwriters. . . . . . . . . . . . . .Sch A-1
Schedule B - Pricing Information . . . . . . . . . . . . . .Sch B-1
Schedule C - List of Persons subject to Lock-up. . . . . . .Sch C-1
Schedule D - List of Joint Ventures and Ownership
Percentages of the Company . . . . . . . . . .Sch D-1
EXHIBITS
Exhibit A- Form of Lock-up Letter. . . . . . . . . . . . . . .A-1
</TABLE>
3
<PAGE>
UTSTARCOM, INC.
(a Delaware corporation)
8,000,000 Shares of Common Stock
(Par Value $.00125 Per Share)
PURCHASE AGREEMENT
_______ __, 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Banc of America Securities LLC
U.S. Bancorp Piper Jaffray Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
UTStarcom, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Banc of America Securities LLC and U.S.
Bancorp Piper Jaffray Inc. are acting as representatives (in such capacity,
the "Representatives"), with respect to the issue and sale by the Company and
the purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.00125 per share, of
the Company ("Common Stock") set forth in said Schedule A, and with respect
to the grant by the Company to the Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or
any part of 1,500,000 additional shares of Common Stock to cover
over-allotments, if any. The aforesaid 8,000,000 shares of Common Stock (the
"Initial Securities") to be purchased by the Underwriters and all or any part
of the 1,500,000 shares of Common Stock subject to the option described in
Section 2(b) hereof (the "Option Securities") are hereinafter called,
collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable
after this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to 500,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities")
shall be reserved for sale by the Underwriters to certain eligible employees
and persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of
<PAGE>
this Agreement, the applicable rules, regulations and interpretations of the
National Association of Securities Dealers, Inc. and all other applicable
laws, rules and regulations. To the extent that such Reserved Securities are
not orally confirmed for purchase by such eligible employees and persons
having business relationships with the Company by the end of the first
business day after the date of this Agreement, such Reserved Securities may
be offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333- )
covering the registration of the Securities under the Securities Act of 1933,
as amended (the "1933 Act"), including the related preliminary prospectus or
prospectuses. Promptly after execution and delivery of this Agreement, the
Company will either (i) prepare and file a prospectus in accordance with the
provisions of Rule 430A ("Rule 430A") of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b)
of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the
Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act
Regulations, prepare and file a term sheet (a "Term Sheet") in accordance
with the provisions of Rule 434 and Rule 424(b). The information included in
such prospectus or in such Term Sheet, as the case may be, that was omitted
from such registration statement at the time it became effective but that is
deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to
as "Rule 434 Information." Each prospectus used before such registration
statement became effective, and any prospectus that omitted, as applicable,
the Rule 430A Information or the Rule 434 Information, that was used after
such effectiveness and prior to the execution and delivery of this Agreement,
is herein called a "preliminary prospectus." Such registration statement,
including the exhibits thereto and schedules thereto at the time it became
effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement."
Any registration statement filed pursuant to Rule 462(b) of the 1933 Act
Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final prospectus in the
form first furnished to the Underwriters for use in connection with the
offering of the Securities is herein called the "Prospectus." If Rule 434 is
relied on, the term "Prospectus" shall refer to the preliminary prospectus
dated _____, 2000 together with the Term Sheet and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term
Sheet. For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any Term Sheet or
any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section
2
<PAGE>
2(c) hereof, and as of each Date of Delivery (if any) referred to in Section
2(b) hereof, and agrees with each Underwriter, as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement, the
Rule 462(b) Registration Statement and any amendments and supplements
thereto complied and will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and did not and
will not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading [, and the Prospectus, any preliminary
prospectus and any supplement thereto or prospectus wrapper prepared in
connection therewith, at their respective times of issuance and at the
Closing Time, complied and will comply in all material respects with any
applicable laws or regulations of foreign jurisdictions in which the
Prospectus and such preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the offer and sale of
Reserved Securities]. Neither the Prospectus nor any amendments or
supplements thereto (including any prospectus wrapper), at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Securities are purchased, at the Date of
Delivery), included or will include an untrue statement of a material
fact or omitted or will omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading. If Rule 434 is used, the Company
will comply with the requirements of Rule 434 and the Prospectus shall
not be "materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall
not apply to statements in or omissions from the Registration Statement
or Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus delivered
to the Underwriters for use in connection with this offering was
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
3
<PAGE>
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the 1933 Act Regulations; each of the Company, its
subsidiaries and its Joint Ventures maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (A)
transactions are executed in accordance with management's general or
specific authorizations; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") in China with a reconciliation to
GAAP in the United Sates; (C) access to assets is permitted only in
accordance with management's general or specific authorization; (D) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate actions taken with respect to any
differences; and (E) each of the Company, its subsidiaries and its Joint
Ventures has made and kept books, records and accounts which, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of assets of such entity and provide a sufficient basis for
the preparation of combined financial statements in accordance with
Chinese GAAP, with a reconciliation thereof to U.S. GAAP.
(iii) FINANCIAL STATEMENTS. The financial statements
[(including any separate financial statements for any subsidiary or any
Joint Venture (as defined below) of the Company other than the Company
and its consolidated subsidiaries)] included in the Registration
Statement and the Prospectus, together with the related schedules and
notes, present fairly the financial position of the Company and its
consolidated subsidiaries at the dates indicated and the statement of
operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with GAAP applied on a
consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included in
the Prospectus present fairly the information shown therein and have been
compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. [The pro forma
financial statements and the related notes thereto included in the
Registration Statement and the Prospectus present fairly the information
shown therein, have been prepared in accordance with the Commission's
rules and guidelines with respect to pro forma financial statements and
have been properly compiled on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.]
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein,
(A) there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects
of the Company, its subsidiaries and its Joint Ventures (as defined
below) considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company, any of its subsidiaries
or any of its Joint Ventures, other than those in the ordinary course of
4
<PAGE>
business, which are material with respect to the Company, its
subsidiaries and its Joint Ventures considered as one enterprise, and
(C) there has been no dividend or distribution of any kind declared, paid
or made by the Company on any class of its capital stock at any time.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(vi) GOOD STANDING OF SUBSIDIARIES. Each of ________,
________ and ________ (each a "U.S. Subsidiary") and ________ and
________ (each a "PRC Subsidiary" and, together with the U.S.
Subsidiaries, the "Subsidiaries") has been duly organized and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
currently conducted and as described in the Prospectus and is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct
of business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued and
outstanding capital stock of each such Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and is
owned by the Company, directly or through subsidiaries, free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any Subsidiary
was issued in violation of the preemptive or similar rights of any
securityholder of such Subsidiary. The Company does not have any
subsidiaries which are not Subsidiaries.
(vii) GOOD STANDING OF JOINT VENTURES. Each of ______,
________ and _______ (each a "Joint Venture" and, together, the "Joint
Ventures") has been duly organized and is validly existing as a limited
liability company in good standing under the laws of the People's
Republic of China (the "PRC"), and its business license is in full force
and effect; the joint venture contract, the articles of association and
other corporate formation documents of each of the above entities comply
with the requirements of PRC law and are in full force and effect. The
Company owns, directly or through subsidiaries, an interest in the Joint
Ventures which ownership percentage of the Company is listed in Schedule
D hereto. Each Joint Venture has the power and authority under the laws
of the PRC to own, lease and operate its assets and properties in
accordance with the terms of its joint venture contract and its articles
of association and to conduct its business as currently conducted, as
specified in its business license and as described in the Prospectus.
All registered capital required to be paid by each of the Company and the
5
<PAGE>
Chinese partner has been paid in full to each Joint Venture under the
joint venture contract and the articles of association for such Joint
Venture. All of the equity interests of the Joint Ventures have been
duly and validly authorized and issued, are fully paid and
non-assessable, and are owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity. The liability of the Company with
respect to its equity interest in each of the PRC Subsidiaries and the
Joint Ventures is limited to its investments therein. The Company and
its Subsidiaries do not hold an interest in any joint venture or similar
entity or contractual arrangement that is not a Joint Venture.
(viii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities,
warrants or options referred to in the Prospectus). The shares of issued
and outstanding capital stock of the Company have been duly authorized
and validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any securityholder
of the Company.
(ix) AUTHORIZATION OF AGREEMENT AND REGISTRATION STATEMENT.
This Agreement has been duly authorized, executed and delivered by the
Company. The Registration Statement and the Prospectus and the filing of
the Registration Statement and the Prospectus with the Commission have
been duly authorized by and on behalf of the Company, and the
Registration Statement has been duly signed by and on behalf of the
Company pursuant to such authorization.
(x) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The
Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid and
non-assessable; the Common Stock conforms to all statements relating
thereto contained in the Prospectus and such description conforms to the
rights set forth in the instruments defining the same; no holder of the
Securities will be subject to personal liability by reason of being such
a holder; and the issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the Company.
(xi) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company
nor any of its subsidiaries or Joint Ventures is in violation of its
articles, charter, by-laws or joint venture contract or in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries or any of its Joint Ventures
is a party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or any subsidiary or any Joint
Venture is subject (collectively, "Agreements and Instruments") except
for such defaults that would not result in a Material Adverse Effect;
6
<PAGE>
and the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein and in the
Registration Statement (including the issuance and sale of the Securities
and the use of the proceeds from the sale of the Securities as described
in the Prospectus under the caption "Use of Proceeds") and compliance by
the Company with its obligations hereunder have been duly authorized by
all necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined below)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any subsidiary
or any Joint Venture pursuant to, the Agreements and Instruments (except
for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not result in a Material Adverse Effect), nor
will such action result in any violation of the provisions of the
articles, charter, by-laws or joint venture contract of the Company or
any subsidiary or any Joint Venture or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
the Company or any subsidiary or any Joint Venture or any of their
assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any
subsidiary or any Joint Venture.
(xii) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any subsidiary or any Joint Venture exists
or, to the knowledge of the Company, is imminent, and the Company is not
aware of any existing or imminent labor disturbance by the employees of
any of its or any subsidiary's or any Joint Venture's principal
suppliers, manufacturers, customers or contractors, which, in either
case, may reasonably be expected to result in a Material Adverse Effect.
(xiii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or
any subsidiary or any Joint Venture, which is required to be disclosed in
the Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect the
properties or assets thereof or the consummation of the transactions
contemplated in this Agreement or the performance by the Company of its
obligations hereunder; the aggregate of all pending legal or governmental
proceedings to which the Company or any subsidiary is a party or of which
any of their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected
to result in a Material Adverse Effect.
(xiv) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which have
not been so described and filed as required.
7
<PAGE>
(xv) POSSESSION OF INTELLECTUAL PROPERTY. The Company, its
subsidiaries and its Joint Ventures own or possess, or can acquire on
reasonable terms, adequate patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other intellectual
property (collectively, "Intellectual Property") necessary to carry on
the business now operated by them, and neither the Company nor any of its
subsidiaries or any of its Joint Ventures has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights
of others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries or any of its Joint Ventures therein, and which infringement
or conflict (if the subject of any unfavorable decision, ruling or
finding) or invalidity or inadequacy, singly or in the aggregate, would
result in a Material Adverse Effect.
(xvi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except [(i)] such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws [and (ii) such as have been obtained
under the laws and regulations of jurisdictions outside the United States
in which the Reserved Securities are offered].
(xvii) POSSESSION OF LICENSES and PERMITS. The Company, its
subsidiaries and its Joint Ventures possess such permits, licenses,
approvals, consents and other authorizations (collectively, "Governmental
Licenses") issued by the appropriate federal, state, local or foreign
regulatory agencies or bodies (including the PRC State Council, the PRC
Ministry of Information Industry, the State Development and Planning
Commission, the [CSRC], the Ministry of Foreign Trade and Economic
Cooperation, the Ministry of Land and Resources, the State Administration
of Foreign Exchange, the General Administration of Customs, the relevant
Posts and Telecommunications Administrations ("PTA") and the relevant
Price Bureaus) necessary to conduct the business now operated by them;
the Company, its subsidiaries and its Joint Ventures are in compliance
with the terms and conditions of all such Governmental Licenses, except
where the failure so to comply would not, singly or in the aggregate,
have a Material Adverse Effect; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be
in full force and effect would not have a Material Adverse Effect; and
neither the Company nor any of its subsidiaries or any of its Joint
Ventures has received any notice of proceedings relating to the
revocation, suspension or modification of any such Governmental Licenses
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a Material Adverse Effect.
(xviii) TITLE TO PROPERTY. The Company, its subsidiaries and
its Joint Ventures have good and marketable title to all real property
owned by the Company, its
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subsidiaries and its Joint Ventures and good title to all other
properties owned by them, in each case, free and clear of all mortgages,
pledges, liens, security interests, claims, restrictions or encumbrances
of any kind except such as (a) are described in the Prospectus or (b) do
not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its subsidiaries or any of its
Joint Ventures; and all of the leases and subleases material to the
business of the Company, its subsidiaries and its Joint Ventures,
considered as one enterprise, and under which the Company or any of its
subsidiaries or any of its Joint Ventures holds properties described in
the Prospectus, are in full force and effect, and neither the Company nor
any subsidiary or any Joint Venture has any notice of any material claim
of any sort that has been asserted by anyone adverse to the rights of the
Company or any subsidiary or any Joint Venture under any of the leases or
subleases mentioned above, or affecting or questioning the rights of the
Company or such subsidiary or such Joint Venture to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xix) REPATRIATION OF DIVIDENDS AND OTHER DISTRIBUTIONS. All
dividends and other distributions declared and payable on the equity or
other interests in the PRC Subsidiaries or the Joint Ventures may, under
the laws and regulations of the PRC, be paid to the Company and may be
converted into foreign currency that may be freely transferred out of the
PRC, and except as disclosed in the Registration Statement and the
Prospectus, all such dividends and distributions will not be subject to
withholding or other taxes under the laws and regulations of the PRC and
are otherwise free and clear of any other tax, withholding or deduction
in the PRC and may be so paid without the necessity of obtaining any
governmental authorization, whether local, provincial or national, in the
PRC.
(xx) PRC TAXES. Other than as described in the Prospectus,
no stamp or other issuance or transfer taxes or duties and no capital
gains, income, withholding or other taxes are payable by or on behalf of
the Company to the PRC or any political subdivision or taxing authority
thereof or therein in connection with the issuance, sale and delivery of
the Securities or the execution, delivery and performance of this
Agreement. No stamp or other issuance or transfer taxes or duties and no
capital gains, income or withholding or other taxes are payable by or on
behalf of the Underwriters to the PRC or any political subdivision or
taxing authority thereof or therein in connection with the issuance, sale
and delivery of the Securities to the Underwriters or by the Underwriters
to the initial purchasers thereof, or the execution, delivery and
performance of this Agreement.
(xxi) TAXES. The Company, its Subsidiaries and the Joint
Ventures have filed all reports or filings required thereof for taxation
purposes, including those required by the PRC or any political
subdivision thereof.
(xxii) SOVEREIGN IMMUNITY. Under the laws of the PRC, neither
the Company nor any of its Subsidiaries or any of its Joint Ventures, or
any of their properties, assets or revenues are entitled to any right of
immunity on the grounds of sovereignty from any legal action, suit or
proceeding, from set-off or counterclaim, from
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the jurisdiction of any court, from service of process, from attachment
to or in aid of execution of judgment or from other legal process or
proceeding for the giving of any relief or for the enforcement of any
judgment.
(xxiii) CHOICE OF LAW. Under the laws of the PRC, the courts of
the PRC recognize and give effect to the choice of law provisions set
forth in this Agreement and enforce judgments of U.S. courts obtained
against the Company to enforce this Agreement, provided that the judgment
(A) was not obtained by fraud; (B) was final and conclusive; (C) in the
opinion of the relevant PRC court after the review of such judgment
pursuant to international treaties concluded or acceded to by the PRC
government or in accordance with the principle of reciprocity, or
otherwise in accordance with the Civil Procedure Law of the PRC, did not
contradict the basic principles of PRC law; (D) in the opinion of the
relevant PRC court after its review of such judgment pursuant to
international treaties concluded or acceded to by the PRC government or
in accordance with the principle of reciprocity, or otherwise in
accordance with the Civil Procedure Law of the PRC, did not violate state
sovereignty, security or public interest; and (E) was for a definite sum
of money.
(xxiv) COMPLIANCE WITH CUBA ACT. The Company has complied
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xxv) INVESTMENT COMPANY ACT. The Company is not, and upon
the issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xxvi) [PASSIVE FOREIGN INVESTMENT COMPANY. The Company is not
a Passive Foreign Investment Company within the meaning of Section 1296
of the United States Internal Revenue Code of 1986, as amended, and the
Company believes that the Securities should not be treated as stock of a
Passive Foreign Investment Company for United States federal income tax
purposes.]
(xxvii) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries or any of its Joint Ventures is in violation
of any federal, state, local or foreign statute, law, rule, regulation,
ordinance, code, policy or rule of common law or any judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution
or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively,
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"Hazardous Materials") or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws"), (B) the Company, its
subsidiaries, and its Joint Ventures have all permits, authorizations and
approvals required under any applicable Environmental Laws and are each
in compliance with their requirements, (C) there are no pending or
threatened administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental Law
against the Company or any of its subsidiaries or any of its Joint
Ventures and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its subsidiaries or any of its Joint Ventures relating to Hazardous
Materials or any Environmental Laws.
(xxviii) YEAR 2000. The Company has reviewed its operations and
those of its subsidiaries and any of its Joint Ventures, as well as those
of any third parties with which the Company or any of its subsidiaries or
any of its Joint Ventures has a material relationship, to evaluate the
extent to which the business or operations of the Company or any of its
subsidiaries or any of its Joint Ventures will be effected by the Year
2000 Problem (as defined below). As a result of such review, the Company
has no reason to believe, and does not believe, that the Year 2000
Problem will have a Material Adverse Effect or result in any material
loss or interference with the business or operations of the Company, any
of its subsidiaries or any of its Joint Ventures. The "Year 2000
Problem" as used herein means any significant risk that computer hardware
or software used in the receipt, transmission, processing, manipulation,
storage, retrieval, retransmission or other utilization of dates or in
the operation of mechanical or electrical systems of any kind will not,
in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000.
(xxix) FOREIGN CORRUPT PRACTICES ACT. Neither the Company, any
of its subsidiaries or any of its Joint Ventures nor any officer,
director, employee or agent thereof or any stockholder thereof acting on
behalf of the Company or any of its subsidiaries or any of its Joint
Ventures, has done any act or authorized, directed or participated in any
act, in violation of any provision of the United States Foreign Corrupt
Practices Act of 1977, as amended, applicable to such entity or person.
(xxx) REGISTRATION RIGHTS. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.
(B) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company or any of its subsidiaries or any of its Joint Ventures delivered to
the Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
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SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING. (a) INITIAL
SECURITIES. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, severally and not jointly, and
each Underwriter, severally and not jointly, agrees to purchase from the
Company, at the price per share set forth in Schedule B, the number of
Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) OPTION SECURITIES. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an additional
1,500,000 shares of Common Stock at the price per share set forth in Schedule
B, less an amount per share equal to any dividends or distributions declared
by the Company and payable on the Initial Securities but not payable on the
Option Securities. The option hereby granted will expire 30 days after the
date hereof and may be exercised in whole or in part from time to time only
for the purpose of covering over-allotments which may be made in connection
with the offering and distribution of the Initial Securities upon notice by
the Representatives to the Company setting forth the number of Option
Securities as to which the several Underwriters are then exercising the
option and the time and date of payment and delivery for such Option
Securities. Any such time and date of delivery (a "Date of Delivery") shall
be determined by the Representatives, but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to
all or any portion of the Option Securities, each of the Underwriters, acting
severally and not jointly, will purchase that proportion of the total number
of Option Securities then being purchased which the number of Initial
Securities set forth in Schedule A opposite the name of such Underwriter
bears to the total number of Initial Securities, subject in each case to such
adjustments as the Representatives in their discretion shall make to
eliminate any sales or purchases of fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Shearman & Sterling, 1550 El Camino Real, Menlo Park, California 94025, or at
such other place as shall be agreed upon by the Representatives and the
Company, at 7:00 A.M. (California time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after
the date hereof (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such
date as shall be agreed upon by the Representatives and the Company (such
time and date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and
delivery of certificates for, such Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by
the Representatives and the Company, on each Date of Delivery as specified in
the notice from the Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery
to the Representatives for the
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respective accounts of the Underwriters of certificates for the Securities to
be purchased by them. It is understood that each Underwriter has authorized
the Representatives, for its account, to accept delivery of, receipt for, and
make payment of the purchase price for, the Initial Securities and the Option
Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the Underwriters, may (but shall
not be obligated to) make payment of the purchase price for the Initial
Securities or the Option Securities, if any, to be purchased by any
Underwriter whose funds have not been received by the Closing Time or the
relevant Date of Delivery, as the case may be, but such payment shall not
relieve such Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations
and registered in such names as the Representatives may request in writing at
least one full business day before the Closing Time or the relevant Date of
Delivery, as the case may be. The certificates for the Initial Securities
and the Option Securities, if any, will be made available for examination and
packaging by the Representatives in The City of New York not later than 10:00
A.M. (Eastern time) on the business day prior to the Closing Time or the
relevant Date of Delivery, as the case may be.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify the Representatives
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been filed,
(ii) of the receipt of any comments from the Commission, (iii) of any request
by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information, and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or
of the initiation or threatening of any proceedings for any of such purposes.
The Company will promptly effect the filings necessary pursuant to Rule
424(b) and will take such steps as it deems necessary to ascertain promptly
whether the form of prospectus transmitted for filing under Rule 424(b) was
received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the
Representatives notice of its intention to file or prepare any amendment to
the Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or the
Prospectus, and will furnish the Representatives with copies of any such
documents a reasonable amount of time prior to such proposed filing or use,
as the case may be, and will not file or use any such document to which the
Representatives or counsel for the Underwriters shall object.
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(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished
or will deliver to the Representatives and counsel for the Underwriters,
without charge, signed copies of the Registration Statement as originally
filed and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Representatives,
without charge, a conformed copy of the Registration Statement as originally
filed and of each amendment thereto (without exhibits) for each of the
Underwriters. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 Act"), such number of copies of
the Prospectus (as amended or supplemented) as such Underwriter may
reasonably request. The Prospectus and any amendments or supplements thereto
furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the Underwriters or for
the Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement the Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to
Section 3(b), such amendment or supplement as may be necessary to correct
such statement or omission or to make the Registration Statement or the
Prospectus comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Representatives may
designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however, that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities
in
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any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject. In each jurisdiction in which the Securities have been
so qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant
to the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and
will file with the Nasdaq National Market all documents and notices required
by the Nasdaq National Market of companies that have securities that are
traded in the over-the-counter market and quotations for which are reported
by the Nasdaq National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days
from the date of the Prospectus, the Company will not, without the prior
written consent of Merrill Lynch, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap
or transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
Notwithstanding the foregoing, such restrictions shall not apply to (A)
shares of the Common Stock disposed of by the undersigned as bona fide gifts
provided that the donee thereof agrees in writing to be bound by the
provisions hereof; (B) a pledge of shares of the Common Stock by the
undersigned for the purposes of securing a loan or similar obligation from
the Company to the holder; (C) the exercise of outstanding stock options
issued under the Company's stock option plan, provided that the shares of
Common Stock issued upon exercise of said options shall be subject to the
restrictions set forth herein; (D) shares of the Common Stock distributed to
partners, members or stockholders of the undersigned, provided that each
distributee agrees in writing to be bound by the provisions hereof; and (E)
shares of the Common Stock purchased in the public market by the undersigned
in the public offering of the Securities or after the date of the public
offering of the Securities.
(k) REPORTING REQUIREMENTS. The Company, during the period when
the Prospectus is required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act and
the rules and regulations of the Commission thereunder.
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(l) COMPLIANCE WITH NASD RULES. The company hereby agrees that it
will ensure that the Reserved Securities will be restricted as required by
the National Association of Securities Dealers, inc. (The "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period
of three months following the date of this Agreement. The Underwriters will
notify the Company as to which persons will need to be so restricted. At the
request of the Underwriters, the Company will direct the transfer agent to
place a stop transfer restriction upon such securities for such period of
time. Should the Company release, or seek to release, from such restrictions
any of the Reserved Securities, the Company agrees to reimburse the
Underwriters for any reasonable expenses (including, without limitation,
legal expenses) they incur in connection with such release.
(m) COMPLIANCE WITH RULE 463. The Company will file with the
Commission such reports on Form SR as may be required pursuant to Rule 463 of
the 1933 Act Regulations.
SECTION 4. PAYMENT AND EXPENSES.
(a) EXPENSES. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of
this Agreement, any Agreement among Underwriters and such other documents as
may be required in connection with the offering, purchase, sale, issuance or
delivery of the Securities, (iii) the preparation, issuance and delivery of
the certificates for the Securities to the Underwriters, including any stock
or other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Securities under securities laws in accordance with
the provisions of Section 3(f) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectus and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities, (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters
in connection with, the review by the NASD of the terms of the sale of the
Securities, (x) the fees and expenses incurred in connection with the
inclusion of the Securities in the Nasdaq National Market, and (xi) all costs
and expenses of the Underwriters, including the fees and disbursements of
counsel for the Underwriters, in connection with matters related to the
Reserved Securities which are designated by the Company for sale to employees
and others having a business relationship with the Company.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by
the Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
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SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations
of the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof
or in certificates of any officer of the Company or any subsidiary or any
Joint Venture of the Company delivered pursuant to the provisions hereof, to
the performance by the Company of its covenants and other obligations
hereunder, and to the following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
Underwriters. A prospectus containing the Rule 430A Information shall have
been filed with the Commission in accordance with Rule 424(b) (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A) or, if
the Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR THE COMPANY. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Company, in form and substance satisfactory to the
Representatives and counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters.
(c) OPINION OF PRC COUNSEL FOR THE COMPANY. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Jun He Law Offices, PRC counsel for the Company, in form and
substance satisfactory to the Representatives and counsel for the
Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters.
(d) OPINION OF COUNSEL FOR THE UNDERWRITERS. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Shearman & Sterling, counsel for the Underwriters, in form
and substance satisfactory to the Representatives, together with signed or
reproduced copies of such letter for each of the other Underwriters, and such
counsel shall have received or been permitted access to such papers and
information as they may reasonably request to enable them to give such
opinion.
(e) OFFICERS' CERTIFICATE. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, its subsidiaries and its Joint Ventures
considered as one enterprise, whether or not arising in the ordinary course
of business, and the Representatives shall have received a certificate of the
President or a Vice President of the Company and of the chief financial or
chief accounting officer of the Company, dated as of Closing Time, to the
effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct
with the same force and
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effect as though expressly made at and as of Closing Time, (iii) the Company
has complied with all agreements and satisfied all conditions on its part to
be performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending or
are contemplated by the Commission.
(f) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of
this Agreement, the Representatives shall have received from
PricewaterhouseCoopers LLP a letter dated such date, in form and substance
satisfactory to the Representatives, together with signed or reproduced
copies of such letter for each of the other Underwriters containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement and
the Prospectus.
(g) BRING-DOWN COMFORT LETTER. At Closing Time, the
Representatives shall have received from PricewaterhouseCoopers LLP a letter,
dated as of Closing Time, to the effect that they reaffirm the statements
made in the letter furnished pursuant to subsection (e) of this Section,
except that the specified date referred to shall be a date not more than
three business days prior to Closing Time.
(h) APPROVAL OF LISTING. At Closing Time, the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject only
to official notice of issuance.
(i) NO OBJECTION. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(j) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit A hereto, in form and substance satisfactory to the Representatives,
signed by each officer, director and stockholder of the Company.
(k) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event
that the Underwriters exercise their option provided in Section 2(b) hereof
to purchase all or any portion of the Option Securities, the representations
and warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company
hereunder shall be true and correct as of each Date of Delivery and, at the
relevant Date of Delivery, the Representatives shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date
of Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company confirming
that the certificate delivered at the Closing Time pursuant to
Section 5(d) hereof remains true and correct as of such Date of Delivery.
(ii) OPINION OF COUNSEL FOR THE COMPANY. The favorable
opinion of Wilson Sonsini Goodrich & Rosati Professional Corporation,
counsel for the Company, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of
18
<PAGE>
Delivery and otherwise to the same effect as the opinion required by
Section 5(b)(1) hereof.
(iii) OPINION OF PRC COUNSEL FOR THE COMPANY. The favorable
opinion of Jun He Law Offices, PRC counsel for the Company, dated such
Date of Delivery, relating to the Option Securities to be purchased on
such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(b)(2) hereof.
(iv) OPINION OF COUNSEL FOR THE UNDERWRITERS. The favorable
opinion of Shearman & Sterling, counsel for the Underwriters, dated such
Date of Delivery, relating to the Option Securities to be purchased on
such Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(c)(1) hereof.
(v) [OPINION OF PRC COUNSEL FOR THE UNDERWRITERS. The
favorable opinion of Commerce & Finance Law Offices, counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(c)(2) hereof.]
(vi) BRING-DOWN COMFORT LETTER. A letter from
PricewaterhouseCoopers LLP, in form and substance satisfactory to the
Representatives and dated such Date of Delivery, substantially in the
same form and substance as the letter furnished to the Representatives
pursuant to Section 5(f) hereof, except that the "specified date" in the
letter furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(l) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them
to pass upon the issuance and sale of the Securities as herein contemplated,
or in order to evidence the accuracy of any of the representations or
warranties, or the fulfillment of any of the conditions, herein contained;
and all proceedings taken by the Company in connection with the issuance and
sale of the Securities as herein contemplated shall be satisfactory in form
and substance to the Representatives and counsel for the Underwriters.
(m) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company
at any time at or prior to Closing Time or such Date of Delivery, as the case
may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6, 7
and 8 shall survive any such termination and remain in full force and effect.
19
<PAGE>
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
[(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the violation of any
applicable laws or regulations of foreign jurisdictions where Reserved
Securities have been offered and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or
prospectus wrapper material distributed in _______, _______ and ________
in connection with the reservation and sale of the Reserved Securities to
eligible employees of the Company and persons having business
relationships with the Company or the omission or alleged omission
therefrom of a material fact necessary to make the statements therein,
when considered in conjunction with the Prospectus or preliminary
prospectus, not misleading;]
[(ii)] [(iii)] against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission [or in
connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof]; provided that (subject to Section 6(d) below) any
such settlement is effected with the written consent of the Company; and
[(iii)] [(iv)] against any and all expense whatsoever, as
incurred (including the fees and disbursements of counsel chosen by
Merrill Lynch), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission [or in connection with any violation
of the nature referred to in Section 6(a)(ii)(A) hereof], to the extent
that any such expense is not paid under (i) [,] [or] (ii) [or (iii)]
above;
20
<PAGE>
PROVIDED, HOWEVER, that this indemnity agreement shall not apply
to any loss, liability, claim, damage or expense to the extent arising
out of any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Merrill Lynch
expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section
6(a) above, counsel to the indemnified parties shall be selected by Merrill
Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above,
counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of suc litigation, investigation, proceeding or claim and (ii)
21
<PAGE>
does not include a statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a) [(ii)] [(iii)] effected without its written
consent if (i) such settlement is entered into more than 45 days after receipt
by such indemnifying party of the aforesaid request, (ii) such indemnifying
party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
[(e) INDEMNIFICATION FOR RESERVED SECURITIES. In connection with the
offer and sale of the Reserved Securities, the Company agrees, promptly upon a
request in writing, to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of eligible employees and of the Company and
persons with a business relationship with the Company to pay for and accept
delivery of Reserved Securities which, by the end of the first business day
following the date of this Agreement, were subject to a properly confirmed
agreement to purchase.]
SECTION 7. CONTRIBUTION. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Securities pursuant to this Agreement or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions[,
or in connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof,] which resulted in such losses, liabilities, claims, damages
or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Underwriters,
in each case as set forth on the cover of the Prospectus, or, if Rule 434 is
used, the corresponding location on the Term Sheet, bear to the aggregate
initial public offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative
22
<PAGE>
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission[ or any violation of the nature referred to in
Section 6(a)(ii)(A) hereof].
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company, its
subsidiaries and its Joint
23
<PAGE>
Ventures considered as one enterprise, whether or not arising in the ordinary
course of business, or (ii) if there has occurred any material adverse change
in the financial markets in the United States or the international financial
markets, any outbreak of hostilities or escalation thereof or other calamity
or crisis or any change or development involving a prospective change in
national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Representatives, impracticable to market the Securities or to enforce
contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or the Hong Kong Stock
Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such
system or by order of the Commission, the NASD or any governmental authority,
(iv) if a banking moratorium has been declared by Federal or New York or PRC
authorities, (v) if a change or development involving a prospective change in
United States, Hong Kong or PRC taxation affecting the Company or the
Securities or the transfer thereof or the imposition of exchange controls by
the United States or Hong Kong or any change or development involving a
prospective change in the PRC exchange controls would materially and
adversely affect the financial markets or the market for the Securities and
other equity securities, or (vi) if the outbreak or escalation of hostilities
involving the United States, Hong Kong or the PRC or the declaration by the
United States, Hong Kong or the PRC of a national emergency or war makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Securities being delivered at such Date of Delivery on the
terms and in the manner contemplated in this Agreement and the Prospectus, or
(vii) if the occurrence of any material adverse change in the existing
financial, political or economic conditions in the United States, Hong Kong
or the PRC or elsewhere which, in the judgment of the Representatives would
materially and adversely affect the financial markets or the market for the
Securities and other equity securities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed
10% of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
24
<PAGE>
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing Time,
the obligation of the Underwriters to purchase and of the Company to sell
the Option Securities to be purchased and sold on such Date of Delivery
shall terminate without liability on the part of any non-defaulting
Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of _________, with a
copy to the Representatives at 101 California Street, Suite 1420, San Francisco
California 94111, attention of ________; and notices to the Company shall be
directed to it at __________, attention of _________.
SECTION 12. PARTIES. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS
OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. EFFECTS OF HEADINGS. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
25
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
UTSTARCOM, INC.
By
---------------------
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BANC OF AMERICA SECURITIES LLC
U.S. BANCORP PIPER JAFFRAY INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
--------------------------------
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
26
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER INITIAL SECURITIES
------------------- ------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated. . . . . . . . . . . . . . . . . . . .
Banc of America Securities LLC. . . . . . . . . . . . . . . .
U.S. Bancorp Piper Jaffray Inc. . . . . . . . . . . . . . . .
_____
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
===========
</TABLE>
Sch A-1
<PAGE>
SCHEDULE B
UTSTARCOM, INC.
_________ SHARES OF COMMON STOCK
(PAR VALUE $.00125 PER SHARE)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $_______.
2. The purchase price per share for the Securities to be
paid by the several Underwriters shall be $_____, being an amount equal
to the initial public offering price set forth above less $_____ per
share; provided that the purchase price per share for any Option
Securities purchased upon the exercise of the over-allotment option
described in Section 2(b) shall be reduced by an amount per share equal
to any dividends or distributions declared by the Company and payable on
the initial Securities but not payable on the Option Securities.
Sch B-1
<PAGE>
SCHEDULE C
LIST OF PERSONS AND ENTITIES
SUBJECT TO LOCK-UP
[All directors and officers of the Company, all holders of at least 5% of the
Common Stock (or securities convertible or exercisable into common stock)
outstanding immediately prior to the offering, and holders of at least __% of
the Common Stock (or securities convertible or exercisable into common stock)
outstanding immediately prior to the offering.]
M-1
<PAGE>
SCHEDULE D
LIST OF JOINT VENTURES AND OWNERSHIP PERCENTAGES OF THE COMPANY
M-2
<PAGE>
EXHIBIT A
FORM OF LOCK-UP
M-3
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
UTSTARCOM, INC.
(a Delaware corporation)
2,000,000 Shares of Common Stock
JAPANESE PURCHASE AGREEMENT
Dated: _______ __, 2000
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES.................................................3
(a) Representations and Warranties by the Company..................................3
(i) Compliance with Registration Requirements.............................3
(ii) Independent Accountants...............................................4
(iii) Financial Statements..................................................5
(iv) No Material Adverse Change in Business................................5
(v) Good Standing of the Company..........................................6
(vi) Good Standing of Subsidiaries.........................................6
(vii) Good Standing of Joint Ventures.......................................6
(viii) Capitalization........................................................7
(ix) Authorization of Agreements and Registration Statements...............7
(x) Authorization and Description of Securities...........................7
(xi) Absence of Defaults and Conflicts.....................................7
(xii) Absence of Labor Dispute..............................................8
(xiii) Absence of Proceedings................................................8
(xiv) Accuracy of Exhibits..................................................9
(xv) Possession of Intellectual Property...................................9
(xvi) Absence of Further Requirements.......................................9
(xvii) Possession of Licenses and Permits....................................9
(xviii) Title to Property....................................................10
(xix) Repatriation of Dividends and other Distributions....................10
(xx) PRC Taxes............................................................11
(xxi) Taxes................................................................11
(xxii) Sovereign Immunity...................................................11
(xxiii) Choice of Law........................................................11
(xxiv) Compliance with Cuba Act.............................................12
(xxv) Investment Company Act...............................................12
(xxvi) [Passive Foreign Investment Company..................................12
(xxvii) Environmental Laws...................................................12
(xxviii) Year 2000............................................................13
(xxix) Foreign Corrupt Practices Act........................................13
(xxx) Registration Rights..................................................13
(b) Officer's Certificates........................................................13
SECTION 2. SALE AND DELIVERY TO JAPANESE MANAGERS; CLOSING...............................13
(a) Japanese Securities...........................................................14
(b) Payment.......................................................................14
(c) Denominations; Registration...................................................14
SECTION 3. COVENANTS OF THE COMPANY......................................................14
(a) Compliance with Securities Regulations and Commission Requests................14
(b) Filing of Amendments..........................................................15
(c) Delivery of Registration Statements...........................................15
(d) Delivery of Prospectuses......................................................15
(e) Continued Compliance with Securities Laws.....................................16
(f) Blue Sky Qualifications.......................................................17
<PAGE>
(g) Rule 158......................................................................17
(h) Use of Proceeds...............................................................17
(i) Listing.......................................................................17
(j) Restriction on Sale of Securities.............................................17
(k) Reporting Requirements........................................................18
(l) Compliance with NASD Rules....................................................18
(m) Compliance with Rule 463......................................................18
SECTION 4. PAYMENT AND EXPENSES..........................................................18
(a) Expenses......................................................................18
(b) Termination of Agreement......................................................19
SECTION 5. CONDITIONS OF JAPANESE MANAGERS' OBLIGATIONS..................................19
(a) Effectiveness of Registration Statements......................................19
(b) Opinion of Counsel for the Company............................................19
(c) Opinion of PRC Counsel for the Company........................................20
(d) Opinion of Japanese Counsel for the Company...................................20
(e) Opinion of Japanese Counsel for the Japanese Managers.........................20
(f) Opinion of Counsel for the Japanese Managers..................................20
(g) Officers' Certificate.........................................................20
(h) Accountant's Comfort Letter...................................................21
(i) Bring-down Comfort Letter.....................................................21
(j) Approval of Listing...........................................................21
(k) No Objection..................................................................21
(l) Lock-up Agreements............................................................21
(m) Purchase of Initial U.S. Securities...........................................21
(n) Additional Documents..........................................................21
(o) Termination of Agreement......................................................22
SECTION 6. INDEMNIFICATION...............................................................22
(a) Indemnification of Japanese Managers..........................................22
(b) Indemnification of Company, Directors and Officers............................23
(c) Actions against Parties; Notification.........................................23
(d) Settlement without Consent if Failure to Reimburse............................24
SECTION 7. CONTRIBUTION..................................................................24
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY................26
SECTION 9. TERMINATION OF AGREEMENT......................................................26
(a) Termination; General..........................................................26
(b) Liabilities...................................................................27
SECTION 10. DEFAULT BY ONE OR MORE OF THE JAPANESE MANAGERS..............................27
SECTION 11. NOTICES......................................................................27
SECTION 12. PARTIES......................................................................28
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SECTION 13. GOVERNING LAW AND TIME......................................................28
SECTION 14. EFFECTS OF HEADINGS.........................................................28
SCHEDULES
Schedule A - List of International Managers............................Sch A-1
Schedule B - Pricing Information.......................................Sch B-1
Schedule C - List of Persons subject to Lock-up........................Sch C-1
Schedule D - List of Joint Ventures and Ownership
Percentages of the Company...............................Sch D-1
EXHIBITS
Exhibit A-Form of Lock-up Letter...........................................A-1
</TABLE>
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UTSTARCOM, INC.
(a Delaware corporation)
2,000,000 Shares of Common Stock
(Par Value $0.00125 Per Share)
JAPANESE PURCHASE AGREEMENT
_______ __, 2000
MERRILL LYNCH JAPAN INCORPORATED
E*TRADE SECURITIES CO., LTD.
as Lead Managers of the several Japanese Managers
c/o Merrill Lynch Japan Incorporated
[Address]
Ladies and Gentlemen:
UTStarcom, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch Japan Incorporated ("Merrill Lynch") and each of
the other Japanese managers named in Schedule A hereto (collectively, the
"Japanese Managers", which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch Japan Incorporated and E*Trade Securities Co., Ltd., are acting as
representatives (in such capacity, the "Lead Managers"), with respect to the
issue and sale by the Company and the purchase by the Japanese Managers,
acting severally and not jointly, of the respective numbers of shares of
Common Stock, par value $0.00125 per share, of the Company ("Common Stock")
set forth in said Schedule A (the "Japanese Securities").
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "Purchase Agreement") providing for the
offering by the Company of an aggregate of 8,000,000 shares of Common Stock
(the "Initial Shares") through arrangements with certain underwriters (the
"Underwriters") for which Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Banc of America Securities LLC and U.S. Bancorp Piper Jaffray Inc. are acting
as representatives (the "Representatives") and the grant by the Company to
the Underwriters, acting severally and not jointly, of an option to purchase
all or any part of the Underwriters' pro rata portion of up to 1,500,000
additional shares of Common Stock solely to cover over-allotments, if any
(the "Option Shares"). The Initial Shares and the Option Shares are
hereinafter called the "Shares". It is understood that the Company is not
obligated to sell and the Japanese Managers are not obligated to purchase,
any Japanese Securities unless all of the Initial Shares are
contemporaneously purchased by the Underwriters. The Shares and the Japanese
Securities are hereinafter collectively called the "Securities".
The Japanese Managers and the Underwriters will concurrently enter
into an Intersyndicate Agreement of even date herewith (the "Intersyndicate
Agreement") providing for the coordination of certain transactions among the
Japanese Managers and the Underwriters under the direction of Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity,
the "Global Coordinator").
<PAGE>
The Company understands that the Japanese Managers propose to make a
public offering of the Japanese Securities as soon as the Lead Managers deem
advisable after this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to 500,000 shares of
the Initial Shares to be purchased by the Underwriters (the "Reserved
Securities") shall be reserved for sale by the Underwriters to certain
eligible employees and persons having business relationships with the
Company, as part of the distribution of the Securities by the Underwriters,
subject to the terms of the Purchase Agreement, the applicable rules,
regulations and interpretations of the National Association of Securities
Dealers, Inc. and all other applicable laws, rules and regulations. To the
extent that such Reserved Securities are not orally confirmed for purchase by
such eligible employees and persons having business relationships with the
Company by the end of the first business day after the date of the Purchase
Agreement, such Reserved Securities may be offered to the public as part of
the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-93069) covering
the registration of the Securities under the Securities Act of 1933, as
amended (the "1933 Act"), including the related preliminary prospectus or
prospectuses. Promptly after execution and delivery of this Agreement, the
Company will either (i) prepare and file a prospectus in accordance with the
provisions of Rule 430A ("Rule 430A") of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b)
of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the
Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act
Regulations, prepare and file a term sheet (a "Term Sheet") in accordance
with the provisions of Rule 434 and Rule 424(b). One form of prospectus is to
be used in connection with the offering and sale of the Shares (the "Form of
Prospectus"). The information included in such prospectus or in such Term
Sheet, as the case may be, that was omitted from such registration statement
at the time it became effective but that is deemed to be part of such
registration statement at the time it became effective (a) pursuant to
paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b)
pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434
Information." The Form of Prospectus used before such registration statement
became effective, and any prospectus that omitted, as applicable, the Rule
430A Information or the Rule 434 Information, that was used after such
effectiveness and prior to the execution and delivery of the Purchase
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time
it became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement."
Any registration statement filed pursuant to Rule 462(b) of the 1933 Act
Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final Form of Prospectus
in the form first furnished to the Underwriters for use in connection with
the offering of the Shares is herein called the "Prospectus" If Rule 434 is
relied on, the term "Prospectus" shall refer to the preliminary Prospectus
dated ___, 2000, together with the Term Sheet, and all references in this
Agreement to the date of such Prospectus shall mean the date of the Term
Sheet. For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any Term Sheet or
any amendment or supplement to any of the foregoing shall be
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<PAGE>
deemed to include the copy filed with the Commission pursuant to its
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
The Company has filed with the Director General of the Kanto Finance
Bureau of Japan (the "Director General") a registration statement covering
the registration of the Japanese Securities to be offered in Japan by the
Japanese Managers, and any amendments or supplements thereto under the
Securities and Exchange Law of Japan, as amended (the "Japanese Securities
and Exchange Law"). Promptly after execution and delivery of this Agreement,
the Company will prepare and file a further amendment to such registration
statement with the Director General (such securities registration statement
and all such amendments thereto are referred to as the "Japanese Registration
Statement" and together with the Registration Statement, the "Registration
Statements"). A second form of prospectus is to be used in connection with
the offering and sale of the Japanese Securities. A preliminary prospectus
and any supplements thereto, used for such purpose prior to the effectiveness
of the registration under the Japanese Registration Statement pursuant to the
Japanese Securities and Exchange Law, are referred to as the "Japanese
preliminary prospectus", and, together with a supplement to such Japanese
preliminary prospectus to be used after such effectiveness, are collectively
referred to as the "Japanese Prospectus" and, together with the Prospectus,
the "Prospectuses".
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Japanese Manager as of the date hereof and,
as of the Closing Time referred to in Section 2(b) hereof, and agrees with
each Japanese Manager, as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Shares are
purchased, at the date of delivery for such shares), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading [, and the Prospectus, any
preliminary prospectuses and any supplement thereto or prospectus wrapper
prepared in connection therewith, at their respective times of issuance
and at the Closing Time, complied and will comply in all material
respects with any applicable laws or regulations of foreign jurisdictions
in which the Prospectus and such preliminary prospectus, as amended or
supplemented, if applicable, are distributed in connection with the offer
and sale of Reserved Securities]. Neither the Prospectus nor any
amendments or
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<PAGE>
supplements thereto (including any prospectus wrapper), at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Shares are purchased, at the date of
delivery for such shares), included or will include an untrue statement
of a material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434 and
the Prospectus shall not be "materially different", as such term is
used in Rule 434, from the prospectus included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or the Prospectus made in
reliance upon and in conformity with information furnished to the Company
in writing by any Japanese Manager through Merrill Lynch expressly for
use in the Registration Statement or the Japanese Prospectus.
Each preliminary prospectus and the prospectus filed as part of
the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus was
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
At the respective times the registration under the Japanese
Registration Statement become effective, the Japanese Prospectus was
issued and at the Closing Time, each of the Japanese Registration
Statement and the Japanese Prospectus complied and will comply in all
material respects with the requirements of the Japanese Securities and
Exchange Law and the cabinet orders and ministerial ordinances and other
rules and regulations thereunder and did not and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statement therein
not misleading. The representations and warranties in this subsection
shall not apply to statements in or omissions from the Japanese
Registration Statement or the Japanese Prospectus made in reliance upon
and in conformity with information furnished to the Company in writing
by any Japanese Manager through Merrill Lynch expressly for use in the
Japanese Registration Statement or the Japanese Prospectus.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statements are independent public accountants as required by
the 1933 Act and the 1933 Act Regulations; each of the Company, its
subsidiaries and its Joint Ventures maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (A)
transactions are executed in accordance with management's general or
specific authorizations; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") in China with a reconciliation to
GAAP in the United Sates; (C) access to assets is permitted only in
accordance with management's general or specific authorization; (D) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate actions taken with respect to any
differences; and (E) each of the Company, its subsidiaries and its Joint
Ventures has made and kept books,
4
<PAGE>
records and accounts which, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of assets of such entity and
provide a sufficient basis for the preparation of combined financial
statements in accordance with Chinese GAAP, with a reconciliation
thereof to U.S. GAAP.
(iii) FINANCIAL STATEMENTS. The financial statements
[(including any separate financial statements for any subsidiary or any
Joint Venture (as defined below) of the Company other than the Company
and its consolidated subsidiaries)] included in the Registration
Statements and the Prospectuses, together with the related schedules and
notes, present fairly the financial position of the Company and its
consolidated subsidiaries at the dates indicated and the statement of
operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with GAAP applied on a
consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statements present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included
in the Prospectuses present fairly the information shown therein and
have been compiled on a basis consistent with that of the audited
financial statements included in the Registration Statements. [The pro
forma financial statements and the related notes thereto included in the
Registration Statements and the Prospectuses present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the bases described
therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give
effect to the transactions and circumstances referred to therein.]
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statements and the Prospectuses, except as otherwise stated therein,
(A) there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects
of the Company, its subsidiaries and its Joint Ventures (as defined
below) considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company, any of its subsidiaries
or any of its Joint Ventures, other than those in the ordinary course of
business, which are material with respect to the Company, its
subsidiaries and its Joint Ventures considered as one enterprise, and
(C) there has been no dividend or distribution of any kind declared, paid
or made by the Company on any class of its capital stock at any time.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its
obligations under this Agreement and the Purchase Agreement; and the
Company is duly qualified as a foreign corporation to transact business
and is in good standing in each other jurisdiction in which such
qualification is required, whether by reason of the
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<PAGE>
ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect.
(vi) GOOD STANDING OF SUBSIDIARIES. Each of ________,
________ and ________ (each a "U.S. Subsidiary") and ________ and
________ (each a "PRC Subsidiary" and, together with the U.S.
Subsidiaries, the "Subsidiaries") has been duly organized and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
currently conducted and as described in the Prospectuses and is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct
of business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statements, all of the issued and
outstanding capital stock of each such Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and is
owned by the Company, directly or through subsidiaries, free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any Subsidiary
was issued in violation of the preemptive or similar rights of any
securityholder of such Subsidiary. The Company does not have any
subsidiaries which are not Subsidiaries.
(vii) GOOD STANDING OF JOINT VENTURES. Each of ______,
________ and _______ (each a "Joint Venture" and, together, the "Joint
Ventures") has been duly organized and is validly existing as a limited
liability company in good standing under the laws of the People's
Republic of China (the "PRC"), and its business license is in full force
and effect; the joint venture contract, the articles of association and
other corporate formation documents of each of the above entities comply
with the requirements of PRC law and are in full force and effect. The
Company owns, directly or through subsidiaries, an interest in the Joint
Ventures which ownership percentage of the Company is listed in Schedule
D hereto. Each Joint Venture has the power and authority under the laws
of the PRC to own, lease and operate its assets and properties in
accordance with the terms of its joint venture contract and its articles
of association and to conduct its business as currently conducted, as
specified in its business license and as described in the Prospectuses.
All registered capital required to be paid by each of the Company and the
Chinese partner has been paid in full to each Joint Venture under the
joint venture contract and the articles of association for such Joint
Venture. All of the equity interests of the Joint Ventures have been
duly and validly authorized and issued, are fully paid and
non-assessable, and are owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity. The liability of the Company with
respect to its equity interest in each of the PRC Subsidiaries and the
Joint Ventures is limited to its investments therein. The Company and
its Subsidiaries do not hold an interest in any joint venture or similar
entity or contractual arrangement that is not a Joint Venture.
(viii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the
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caption "Capitalization" and in the Japanese Prospectus in "Part
II-V-1.-(1) Total Number of Shares" (except for subsequent issuances,
if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectuses
or pursuant to the exercise of convertible securities, warrants or
options referred to in the Prospectuses). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any
securityholder of the Company.
(ix) AUTHORIZATION OF AGREEMENTS AND REGISTRATION STATEMENTS.
This Agreement and the Purchase Agreement have been duly authorized,
executed and delivered by the Company. The Registration Statements and
the Prospectuses, the filing of the Registration Statement and the
Prospectus with the Commission and the filing of the Japanese
Registration Statement with the Director General have been duly
authorized by and on behalf of the Company, and the Registration
Statements have been duly signed by and on behalf of the Company pursuant
to such authorization.
(x) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The
Securities to be purchased by the Japanese Managers and the Underwriters
have been duly authorized for issuance and sale to the Japanese Managers
pursuant to this Agreement and to the Underwriters pursuant to the
Purchase Agreement and, when issued and delivered by the Company pursuant
to this Agreement and the Purchase Agreement, respectively, against
payment of the consideration set forth herein and the Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable; the
Common Stock conforms to all statements relating thereto contained in the
Prospectuses and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(xi) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company
nor any of its subsidiaries or Joint Ventures is in violation of its
articles, charter, by-laws or joint venture contract or in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries or any of its Joint Ventures
is a party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or any subsidiary or any Joint
Venture is subject (collectively, "Agreements and Instruments") except
for such defaults that would not result in a Material Adverse Effect; and
the execution, delivery and performance of this Agreement and the
Purchase Agreement and the consummation of the transactions contemplated
in this Agreement, the Purchase Agreement, and the Registration
Statements (including the issuance and sale of the Securities and the use
of the proceeds from the sale of the Securities as described in the
Prospectuses under the caption "Use of Proceeds") and compliance by the
Company with its obligations under this Agreement and the Purchase
Agreement have been duly authorized by all necessary corporate action and
do not and will not, whether
7
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with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event
(as defined below) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company or any subsidiary or any Joint Venture pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation
of the provisions of the articles, charter, by-laws or joint venture
contract of the Company or any subsidiary or any Joint Venture or any
applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any subsidiary or any
Joint Venture or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any subsidiary or any Joint Venture.
(xii) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any subsidiary or any Joint Venture exists
or, to the knowledge of the Company, is imminent, and the Company is not
aware of any existing or imminent labor disturbance by the employees of
any of its or any subsidiary's or any Joint Venture's principal
suppliers, manufacturers, customers or contractors, which, in either
case, may reasonably be expected to result in a Material Adverse Effect.
(xiii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or
any subsidiary or any Joint Venture, which is required to be disclosed in
the Registration Statements (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect the
properties or assets thereof or the consummation of the transactions
contemplated in this Agreement and the Purchase Agreement or the
performance by the Company of its obligations hereunder; the aggregate of
all pending legal or governmental proceedings to which the Company or any
subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statements, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiv) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration
Statements or the Prospectuses or to be filed as exhibits thereto which
have not been so described and filed as required.
(xv) POSSESSION OF INTELLECTUAL PROPERTY. The Company, its
subsidiaries and its Joint Ventures own or possess, or can acquire on
reasonable terms, adequate patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other intellectual
property
8
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(collectively, "Intellectual Property") necessary to carry on the
business now operated by them, and neither the Company nor any of its
subsidiaries or any of its Joint Ventures has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights
of others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries or any of its Joint Ventures therein, and which infringement
or conflict (if the subject of any unfavorable decision, ruling or
finding) or invalidity or inadequacy, singly or in the aggregate, would
result in a Material Adverse Effect.
(xvi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities under this Agreement and the Purchase Agreement or the
consummation of the transactions contemplated by this Agreement and the
Purchase Agreement, except (i) such as have been already obtained or as
may be required under the 1933 Act or the 1933 Act Regulations or state
securities laws or the Japanese Securities and Exchange Law [and (ii)
such as have been obtained under the laws and regulations of
jurisdictions outside the United States in which the Reserved Securities
are offered].
(xvii) POSSESSION OF LICENSES and PERMITS. The Company, its
subsidiaries and its Joint Ventures possess such permits, licenses,
approvals, consents and other authorizations (collectively, "Governmental
Licenses") issued by the appropriate federal, state, local or foreign
regulatory agencies or bodies (including the PRC State Council, the PRC
Ministry of Information Industry, the State Development and Planning
Commission, the [CSRC], the Ministry of Foreign Trade and Economic
Cooperation, the Ministry of Land and Resources, the State Administration
of Foreign Exchange, the General Administration of Customs, the relevant
Posts and Telecommunications Administrations ("PTA") and the relevant
Price Bureaus) necessary to conduct the business now operated by them;
the Company, its subsidiaries and its Joint Ventures are in compliance
with the terms and conditions of all such Governmental Licenses, except
where the failure so to comply would not, singly or in the aggregate,
have a Material Adverse Effect; all of the Governmental Licenses are
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be
in full force and effect would not have a Material Adverse Effect; and
neither the Company nor any of its subsidiaries or any of its Joint
Ventures has received any notice of proceedings relating to the
revocation, suspension or modification of any such Governmental Licenses
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a Material Adverse Effect.
(xviii) TITLE TO PROPERTY. The Company, its subsidiaries and
its Joint Ventures have good and marketable title to all real property
owned by the Company, its subsidiaries and its Joint Ventures and good
title to all other properties owned by them, in each case, free and clear
of all mortgages, pledges, liens, security interests, claims,
restrictions or encumbrances of any kind except such as (a) are described
in the Prospectuses or (b) do not, singly or in the aggregate, materially
affect the value of such
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property and do not interfere with the use made and proposed to be made
of such property by the Company or any of its subsidiaries or any of
its Joint Ventures; and all of the leases and subleases material to the
business of the Company, its subsidiaries and its Joint Ventures,
considered as one enterprise, and under which the Company or any of its
subsidiaries or any of its Joint Ventures holds properties described in
the Prospectuses, are in full force and effect, and neither the Company
nor any subsidiary or any Joint Venture has any notice of any material
claim of any sort that has been asserted by anyone adverse to the
rights of the Company or any subsidiary or any Joint Venture under any
of the leases or subleases mentioned above, or affecting or questioning
the rights of the Company or such subsidiary or such Joint Venture to
the continued possession of the leased or subleased premises under any
such lease or sublease.
(xix) REPATRIATION OF DIVIDENDS AND OTHER DISTRIBUTIONS. All
dividends and other distributions declared and payable on the equity or
other interests in the PRC Subsidiaries or the Joint Ventures may, under
the laws and regulations of the PRC, be paid to the Company and may be
converted into foreign currency that may be freely transferred out of the
PRC, and except as disclosed in the Registration Statements and the
Prospectuses, all such dividends and distributions will not be subject to
withholding or other taxes under the laws and regulations of the PRC and
are otherwise free and clear of any other tax, withholding or deduction
in the PRC and may be so paid without the necessity of obtaining any
governmental authorization, whether local, provincial or national, in the
PRC.
(xx) PRC TAXES. Other than as described in the Prospectuses,
no stamp or other issuance or transfer taxes or duties and no capital
gains, income, withholding or other taxes are payable by or on behalf of
the Company to the PRC or any political subdivision or taxing authority
thereof or therein in connection with the issuance, sale and delivery of
the Securities or the execution, delivery and performance of this
Agreement and the Purchase Agreement. No stamp or other issuance or
transfer taxes or duties and no capital gains, income or withholding or
other taxes are payable by or on behalf of the Underwriters or the
Japanese Managers to the PRC or any political subdivision or taxing
authority thereof or therein in connection with the issuance, sale and
delivery of the Securities to the Underwriters and the Japanese Managers
or by the Underwriters and the Japanese Managers to the initial
purchasers thereof, or the execution, delivery and performance of this
Agreement and the Purchase Agreement.
(xxi) TAXES. The Company, its subsidiaries and the Joint
Ventures have filed all reports or filings required thereof for taxation
purposes, including those required by the PRC or any political
subdivision thereof.
(xxii) SOVEREIGN IMMUNITY. Under the laws of the PRC, neither
the Company nor any of its subsidiaries or any of its Joint Ventures, or
any of their properties, assets or revenues are entitled to any right of
immunity on the grounds of sovereignty from any legal action, suit or
proceeding, from set-off or counterclaim, from the jurisdiction of any
court, from service of process, from attachment to or in aid of execution
of judgment or from other legal process or proceeding for the giving of
any relief or for the enforcement of any judgment.
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(xxiii) CHOICE OF LAW. Under the laws of the PRC, the courts of
the PRC recognize and give effect to the choice of law provisions set
forth in this Agreement and the Purchase Agreement and enforce judgments
of U.S. courts obtained against the Company to enforce this Agreement and
the Purchase Agreement, provided that the judgment (A) was not obtained
by fraud; (B) was final and conclusive; (C) in the opinion of the
relevant PRC court after the review of such judgment pursuant to
international treaties concluded or acceded to by the PRC government or
in accordance with the principle of reciprocity, or otherwise in
accordance with the Civil Procedure Law of the PRC, did not contradict
the basic principles of PRC law; (D) in the opinion of the relevant PRC
court after its review of such judgment pursuant to international
treaties concluded or acceded to by the PRC government or in accordance
with the principle of reciprocity, or otherwise in accordance with the
Civil Procedure Law of the PRC, did not violate state sovereignty,
security or public interest; and (E) was for a definite sum of money.
(xxiv) COMPLIANCE WITH CUBA ACT. The Company has complied
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xxv) INVESTMENT COMPANY ACT. The Company is not, and upon
the issuance and sale of the Securities as contemplated in this Agreement
and the Purchase Agreement and the application of the net proceeds
therefrom as described in the Prospectuses will not be, an "investment
company" or an entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").
(xxvi) [PASSIVE FOREIGN INVESTMENT COMPANY. The Company is not
a Passive Foreign Investment Company within the meaning of Section 1296
of the United States Internal Revenue Code of 1986, as amended, and the
Company believes that the Securities should not be treated as stock of a
Passive Foreign Investment Company for United States federal income tax
purposes.]
(xxvii) ENVIRONMENTAL LAWS. Except as described in the
Registration Statements and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries or any of its Joint Ventures is in violation
of any federal, state, local or foreign statute, law, rule, regulation,
ordinance, code, policy or rule of common law or any judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution
or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
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"Environmental Laws"), (B) the Company, its subsidiaries, and its Joint
Ventures have all permits, authorizations and approvals required under
any applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or
proceedings relating to any Environmental Law against the Company or any
of its subsidiaries or any of its Joint Ventures and (D) there are no
events or circumstances that might reasonably be expected to form the
basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its subsidiaries or any of its Joint
Ventures relating to Hazardous Materials or any Environmental Laws.
(xxviii) YEAR 2000. [The Company has reviewed its operations and
those of its subsidiaries and any of its Joint Ventures, as well as those
of any third parties with which the Company or any of its subsidiaries or
any of its Joint Ventures has a material relationship, to evaluate the
extent to which the business or operations of the Company or any of its
subsidiaries or any of its Joint Ventures will be effected by the Year
2000 Problem (as defined below). As a result of such review, the Company
has no reason to believe, and does not believe, that the Year 2000
Problem will have a Material Adverse Effect or result in any material
loss or interference with the business or operations of the Company, any
of its subsidiaries or any of its Joint Ventures. The "Year 2000
Problem" as used herein means any significant risk that computer hardware
or software used in the receipt, transmission, processing, manipulation,
storage, retrieval, retransmission or other utilization of dates or in
the operation of mechanical or electrical systems of any kind will not,
in the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000.]
(xxix) FOREIGN CORRUPT PRACTICES ACT. Neither the Company, any
of its subsidiaries or any of its Joint Ventures nor any officer,
director, employee or agent thereof or any stockholder thereof acting on
behalf of the Company or any of its subsidiaries or any of its Joint
Ventures, has done any act or authorized, directed or participated in any
act, in violation of any provision of the United States Foreign Corrupt
Practices Act of 1977, as amended, applicable to such entity or person.
(xxx) REGISTRATION RIGHTS. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statements or otherwise
registered by the Company under the 1933 Act.
(b) OFFICER'S CERTIFICATES. Any certificate signed by any officer
of the Company or any of its subsidiaries or any of its Joint Ventures
delivered to the Global Coordinator, the Lead Managers or to counsel for the
Japanese Managers shall be deemed a representation and warranty by the
Company to each Japanese Manager as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO JAPANESE MANAGERS; CLOSING. (a)
JAPANESE SECURITIES. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company agrees to sell to each Japanese Manager,
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severally and not jointly, and each Japanese Manager, severally and not
jointly, agrees to purchase from the Company, at the price per share set
forth in Schedule B, the number of Japanese Securities set forth in Schedule
A opposite the name of such Japanese Manager, plus any additional number of
Japanese Securities which such Japanese Manager may become obligated to
purchase pursuant to the provisions of Section 10 hereof.
(b) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, Japanese Securities shall be made at the offices of
Shearman & Sterling, 1550 El Camino Real, Menlo Park, California 94025, or at
such other place as shall be agreed upon by the Global Coordinator and the
Company, at 7:00 A.M. (California time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after
the date hereof (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such
date as shall be agreed upon by the Global Coordinator and the Company (such
time and date of payment and delivery being herein called "Closing Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery
to the Lead Managers for the respective accounts of the Japanese Managers of
certificates for the Japanese Securities to be purchased by them. It is
understood that each Japanese Manager has authorized the Lead Managers, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Japanese Securities which it has agreed to purchase.
Merrill Lynch, individually and not as representative of the Japanese
Managers, may (but shall not be obligated to) make payment of the purchase
price for the Japanese Securities to be purchased by any Japanese Manager
whose funds have not been received by the Closing but such payment shall not
relieve such Japanese Manager from its obligations hereunder.
(c) DENOMINATIONS; REGISTRATION. Certificates for the Japanese
Securities shall be in such denominations and registered in such names as the
Lead Managers may request in writing at least one full business day before
the Closing Time. The certificates for the Japanese Securities will be made
available for examination and packaging by the Lead Managers in The City of
New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Japanese Manager as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been filed,
(ii) of the receipt of any comments from the Commission, (iii) of any request
by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information, and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or
of the initiation or threatening of any
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proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it
deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
The Company will notify the Global Coordinator immediately, and
confirm the notice in writing, (i) of any request by or the receipt of
correspondence from the Director General and (ii) of the issuance by the
Director General of any notice of hearing from which may result an order
requiring the filing of an amendment or supplement to the Japanese
Registration Statement (whether as originally filed or amended) or an order
suspending the effectiveness of the registration under the Japanese
Registration Statement. In the event that any such order shall have been
issued, the Company will make every reasonable effort to promptly file such
amendment to the Japanese Registration Statement as is necessary for the
Director General to terminate such suspension order or otherwise use its best
efforts to obtain such termination.
(b) FILING OF AMENDMENTS. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment or
supplement to the Registration Statements (including any filing under Rule
462(b)), any Term Sheet or any amendment, supplement or revision to either
the prospectus included in the Registration Statements at the time of
effectiveness or the Prospectuses, and will furnish the Global Coordinator
with copies of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use any such
document to which the Global Coordinator or counsel for the Japanese Managers
shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished
or will deliver to the Lead Managers and counsel for the Japanese Managers,
without charge, signed copies of the Japanese Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the Lead
Managers, without charge, a conformed copy of the Japanese Registration
Statement as originally filed and of each amendment thereto (without
exhibits) for each of the Japanese Managers.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
Japanese Manager, without charge, as many copies of each Japanese preliminary
prospectus as such Japanese Manager reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the 1933
Act. The Company will furnish to each Japanese Manager, without charge, such
number of copies of the Japanese Prospectus (as amended or supplemented) as
such Japanese Manager may reasonably request.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in the
Purchase Agreement and in the Prospectus. If at any time when a prospectus
is required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the Underwriters or for
the Company, to amend the Registration
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Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of the
1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b), such amendment or
supplement as may be necessary to correct such statement or omission or to
make the Registration Statement or the Prospectus comply with such
requirements, and the Company will furnish to the Japanese Managers such
number of copies of such amendment or supplement as the Japanese Managers may
reasonably request.
If the delivery of a prospectus is required under the Japanese
Securities and Exchange Law in connection with the offering or sale of the
Japanese Securities at any time prior to the expiration of three months after
the date on which the registration under the Japanese Registration Statement
becomes effective, and if at such time any event shall occur or condition
shall exist as a result of which it is necessary, in the opinion of counsel
for the Japanese Managers or for the Company, to amend or supplement the
Japanese Registration Statement or the Japanese Prospectus in order that the
Japanese Prospectus will not include any untrue statements of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein, when such Japanese Prospectus is delivered to
a purchaser, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Japanese Registration
Statement or the Japanese Prospectus in order to comply with the Japanese
Securities and Exchange Law, the Company will promptly notify the Lead
Managers and upon the request of the Lead Managers, prepare and furnish
without charge to the Japanese Managers, as many copies as the Lead Managers
may reasonably request of such amendment or supplement to the Japanese
Prospectus which will correct such statement or omission or effect such
compliance [and file such amended or supplemented Registration Statement or
Prospectus, as the case may be].
The Company will comply with all the provisions, applicable to the
Company and shares of Common Stock of the Company, of the Japanese Securities
and Exchange Law and the cabinet orders and ministerial ordinances and other
rules and regulations thereunder (including the filing of securities reports
and other reports required thereunder) and all orders and guidances of the
Ministry of Finance of Japan issued thereunder.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best
efforts, in cooperation with the Japanese Managers, to qualify the Japanese
Securities for offering and sale under the applicable securities laws of such
states and other jurisdictions (domestic or foreign) as the Global
Coordinator may designate and to maintain such qualifications in effect for a
period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; provided,
however, that the Company shall not be obligated to file any general consent
to service of process or to qualify as a foreign corporation or as a dealer
in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction
in which it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements and
reports as may be required by the laws of such jurisdiction to continue such
qualification in
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effect for a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant
to the Securities Exchange Act of 1934, as amended (the "1934 Act"), as are
necessary in order to make generally available to its securityholders as soon
as practicable an earnings statement for the purposes of, and to provide the
benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and
will file with the Nasdaq National Market all documents and notices required
by the Nasdaq National Market of companies that have securities that are
traded in the over-the-counter market and quotations for which are reported
by the Nasdaq National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, directly or indirectly, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant
to purchase or otherwise transfer or dispose of any share of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock or file any registration statement under the 1933 Act with respect to
any of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the Common Stock, whether any such
swap or transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
(k) REPORTING REQUIREMENTS. The Company, during the period when
the Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act and
the rules and regulations of the Commission thereunder.
(l) COMPLIANCE WITH NASD RULES. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as required by
the National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period
of three months following the date of this Agreement. The Underwriters will
notify the Company as to which persons will need to be so restricted. At the
request of the Underwriters, the Company will direct the transfer agent to
place a stop transfer restriction upon such securities for such period of
time. Should the Company release, or seek to release, from such restrictions
any of the Reserved Securities, the Company agrees to reimburse the
Underwriters for any reasonable expenses (including, without limitation,
legal expenses) they incur in connection with such release.
(m) COMPLIANCE WITH RULE 463. The Company will file with the
Commission such reports on Form SR as may be required pursuant to Rule 463 of
the 1933 Act Regulations.
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SECTION 4. PAYMENT AND EXPENSES.
(a) EXPENSES. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Japanese Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Managers and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Japanese Securities, (iii) the preparation,
issuance and delivery of the certificates for the Japanese Securities to the
Japanese Managers, including any stock or other transfer taxes and any stamp
or other duties payable upon the sale, issuance or delivery of the Japanese
Securities to the Japanese Managers and the transfer of the Securities
between the Japanese Managers and the Underwriters, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Securities under securities laws in accordance with
the provisions of Section 3(f) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Japanese Securities, (ix) the filing fees
incident to, and the reasonable fees and disbursements of counsel to the
Japanese Managers in connection with, the review by the NASD of the terms of
the sale of the Securities, (x) the fees and expenses incurred in connection
with the inclusion of the Japanese Securities in the Nasdaq National Market,
and (xi) all costs and expenses of the Japanese Managers.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by
the Lead Managers in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Japanese Managers for all of
their out-of-pocket expenses, including the reasonable fees and disbursements
of counsel for the Japanese Managers.
SECTION 5. CONDITIONS OF JAPANESE MANAGERS' OBLIGATIONS. The
obligations of the several Japanese Managers hereunder are subject to the
accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company or any
subsidiary or any Joint Venture of the Company delivered pursuant to the
provisions hereof, to the performance by the Company of its covenants and
other obligations hereunder, and to the following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENTS. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the Japanese
Managers. A prospectus containing the Rule 430A Information shall have been
filed with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to
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rely upon Rule 434, a Term Sheet shall have been filed with the Commission in
accordance with Rule 424(b).
The registration under the Japanese Registration Statement has become
effective and at the Closing Time, no notice of hearing, from which an order
suspending the effectiveness of such registration shall have been issued
under the Japanese Securities and Exchange Law, and any request on the part
of the Director General for additional information shall have been complied
with to the reasonable satisfaction of counsel to the Japanese Managers.
(b) OPINION OF COUNSEL FOR THE COMPANY. At Closing Time, the Lead
Managers shall have received the favorable opinion, dated as of Closing Time,
of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for
the Company, in form and substance satisfactory to the Lead Managers and
counsel for the Japanese Managers, together with signed or reproduced copies
of such letter for each of the other Japanese Managers.
(c) OPINION OF PRC COUNSEL FOR THE COMPANY. At Closing Time, the
Lead Managers shall have received the favorable opinion, dated as of Closing
Time, of Jun He Law Offices, PRC counsel for the Company, in form and
substance satisfactory to the Lead Managers and counsel for the Japanese
Managers, together with signed or reproduced copies of such letter for each
of the other Japanese Managers.
(d) OPINION OF JAPANESE COUNSEL FOR THE COMPANY. At Closing Time,
the Lead Managers shall have received the favorable opinion, dated as of
Closing Time, of ________, Japanese counsel for the Company, in form and
substance satisfactory to the Lead Managers and counsel for the Japanese
Managers, together with signed or reproduced copies of such letter for each
of the other Japanese Managers.
(e) OPINION OF JAPANESE COUNSEL FOR THE JAPANESE MANAGERS. At
Closing Time, the Lead Managers shall have received the favorable opinion,
dated as of Closing Time, of Tomotsune Kimura & Mitomi, Japanese counsel for
the Japanese Managers, in form and substance satisfactory to the Lead
Managers, together with signed or reproduced copies of such letter for each
of the other Japanese Managers, and such counsel shall have received or been
permitted access to such papers and information as they may reasonably
request to enable them to give such opinion.
(f) OPINION OF COUNSEL FOR THE JAPANESE MANAGERS. At Closing Time,
the Lead Managers shall have received the favorable opinion, dated as of
Closing Time, of Shearman & Sterling, counsel for the Japanese Managers, in
form and substance satisfactory to the Lead Managers, together with signed or
reproduced copies of such letter for each of the other Japanese Managers, and
such counsel shall have received or been permitted access to such papers and
information as they may reasonably request to enable them to give such
opinion.
(g) OFFICERS' CERTIFICATE. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, its subsidiaries and its Joint Ventures
considered as one enterprise, whether or not arising in the ordinary course
of business, and the Lead
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Managers shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting
officer of the Company, dated as of Closing Time, to the effect that (i)
there has been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force
and effect as though expressly made at and as of Closing Time, (iii) the
Company has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to Closing Time, and (iv) no
stop order suspending the effectiveness of the Registration Statement or the
registration under the Japanese Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or are
contemplated by the Commission or the Director General, as the case may be.
(h) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of
this Agreement, the Lead Managers shall have received from
PricewaterhouseCoopers LLP a letter dated such date, in form and substance
satisfactory to the Lead Managers, together with signed or reproduced copies
of such letter for each of the other Japanese Managers containing statements
and information of the type ordinarily included in accountants' "comfort
letters" to Japanese Managers with respect to the financial statements and
certain financial information contained in the Registration Statements and
the Prospectuses.
(i) BRING-DOWN COMFORT LETTER. At Closing Time, the Lead Managers
shall have received from PricewaterhouseCoopers LLP a letter, dated as of
Closing Time, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (h) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.
(j) APPROVAL OF LISTING. At Closing Time, the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject only
to official notice of issuance.
(k) NO OBJECTION. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(l) LOCK-UP AGREEMENTS. At the date of this Agreement, the Lead
Managers shall have received an agreement substantially in the form of Exhibit D
hereto, in form and substance satisfactory to the Lead Managers, signed by each
officer, director and stockholder of the Company.
(m) PURCHASE OF INITIAL U.S. SECURITIES. Contemporaneously with the
purchase by the Japanese Managers of Japanese Securities under this Agreement,
the Underwriters shall have purchased the Initial Shares under the Purchase
Agreement.
(n) ADDITIONAL DOCUMENTS. At Closing Time, counsel for the
Japanese Managers shall have been furnished with such documents and opinions
as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the
Securities as herein contemplated shall be satisfactory in form and substance
to the Lead Managers and counsel for the Japanese Managers.
19
<PAGE>
(o) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, may be terminated by the Lead Managers by notice to the
Company at any time at or prior to Closing Time, and such termination shall
be without liability of any party to any other party except as provided in
Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such
termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF JAPANESE MANAGERS. The Company agrees to
indemnify and hold harmless each Japanese Manager and each person, if any,
who controls any Japanese Manager within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statements (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or the omission
or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact included in any preliminary prospectuses or the
Prospectuses (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which
they were made, not misleading;
[(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the violation of any
applicable laws or regulations of foreign jurisdictions where Reserved
Securities have been offered and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or
prospectus wrapper material distributed in _______, _______ and ________
in connection with the reservation and sale of the Reserved Securities to
eligible employees of the Company and persons having business
relationships with the Company or the omission or alleged omission
therefrom of a material fact necessary to make the statements therein,
when considered in conjunction with the Prospectuses or preliminary
prospectuses, not misleading;]
[(ii)] [(iii)] against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission [or in
connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof]; provided that (subject to Section 6(d) below) any
such settlement is effected with the written consent of the Company; and
[(iii)] [(iv)] against any and all expense whatsoever, as
incurred (including the fees and disbursements of counsel chosen by
Merrill Lynch), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or
20
<PAGE>
proceeding by any governmental agency or body, commenced or threatened,
or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission [or in
connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof], to the extent that any such expense is not paid
under (i) [,] [or] (ii) [or (iii)] above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply
to any loss, liability, claim, damage or expense to the extent arising
out of any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with written information
furnished to the Company by any Japanese Manager through Merrill Lynch
expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the
Prospectuses (or any amendment or supplement thereto).
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each
Japanese Manager severally agrees to indemnify and hold harmless the Company,
its directors, each of its officers who signed the Japanese Registration
Statement, and each person, if any, who controls the Company within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements
or omissions, made in the Japanese Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434 Information,
if applicable, or any preliminary Japanese prospectus or the Japanese
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Japanese
Manager through Merrill Lynch expressly for use in the Japanese Registration
Statement (or any amendment thereto) or such preliminary Japanese prospectus
or the Japanese Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it
is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. In the case of parties indemnified pursuant to
Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section
6(b) above, counsel to the indemnified parties shall be selected by the
Company. An indemnifying party may participate at its own expense in the
defense of any such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent
to the entry of any
21
<PAGE>
judgment with respect to any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be
sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of suc litigation,
investigation, proceeding or claim and (ii) does not include a statement as
to or an admission of fault, culpability or a failure to act by or on behalf
of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a) [(ii)] [(iii)] effected without its
written consent if (i) such settlement is entered into more than 45 days
after receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement
at least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. CONTRIBUTION. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred, (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Japanese Managers on the other hand
from the offering of the Japanese Securities pursuant to this Agreement or
(ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company on the one hand and of the Japanese Managers on the other hand in
connection with the statements or omissions[, or in connection with any
violation of the nature referred to in Section 6(a)(ii)(A) hereof,] which
resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Japanese Managers on the other hand in connection with the offering of the
Japanese Securities pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of
the Japanese Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the total underwriting discount
received by the Japanese Managers, in each case as set forth on the cover of
the Japanese Prospectus, or, if Rule 434 is used, the corresponding location
on the Term Sheet, bear to the aggregate initial public offering price of the
Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Japanese
Managers on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact
22
<PAGE>
relates to information supplied by the Company or by the Japanese Managers
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission[or any violation
of the nature referred to in Section 6(a)(ii)(A) hereof].
The Company and the Japanese Managers agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the Japanese Managers were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 7.
The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Japanese Manager
shall be required to contribute any amount in excess of the amount by which
the total price at which the Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such Japanese Manager has otherwise been required to pay by reason of any
such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
Japanese Manager within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as such
Japanese Manager, and each director of the Company, each officer of the
Company who signed the Registration Statements, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as the
Company. The Japanese Managers' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the number of Initial
Japanese Securities set forth opposite their respective names in Schedule A
hereto and not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of any
Japanese Manager or controlling person, or by or on behalf of the Company,
and shall survive delivery of the Japanese Securities to the Japanese
Managers.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Lead Managers may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the
23
<PAGE>
Japanese Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of
the Company, its subsidiaries and its Joint Ventures considered as one
enterprise, whether or not arising in the ordinary course of business, or
(ii) if there has occurred any material adverse change in the financial
markets in the United States or Japan or the international financial markets,
any outbreak of hostilities or escalation thereof or other calamity or crisis
or any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Lead Managers,
impracticable to market the Securities or to enforce contracts for the sale
of the Securities, or (iii) if trading in any securities of the Company has
been suspended or materially limited by the Commission or the Director
General or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or the Hong Kong Stock
Exchange or the [Japan Stock Exchange] or in the Nasdaq National Market has
been suspended or materially limited, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
NASD or any governmental authority, (iv) if a banking moratorium has been
declared by Federal or New York or Japanese or PRC authorities, (v) if a
change or development involving a prospective change in United States, Hong
Kong, Japanese or PRC taxation affecting the Company or the Securities or the
transfer thereof or the imposition of exchange controls by the United States
or Hong Kong or Japan or any change or development involving a prospective
change in the PRC exchange controls would materially and adversely affect the
financial markets or the market for the Securities and other equity
securities, or (vi) if the outbreak or escalation of hostilities involving
the United States, Hong Kong, Japan or the PRC or the declaration by the
United States, Hong Kong, Japan or the PRC of a national emergency or war
makes it impracticable or inadvisable to proceed with the public offering or
the delivery of the Securities on the terms and in the manner contemplated in
this Agreement, the Purchase Agreement and the Prospectuses, or (vii) if the
occurrence of any material adverse change in the existing financial,
political or economic conditions in the United States, Hong Kong, Japan or
the PRC or elsewhere which, in the judgment of the Lead Managers would
materially and adversely affect the financial markets or the market for the
Securities and other equity securities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full
force and effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE JAPANESE MANAGERS. If one
or more of the Japanese Managers shall fail at Closing Time to purchase the
Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Lead Managers shall have the right, within
24 hours thereafter, to make arrangements for one or more of the
non-defaulting Japanese Managers, or any other Japanese Managers, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as
may be agreed upon and upon the terms herein set forth; if, however, the Lead
Managers shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed
10% of the number of Japanese Securities to be purchased on such date,
each of the non-defaulting Japanese
24
<PAGE>
Managers shall be obligated, severally and not jointly, to purchase the
full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations
of all non-defaulting Japanese Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Japanese Securities to be purchased on such date, this
Agreement shall terminate without liability on the part of any
non-defaulting Japanese Manager.
No action taken pursuant to this Section shall relieve any defaulting
Japanese Manager from liability in respect of its default.
[In the event of any such default which does not result in a termination
of this Agreement, either the Lead Managers or the Company shall have the right
to postpone Closing Time for a period not exceeding seven days in order to
effect any required changes in the Registration Statements or Prospectuses or in
any other documents or arrangements. As used herein, the term "Japanese
Manager" includes any person substituted for an Japanese Manager under this
Section 10.]
SECTION 11. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Japanese Managers shall be directed to the Lead Manager at
_________________________________________________________, attention of
_________, with a copy to the Lead Managers at 101 California Street, Suite
1420, San Francisco, California 94111, attention of ________; and notices to
the Company shall be directed to it at __________, attention of _________.
SECTION 12. PARTIES. This Agreement shall each inure to the benefit
of and be binding upon the Japanese Managers and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Japanese Managers and the Company and their respective successors
and the controlling persons and officers and directors referred to in
Sections 6 and 7 and their heirs and legal Lead Managers, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the Japanese
Managers and the Company and their respective successors, and said
controlling persons and officers and directors and their heirs and legal Lead
Managers, and for the benefit of no other person, firm or corporation. No
purchaser of Japanese Securities from any Japanese Manager shall be deemed to
be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW
YORK CITY TIME.
SECTION 14. EFFECTS OF HEADINGS. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not
affect the construction hereof.
25
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Japanese Managers and the Company in accordance with
its terms.
Very truly yours,
UTSTARCOM, INC.
By__________________________________
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH JAPAN INCORPORATED
E*TRADE SECURITIES CO., LTD.
By: MERRILL LYNCH JAPAN INCORPORATED
By____________________________________
Authorized Signatory
For themselves and as Lead Managers of the other Japanese Managers.
26
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Name of Japanese Manager Janpanese Securities
------------------------ --------------------
<S> <C>
MERRILL LYNCH JAPAN INCORPORATED...........................
E*TRADE SECURITIES CO., LTD................................
---------------
Total......................................................
===============
</TABLE>
<PAGE>
SCHEDULE B
UTSTARCOM, INC.
_________ Shares of Common Stock
(Par Value $0.00125 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $_______.
2. The purchase price per share for the Securities to be
paid by the several Japanese Managers shall be $_____, being an amount
equal to the initial public offering price set forth above less $_____
per share.
<PAGE>
SCHEDULE C
List of persons and entities
subject to lock-up
[All directors and officers of the Company, all holders of at least 5% of the
Common Stock (or securities convertible or exercisable into common stock)
outstanding immediately prior to the offering, and holders of at least __% of
the Common Stock (or securities convertible or exercisable into common stock)
outstanding immediately prior to the offering.]
<PAGE>
SCHEDULE D
List of Joint Ventures and Ownership Percentages of the Company
<PAGE>
EXHIBIT A
Form of Lock-up Agreement
<PAGE>
EXHIBIT 3.2
THIRTEENTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
UTSTARCOM, INC.
UTStarcom, Inc. (the "CORPORATION"), a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is UTStarcom, Inc. UTStarcom, Inc.
was originally incorporated under the name Unitech Industries Inc. and the
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on June 10, 1991.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of
the State of Delaware, this Thirteenth Amended and Restated Certificate of
Incorporation restates and integrates and further amends the provisions of the
Corporation's Certificate of Incorporation.
3. The terms and provisions of this Thirteenth Amended and Restated
Certificate of Incorporation have been duly approved by written consent of the
required number of shares of outstanding stock of the Corporation pursuant to
Subsection 228(a) of the General Corporation Law of the State and written notice
pursuant to Subsection 228(d) of the General Corporation Law of the State has
been given to those stockholders whose written consent has not been obtained.
4. The text of the Thirteenth Amended and Restated Certificate of
Incorporation reads in its entirety as follows:
FIRST. The name of the Corporation is UTStarcom, Inc.
SECOND. The address of the Corporation's registered office in the State
of Delaware is Corporation Trust Center, 1209 Orange St., Wilmington, County of
New Castle, Delaware 19801. The name of its registered agent at such address
is The Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. This Corporation is authorized to issue two classes of shares
to be designated, respectively, Common Stock ("COMMON") and Preferred Stock
("PREFERRED"). The total number of shares of Common this Corporation shall
have authority to issue is 250,000,000 with a par value of $0.00125 per
share. The total number of shares of Preferred this Corporation shall have
authority to issue is 5,000,000 with a par value of $0.00125 per share.
<PAGE>
The Board of Directors is authorized, subject to limitations prescribed
by law, to provide for the issuance of the shares of Preferred in series and, by
filing a certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in such series,
and to fix the designation, powers, preferences and rights of the shares of each
such series and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include, but
not be limited to, determination of the following:
(a) the number of shares constituting that series and the distinctive
designation of that series;
(b) the dividend rate on the shares of that series, whether dividends
shall be cumulative and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that series;
(c) whether that series shall have voting rights, in addition to the
voting rights provided by law and, if so, the terms of such voting rights;
(d) whether that series shall have conversion privileges and, if so,
the terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall determine;
(e) whether or not the shares of that series shall be redeemable and,
if so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates;
(f) whether that series shall have a sinking fund for the redemption
or purchase of shares of that series and, if so, the terms and amount of such
sinking fund; and
(g) the rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, and
the relative rights of priority, if any, of payment of shares of that series.
FIFTH.
A. The management of the business and the conduct of the affairs
of the Corporation shall be vested in the Board of Directors. Prior to the
closing of the first sale of Common Stock of the Corporation pursuant to a
registration statement declared effective by the Securities and Exchange
Corporation under the Securities Act of 1933, as amended, the number of
directors which shall constitute the whole Board of Directors shall be fixed in
the manner designated in the Bylaws of the Corporation.
-2-
<PAGE>
B. At any time following the closing of the first sale of Common
Stock of the Corporation pursuant to a registration statement declared effective
by the Securities and Exchange Corporation under the Securities Act of 1933, as
amended, the number of directors which constitute the whole Board of Directors
of the Corporation shall be fixed exclusively by one or more resolutions adopted
from time to time by the Board of Directors. The Board of Directors shall be
divided into three classes designated as Class I, Class II, and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first
annual meeting of stockholders following the date hereof, the term of office of
the Class I directors shall expire and Class I directors shall be elected for a
full term of three years. At the second annual meeting of stockholders
following the date hereof, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the date hereof, the term
of office of the Class III directors shall expire and Class III directors shall
be elected for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
C. In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation.
D. Elections of directors need not be by written ballot except
and to the extent provided in the Bylaws of the corporation.
E. Vacancies created by newly created directorships, created in
accordance with the Bylaws of this Corporation, may be filled by the vote of a
majority, although less than a quorum, of the directors then in office, or by a
sole remaining director
SIXTH.
A. To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
B. The Corporation may indemnify to the fullest extent permitted
by law any person made or threatened to be made a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that he, his testator or intestate is or was a director, officer,
employee or agent of the Corporation or any predecessor of the Corporation or
serves or served at any other enterprise as a director, officer, employee or
agent at the request of the Corporation or any predecessor to the Corporation.
C. Neither any amendment nor repeal of this Article SIXTH, nor
the adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article SIXTH, shall eliminate or reduce the effect of
this Article SIXTH, in respect of any matter occurring,
-3-
<PAGE>
or any action or proceeding accruing or arising or that, but for this Article
SIXTH, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
SEVENTH. The Corporation is to have perpetual existence.
EIGHTH.
A. Meetings of stockholders may be held within or without the
State of Delaware, as the Bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside of the
State of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the Bylaws of the Corporation.
B. At any time following the closing of the first sale of Common
Stock of the Corporation pursuant to a registration statement declared effective
by the Securities and Exchange Corporation under the Securities Act of 1933, as
amended, stockholders of the Corporation may not take any action by written
consent in lieu of a meeting and any action contemplated by stockholders after
such time must be taken at a duly called annual or special meeting of
stockholders.
C. Advance notice of new business and stockholder nominations
for the election of directors shall be given in the manner and to the extent
provided in the Bylaws of the Corporation.
NINTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
-4-
<PAGE>
IN WITNESS WHEREOF, this Certificate has been signed this __ day of
______, 2000.
UTSTARCOM, INC.
A Delaware corporation
--------------------------------------
Hong Liang Lu
President and Chief Executive Officer
ATTEST:
- -----------------------------------
Carmen Chang
Assistant Secretary
<PAGE>
EXHIBIT 3.4
FIRST
AMENDED AND RESTATED
BYLAWS
OF
UTSTARCOM, INC.
(a Delaware corporation)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . .1
1.1 REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . . . .1
1.2 OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II - MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . .1
2.1 PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . . .1
2.2 ANNUAL MEETING. . . . . . . . . . . . . . . . . . . . . . . .1
2.3 SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . .2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . . .2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND
STOCKHOLDER BUSINESS. . . . . . . . . . . . . . . . . . . . .2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. . . . . . . . .4
2.7 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.8 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . .5
2.9 VOTING. . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.10 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . .5
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . .6
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING. . . . . . . . . .6
2.13 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE . . . . . . . . . . . .7
ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . .7
3.1 POWERS. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.2 NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . .8
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. . . . . . . . . . .8
3.4 RESIGNATION AND VACANCIES . . . . . . . . . . . . . . . . . .8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. . . . . . . . . . .9
3.6 REGULAR MEETINGS. . . . . . . . . . . . . . . . . . . . . . .9
3.7 SPECIAL MEETINGS; NOTICE. . . . . . . . . . . . . . . . . . .9
3.8 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.9 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . 10
3.10 ADJOURNMENT . . . . . . . . . . . . . . . . . . . . . . . . 10
3.11 NOTICE OF ADJOURNMENT . . . . . . . . . . . . . . . . . . . 10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . 10
3.13 FEES AND COMPENSATION OF DIRECTORS. . . . . . . . . . . . . 10
3.14 APPROVAL OF LOANS TO OFFICERS . . . . . . . . . . . . . . . 11
ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . . . 11
4.2 MEETINGS AND ACTION OF COMMITTEES . . . . . . . . . . . . . 12
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4.3 COMMITTEE MINUTES . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 ELECTION OF OFFICERS. . . . . . . . . . . . . . . . . . . . 12
5.3 SUBORDINATE OFFICERS. . . . . . . . . . . . . . . . . . . . 13
5.4 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . . . 13
5.5 VACANCIES IN OFFICES. . . . . . . . . . . . . . . . . . . . 13
5.6 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . 13
5.7 PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.8 VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . . . 14
5.9 SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.10 CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . 14
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND
OTHER AGENTS . . . . . . . . . . . . . . . . . . . . . . 15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . 15
6.2 INDEMNIFICATION OF OTHERS . . . . . . . . . . . . . . . . . 15
6.3 ADVANCEMENT OF EXPENSES . . . . . . . . . . . . . . . . . . 15
6.4 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.5 OTHER INDEMNIFICATION . . . . . . . . . . . . . . . . . . . 16
6.6 REPEAL OR MODIFICATION. . . . . . . . . . . . . . . . . . . 16
ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . 16
7.1 MAINTENANCE AND INSPECTION OF RECORDS . . . . . . . . . . . 16
7.2 INSPECTION BY DIRECTORS . . . . . . . . . . . . . . . . . . 17
7.3 ANNUAL STATEMENT TO STOCKHOLDERS. . . . . . . . . . . . . . 17
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. . . . . . . 17
7.5 CERTIFICATION AND INSPECTION OF BYLAWS. . . . . . . . . . . 17
ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . 17
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING . . . 17
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS . . . . . . . . . 18
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. . . . . 18
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES. . . . . . 18
8.5 SPECIAL DESIGNATION ON CERTIFICATES . . . . . . . . . . . . 19
8.6 LOST CERTIFICATES . . . . . . . . . . . . . . . . . . . . . 19
8.7 CONSTRUCTION; DEFINITIONS . . . . . . . . . . . . . . . . . 19
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ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . 20
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS. . . . . . . . . . 20
</TABLE>
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<PAGE>
FIRST
AMENDED AND RESTATED
BYLAWS
OF
UTSTARCOM, INC.
(a Delaware Corporation)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. At the meeting, directors shall
be elected, and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than fifty percent (50%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the
general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the chairman of the board, the president, any vice
president or the secretary of the corporation. The officer receiving the
request shall cause notice to be promptly given to the shareholders entitled
to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these
bylaws, that a meeting will be held at the time requested by the person or
persons calling the meeting, so long as that time is not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the
request. If the notice is not given within twenty (20) days after receipt of
the request, then the person or persons requesting the meeting may give the
notice. Nothing contained in this paragraph of this Section 2.3 shall be
construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise
given in accordance with Section 2.5 of these bylaws not less than ten (10)
nor more than sixty (60) days before the date of the meeting. The notice
shall specify the place, date and hour of the meeting and (i) in the case of
a special meeting, the purpose or purposes for which the meeting is called
(no business other than that specified in the notice may be transacted) or
(ii) in the case of the annual meeting, those matters which the board of
directors, at the time of giving the notice, intends to present for action by
the stockholders (but any proper matter may be presented at the meeting for
such action). The notice of any meeting at which directors are to be elected
shall include the name of any nominee or nominees who, at the time of the
notice, the board intends to present for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction
of the Board of Directors or by any stockholder of the corporation entitled
to vote in the election of directors at the meeting who complies with the
notice procedures set forth in this Section. Such nominations, other than
those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the corporation. To
be timely, a stockholder's notice shall be delivered to or mailed and
received at the principal executive offices of the corporation not less than
one hundred twenty (120) days prior to the meeting; provided, however, that
in the event less than one hundred thirty (130) days notice or
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prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure
was made. Such stockholder's notice shall set forth (a) as to each person,
if any, whom the stockholder proposes to nominate for election or re-election
as a director: (i) the name, age, business address and residence address of
such person, (ii) the principal occupation or employment of such person,
(iii) the class and number of shares of the corporation which are
beneficially owned by such person, (iv) any other information relating to
such person that is required by law to be disclosed in solicitations of
proxies for election of directors, and (v) such person's written consent to
being named as a nominee and to serving as a director if elected; and (b) as
to the stockholder giving the notice: (i) the name and address, as they
appear on the corporation's books, of such stockholder, and (ii) the class
and number of shares of the corporation which are beneficially owned by such
stockholder, and (iii) a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) relating to the nomination. At the request
of the Board of Directors any person nominated by the Board for election as a
director shall furnish to the Secretary of the corporation that information
required to be set forth in the stockholder's notice of nomination which
pertains to the nominee. No person shall be eligible for election as a
director of the corporation unless nominated in accordance with the
procedures set forth in this Section. The chairman of the meeting shall, if
the facts warrant, determine and declare at the meeting that a nomination was
not made in accordance with the procedures prescribed by these Bylaws, and if
the chairman should so determine, the chairman shall so declare at the
meeting and the defective nomination shall be disregarded.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (a) as
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (c)
otherwise properly brought before the meeting by a stockholder. Business to
be brought before an annual meeting by a stockholder shall not be considered
properly brought if the stockholder has not given timely notice thereof in
writing to the Secretary of the corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation not less than forty five (45) days prior to the
date on which the corporation first mailed proxy materials for the prior
year's annual meeting; provided, however, that if the corporation's annual
meeting of stockholders occurs on a date more than thirty (30) days earlier
or later than the corporation's prior year's annual meeting, then the Board
of Directors shall determine a date a reasonable period prior to the
corporation's annual meeting of stockholders by which date the stockholders
notice must be delivered and publicize such date in a filing pursuant to the
Securities Exchange Act of 1934, as amended, or via press release. Such
publication shall occur at least ten (10) days prior to the date set by the
Board of Directors. A stockholder's notice to the Secretary shall set forth
as to each matter the stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name
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<PAGE>
and address of the stockholder proposing such business, (iii) the class and
number of shares of the corporation which are beneficially owned by the
stockholder, (iv) any material interest of the stockholder in such business,
and (v) any other information that is required by law to be provided by the
stockholder in his capacity as a proponent of a stockholder proposal.
Notwithstanding anything in these bylaws to the contrary, no business shall
be conducted at any annual meeting except in accordance with the procedures
set forth in this Section. The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this Section, and, if the chairman should so determine, the chairman shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges
prepaid and shall be addressed to the stockholder at the address of that
stockholder appearing on the books of the corporation or given by the
stockholder to the corporation for the purpose of notice. Notice shall be
deemed to have been given at the time when delivered personally or deposited
in the mail or sent by telegram or other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman
of the meeting or (ii) the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have power to adjourn the meeting in
accordance with Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the
question is one upon which, by express provision of the laws of the State of
Delaware or of the certificate of incorporation or these bylaws, a different
vote is required, in which case such express provision shall govern and
control the decision of the question.
If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by
a majority of the stockholders initially constituting the quorum.
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2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time and place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting
if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact
any business that might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these
bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries,
pledgors and joint owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation or these bylaws, each stockholder shall be entitled to one vote
for each share of capital stock held by such stockholder.
At a stockholders' meeting at which directors are to be elected, a
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate
a number of votes greater than the number of votes which such stockholder
normally is entitled to cast) if the candidates' names have been placed in
nomination prior to commencement of the voting and the stockholder has given
notice prior to commencement of the voting of the stockholders' intention to
cumulate votes. If any stockholder has given such a notice, then every
stockholder entitled to vote may cumulate votes for candidates in nomination
either (i) by giving one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which that
stockholder's shares are normally entitled or (ii) by distributing the
stockholder's votes on the same principle among any or all of the candidates,
as the stockholder thinks fit. The candidates receiving the highest number of
affirmative votes, up to the number of directors to be elected, shall be
elected; votes against any candidate and votes withheld shall have no legal
effect.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the corporation,
no stockholder will be permitted to cumulate votes at any election of
directors.
2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such
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<PAGE>
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special
meeting of the stockholders need be specified in any written waiver of notice
unless so required by the certificate of incorporation or these bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any
action required by this chapter to be taken at any annual or special meeting
of stockholders of a corporation, or any action that may be taken at any
annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice, and without a vote if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders
who have not consented in writing. If the action which is consented to is
such as would have required the filing of a certificate under any section of
the General Corporation Law of Delaware if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such
section shall state, in lieu of any statement required by such section
concerning any vote of stockholders, that written notice and written consent
have been given as provided in Section 228 of the General Corporation Law of
Delaware.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the corporation,
no action that is required or permitted to be taken by the stockholders at
any annual or special meeting of stockholders may be effected by written
consent of stockholders in lieu of a meeting of stockholders.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a
record date, which shall not precede the date upon which the resolution
fixing the record date is adopted by the board of directors and which shall
not be more than sixty (60) days nor less than ten (10) days before the date
of any such meeting, and in such event only stockholders of record on the
date so fixed are entitled to notice and to vote, notwithstanding any
transfer of any shares on the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record
date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the business day
next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held.
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<PAGE>
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting unless the board of directors fixes a new record date for the
adjourned meeting, but the board of directors shall fix a new record date if
the meeting is adjourned for more than thirty (30) days from the date set for
the original meeting.
The record date for any other purpose shall be as provided in Section
8.1 of these bylaws.
2.13 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the
secretary of the corporation, but no such proxy shall be voted or acted upon
after three (3) years from its date unless the proxy provides for a longer
period. A proxy shall be deemed signed if the stockholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic
transmission, telefacsimile or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on
its face that it is irrevocable shall be governed by the provisions of
Section 212(e) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation and these bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction
of the board of directors.
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<PAGE>
3.2 NUMBER OF DIRECTORS
The board of directors shall be eight until changed by amendment of
this Section 3.2 duly approved by a majority of the directors then in office.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to
fill a vacancy, shall hold office until the expiration of the term for which
elected and until a successor has been elected and qualified.
Notwithstanding the foregoing, effective upon the closing of a firm
commitment underwritten public offering of Common Stock of the Corporation,
the board of directors shall be divided into three classes, the members of
each class to serve for a term of three years; provided that the directors
shall be elected as follows: at the first annual meeting of the stockholders
held following the closing of a firm commitment underwritten public offering
of Common Stock of the Corporation, the directors in the first class shall be
elected for a term of three years, at the second annual meeting following
such date, the directors in the second class shall be elected for a term of
three years, and at the third annual meeting following such date, the
directors in the third class shall be elected for a term of three years. The
board of directors by resolution shall nominate the directors to be elected
for each class. At subsequent annual meetings of shareholders, a number of
directors shall be elected equal to the number of directors with terms
expiring at that annual meeting. Directors elected at each such subsequent
annual meeting shall be elected for a term expiring with the annual meeting
of shareholders three years thereafter.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of
directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time, the board of directors may elect a successor to take office when the
resignation becomes effective.
All vacancies in the board of directors may be filled by a majority of
the remaining directors, even if less than a quorum, or by a sole remaining
director; provided, that whenever the holders of any class or classes of
stock or series thereof are entitled to elect one or more directors by the
provisions of the certificate of incorporation, vacancies and newly created
directorships of such class or classes or series may be filled by a majority
of the directors elected by such class or classes or series thereof then in
office, or by a sole remaining director so elected.
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3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place
within or outside the State of Delaware that has been designated from time to
time by resolution of the board. In the absence of such a designation,
regular meetings shall be held at the principal executive office of the
corporation. Special meetings of the board may be held at any place within or
outside the State of Delaware that has been designated in the notice of the
meeting or, if not stated in the notice or if there is no notice, at the
principal executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone
or similar communication equipment, so long as all directors participating in
the meeting can hear one another; and all such directors shall be deemed to
be present in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice
if the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any
vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation, or by facsimile or
electronic mail. If the notice is mailed, it shall be deposited in the
United States mail at least four (4) days before the time of the holding of
the meeting. If the notice is delivered personally or by telephone or
telegram, it shall be delivered personally or by telephone or to the
telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may
be communicated either to the director or to a person at the office of the
director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose or
the place of the meeting, if the meeting is to be held at the principal
executive office of the corporation.
3.8 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in
Section 3.10 of these bylaws. Every act or decision done or made by a
majority of the directors present at a duly held meeting at which a quorum is
present shall be regarded as the act of the board of directors, subject to
the provisions of the certificate of incorporation and other applicable law.
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A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting.
A waiver of notice need not specify the purpose of any regular or special
meeting of the board of directors.
3.10 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not
be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours,
then notice of the time and place of the adjourned meeting shall be given
before the adjourned meeting takes place, in the manner specified in Section
3.7 of these bylaws, to the directors who were not present at the time of the
adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action
by written consent shall have the same force and effect as a unanimous vote
of the board of directors. Such written consent and any counterparts thereof
shall be filed with the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall
not be construed to preclude any director from serving the corporation in any
other capacity as an officer, agent, employee or otherwise and receiving
compensation for those services.
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3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of
its subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with
or without interest and may be unsecured, or secured in such manner as the
board of directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing contained in this section shall
be deemed to deny, limit or restrict the powers of guaranty or warranty of
the corporation at common law or under any statute.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board.
The board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the
vote of a majority of the authorized number of directors. Any committee, to
the extent provided in the resolution of the board, shall have and may
exercise all the powers and authority of the board, but no such committee
shall have the power of authority to:
(a) amend the certificate of incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of
directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the corporation);
(b) adopt an agreement of merger or consolidation under
Sections 251 or 252 of the General Corporation Law of Delaware;
(c) recommend to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets;
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(d) recommend to the stockholders a dissolution of the
corporation or a revocation of a dissolution; or
(e) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to
adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws,
Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7
(special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of
notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment),
and Section 3.12 (action without meeting), with such changes in the context
of those bylaws as are necessary to substitute the committee and its members
for the board of directors and its members; provided, however, that the time
of regular meetings of committees may be determined either by resolution of
the board of directors or by resolution of the committee, that special
meetings of committees may also be called by resolution of the board of
directors, and that notice of special meetings of committees shall also be
given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
4.3 COMMITTEE MINUTES.
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary and
a chief financial officer. The corporation may also have, at the discretion
of the board of directors, a chairman of the board, one or more vice
presidents, one or more assistant secretaries, one or more assistant
treasurers, and such other officers as may be appointed in accordance with
the provisions of Section 5.3 of these bylaws. Any number of offices may be
held by the same person.
5.2 ELECTION OF OFFICERS
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The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board, subject to the rights, if any, of
an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and
perform such duties as are provided in these bylaws or as the board of
directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except
in case of an officer chosen by the board of directors, by any officer upon
whom such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall
not be necessary to make it effective. Any resignation is without prejudice
to the rights, if any, of the corporation under any contract to which the
officer is a party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed
in these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and
perform such other powers and duties as may from time to time be assigned to
the chairman of the board by the board of directors or as may be prescribed
by these bylaws. If there is no president, then the chairman of the board
shall also be the chief executive officer of the corporation and shall have
the powers and duties prescribed in Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board, if there be such an officer,
the president shall be the chief executive officer of the corporation and
shall, subject to the control of the board of directors, have general
supervision, direction, and control of the business and the officers of the
corporation. The president shall preside
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at all meetings of the stockholders and, in the absence or nonexistence of a
chairman of the board, at all meetings of the board of directors. The
president shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform
all the duties of the president and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of
directors, these bylaws, the president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors and stockholders. The minutes shall show
the time and place of each meeting, whether regular or special (and, if
special, how authorized and the notice given), the names of those present at
directors' meetings or committee meetings, the number of shares present or
represented at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names
of all stockholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law
or by these bylaws. The secretary shall keep the seal of the corporation, if
one be adopted, in safe custody and shall have such other powers and perform
such other duties as may be prescribed by the board of directors or by these
bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, retained earnings, and shares. The books of account shall at all
reasonable times be open to inspection by any director.
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The chief financial officer shall deposit all money and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the board of directors. The chief
financial officer shall disburse the funds of the corporation as may be
ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all of such person's
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware as the same now exists
or may hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually
and reasonably incurred in connection with any threatened, pending or
completed action, suit, or proceeding in which such person was or is a party
or is threatened to be made a party by reason of the fact that such person is
or was a director or officer of the corporation. For purposes of this
Section 6.1, a "director" or "officer" of the corporation shall mean any
person (i) who is or was a director or officer of the corporation, (ii) who
is or was serving at the request of the corporation as a director or officer
of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was a director or officer of a corporation which was
a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action,
suit, or proceeding, in which such person was or is a party or is threatened
to be made a party by reason of the fact that such person is or was an
employee or agent of the corporation. For purposes of this Section 6.2, an
"employee" or "agent" of the corporation (other than a director or officer)
shall mean any person (i) who is or was an employee or agent of the
corporation, (ii) who is or was serving at the request of the corporation as
an employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation.
6.3 ADVANCEMENT OF EXPENSES
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Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1, or for which
indemnification is permitted pursuant to Section 6.2, following the
authorization thereof by the Board of Directors, shall be paid by the
corporation in advance of the final disposition of such action or proceeding
upon receipt of any undertaking by or on behalf of the indemnified party to
repay such amount if it shall ultimately be determined that the indemnified
party is not entitled to be indemnified as authorized in this Article VI.
6.4 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against such person and incurred by such person in any such capacity, or
arising out of such person's status as such, whether or not the corporation
would have the power to indemnify such person against such liability under
the provisions of the General Corporation Law of Delaware.
6.5 OTHER INDEMNIFICATION
The indemnification and advancement of expenses provided by, or
granted pursuant to, other sections of this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
an official capacity and as to action in another capacity while holding such
office.
6.6 REPEAL OR MODIFICATION
Any repeal or modification of the foregoing provisions of this Article
VI shall not adversely affect any right or protection hereunder of any person
in respect of any act or omission occurring prior to the time of such repeal
or modification.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record
of its stockholders listing their names and addresses and the number and
class of shares held by each stockholder, a copy of these bylaws as amended
to date, accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to
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inspect for any proper purpose the corporation's stock ledger, a list of its
stockholders, and its other books and records and to make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or
other agent is the person who seeks the right to inspection, the demand under
oath shall be accompanied by a power of attorney or such other writing that
authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand under oath shall be directed to the corporation at
its registered office in Delaware or at its principal place of business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine (and to make copies of)
the corporation's stock ledger, a list of its stockholders and its other
books and records for a purpose reasonably related to his or her position as
a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, if any, the president, any vice president,
the chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise
on behalf of this corporation all rights incident to any and all shares of
the stock of any other corporation or corporations standing in the name of
this corporation. The authority herein granted may be exercised either by
such person directly or by any other person authorized to do so by proxy or
power of attorney duly executed by such person having the authority.
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
The original or a copy of these bylaws, as amended or otherwise
altered to date, certified by the secretary, shall be kept at the
corporation's principal executive office and shall be open to inspection by
the stockholders of the corporation, at all reasonable times during office
hours.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or
the stockholders entitled to exercise any rights in
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respect of any other lawful action, the board of directors may fix, in
advance, a record date, which shall not be more than sixty (60) days before
any such action. In that case, only stockholders of record at the close of
business on the date so fixed are entitled to receive the dividend,
distribution or allotment of rights, or to exercise such rights, as the case
may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date so fixed, except as otherwise provided in
the General Corporation Law of Delaware.
If the board of directors does not so fix a record date, then the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the board adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts,
other orders for payment of money, notes or other evidences of indebtedness
that are issued in the name of or payable to the corporation, and only the
persons so authorized shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the
agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not
apply to shares represented by a certificate until such certificate is
surrendered to the corporation. Notwithstanding the adoption of such a
resolution by the board of directors, every holder of stock represented by
certificates and, upon request, every holder of uncertificated shares, shall
be entitled to have a certificate signed by, or in the name of the
corporation by, the chairman or vice-chairman of the board of directors, or
the president or vice-president, and by the treasurer or an assistant
treasurer, or the secretary or an assistant secretary of such corporation
representing the number of shares registered in certificate form. Any or all
of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before
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such certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
Upon surrender to the secretary or transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence
of succession, assignment or authority to transfer, it shall be the duty of
the corporation to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, or upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated. Upon the declaration of any dividend on fully paid shares,
the corporation shall declare a dividend upon partly paid shares of the same
class, but only upon the basis of the percentage of the consideration
actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations
or restrictions of such preferences and/or rights shall be set forth in full
or summarized on the face or back of the certificate that the corporation
shall issue to represent such class or series of stock; provided, however,
that, except as otherwise provided in Section 202 of the General Corporation
Law of Delaware, in lieu of the foregoing requirements there may be set forth
on the face or back of the certificate that the corporation shall issue to
represent such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests the powers, the
designations, the preferences and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter
is surrendered to the corporation and cancelled at the same time. The board
of directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account
of the alleged loss, theft or destruction of the certificate or the issuance
of the replacement certificate.
8.7 CONSTRUCTION; DEFINITIONS
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Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the General Corporation Law of Delaware
shall govern the construction of these bylaws. Without limiting the
generality of this provision, the singular number includes the plural, the
plural number includes the singular, and the term "person" includes both a
corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS
The original or other bylaws of the corporation may be adopted,
amended or repealed by the stockholders entitled to vote or by the board of
directors of the corporation. The fact that such power has been so conferred
upon the directors shall not divest the stockholders of the power, nor limit
their power to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in
the book of bylaws with the original bylaws, in the appropriate place. If
any bylaw is repealed, the fact of repeal with the date of the meeting at
which the repeal was enacted or the filing of the operative written
consent(s) shall be stated in said book.
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EXHIBIT 5.1
[Wilson Sonsini Goodrich & Rosati Letterhead]
FEBRUARY 15, 2000
UTStarcom, Inc.
1275 Harbor Bay Parkway
Alameda, CA 94502
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on December 20, 1999 (Registration
No. 333-93069), as amended (the "Registration Statement"), in connection with
the registration under the Securities Act of 1933, as amended, of up to
11,500,000 shares of your Common Stock, $0.00125 par value per share (the
"Shares"). The Shares include an over-allotment option granted to the
underwriters of the offering to purchase up to 1,500,000 shares. We understand
that the Shares are to be sold to the underwriters of the offering for resale to
the public as described in the Registration Statement and pursuant to the
underwriting agreements filed as exhibits thereto. As your legal counsel, we
have examined the proceedings taken, and are familiar with the proceedings
proposed to be taken, by you in connection with the sale and issuance of the
Shares.
It is our opinion that upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement, will be legally issued, fully paid and non-assessable.
We express no opinion as to any matter relating to the laws of any
jurisdiction other than the laws of the States of California and Delaware and
the federal laws of the United States.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.4
UTSTARCOM, INC.
1997 STOCK PLAN
(AS AMENDED ON DECEMBER 13, 1999)
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to Employees, Directors and Consultants and to
promote the success of the Company's business. Options granted under the Plan
may be Incentive Stock Options or Nonstatutory Stock Options, as determined by
the Administrator at the time of grant. Stock Purchase Rights may also be
granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as shall
be administering the Plan in accordance with Section 4 hereof.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the Board
in accordance with Section 4 hereof.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means UTStarcom, Inc., a Delaware corporation.
(h) "CONSULTANT" means any person who is engaged by the Company or any
Parent or Subsidiary to render consulting or advisory services to such entity.
(i) "DIRECTOR" means a member of the Board of Directors of the
Company.
(j) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be
<PAGE>
an Employee in the case of (i) any leave of absence approved by the Company
or (ii) transfers between locations of the Company or between the Company,
its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock
Options, no such leave may exceed ninety days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence approved by the Company is
not so guaranteed, on the 181st day of such leave any Incentive Stock Option
held by the Optionee shall cease to be treated as an Incentive Stock Option
and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither
service as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
THE WALL STREET JOURNAL or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTION AGREEMENT" means a written or electronic agreement between
the Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.
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<PAGE>
(s) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
(t) "OPTIONED STOCK" means the Common Stock subject to an Option or a
Stock Purchase Right.
(u) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(v) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(w) "PLAN" means this 1997 Stock Plan.
(x) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
(y) "SECTION 16(b) " means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
(z) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(aa) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 below.
(bb) "STOCK PURCHASE RIGHT" means a right to purchase Common Stock
pursuant to Section 11 below.
(cc) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be subject to
option and sold under the Plan is 5,262,287 Shares, plus an annual increase
to be added on the first day of the Company's fiscal year beginning in 2001
equal to the lesser of 4% of the outstanding Shares on such date, 3,000,000
shares or a lesser amount determined by the Board. The Shares may be
authorized but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan, upon
exercise of either an Option or Stock Purchase Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
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<PAGE>
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be administered
by different Committees with respect to different groups of Service Providers.
(ii) SECTION 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) RULE 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) OTHER ADMINISTRATION. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or Stock
Purchase Right granted hereunder. Such terms and conditions include, but are not
limited to, the exercise price, the time or times when Options or Stock Purchase
Rights may be exercised (which may be based on performance criteria), any
vesting acceleration or waiver of forfeiture restrictions, and any restriction
or limitation regarding any Option or Stock Purchase Right or the Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(e) instead of Common Stock;
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<PAGE>
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by Optionees to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
(xi) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan; and
(xii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) The following limitations shall apply to grants of Options:
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<PAGE>
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 700,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 700,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the canceled Option will be counted against the limits
set forth in subsections (i) and (ii) above. For this purpose, if the exercise
price of an Option is reduced, the transaction will be treated as a cancellation
of the Option and the grant of a new Option.
(d) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by the
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 14 of the Plan.
7. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement; provided, however, that the term of an Incentive Stock Option shall
be no more than ten (10) years from the date of grant thereof; provided,
further, that in the case of an Incentive Stock Option granted to an Optionee
who, at the time the Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Option shall be five (5) years from the
date of grant or such shorter term as may be provided in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of such
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the exercise
price shall be no less than 110% of the Fair Market Value per Share on the date
of grant.
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<PAGE>
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting of
Options granted hereunder shall be tolled during any unpaid leave of absence. An
Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
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<PAGE>
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of the Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is specified in the
Option Agreement to the extent that the Option is vested on the date of death
(but in no event later than the expiration of the term of such Option as set
forth in the Option Agreement) by the Optionee's estate or by a person who
acquires the right to exercise the Option by bequest or inheritance. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to the entire Option, the
Shares covered by the unvested portion of the Option shall immediately revert to
the Plan. If the Option is not so exercised within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
otherwise determined by the Administrator, Options and Stock Purchase Rights may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of
-8-
<PAGE>
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. The offer shall be accepted by execution of a
Restricted Stock purchase agreement in the form determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines otherwise,
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have
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<PAGE>
been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of
Common Stock subject to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
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<PAGE>
13. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option or Stock Purchase Right is so granted within a reasonable time after the
date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) STOCKHOLDER APPROVAL. The Board shall obtain stockholder approval
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. RESERVATION OF SHARES. The Company, during the term of this Plan, shall
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
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<PAGE>
UTSTARCOM, INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows:
Grant Number
-------------------------
Date of Grant
-------------------------
Vesting Commencement Date
-------------------------
Exercise Price per Share $
------------------------
Total Number of Shares Granted
-------------------------
Total Exercise Price $
------------------------
Type of Option: Incentive Stock Option
---
Nonstatutory Stock Option
---
Term/Expiration Date:
-------------------------
VESTING SCHEDULE:
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to Optionee's continuing to be a Service
Provider on such dates.
<PAGE>
TERMINATION PERIOD:
This Option shall be exercisable for [THREE] months after Optionee ceases
to be a Service Provider. Upon Optionee's death or disability, this Option may
be exercised for such longer period as provided in the Plan. In no event may
Optionee exercise this Option after the Term/Expiration Date as provided above.
II. AGREEMENT
1. GRANT OF OPTION. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant and
with the applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option shall be exercisable by
delivery of an exercise notice in the form attached as Exhibit A (the AExercise
Notice@) which shall state the election to exercise the Option, the number of
Shares with respect to which the Option is being exercised, and such other
representations and agreements as may be required by the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by the aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
-2-
<PAGE>
3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash or check;
(b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
(c) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
4. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
6. TAX CONSEQUENCES. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY
IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION
OR DISPOSING OF THE SHARES.
(a) EXERCISING THE OPTION.
(i) NONSTATUTORY STOCK OPTION. The Optionee may incur
regular federal income tax liability upon exercise of a NSO. The Optionee will
be treated as having received compensation income (taxable at ordinary income
tax rates) equal to the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price.
If the Optionee is an Employee or a former Employee, the Company will be
required to withhold from his or her compensation or collect from Optionee and
pay to the applicable taxing authorities an amount in cash equal to a percentage
of this compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(ii) INCENTIVE STOCK OPTION. If this Option qualifies as an
ISO, the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price
-3-
<PAGE>
will be treated as an adjustment to alternative minimum taxable income for
federal tax purposes and may subject the Optionee to alternative minimum tax in
the year of exercise. In the event that the Optionee ceases to be an Employee
but remains a Service Provider, any Incentive Stock Option of the Optionee that
remains unexercised shall cease to qualify as an Incentive Stock Option and will
be treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
(b) DISPOSITION OF SHARES.
(i) NSO. If the Optionee holds NSO Shares for at least one
year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws but not
the choice of law rules of California.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER
-4-
<PAGE>
ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED
HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS
OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING
PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH
OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS
A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
OPTIONEE: UTSTARCOM, INC.
- ----------------------------------- ----------------------------------------
Signature By
- ----------------------------------- ----------------------------------------
Print Name Title
- -----------------------------------
- -----------------------------------
Residence Address
-5-
<PAGE>
EXHIBIT A
1997 STOCK PLAN
EXERCISE NOTICE
UTStarcom, Inc.
1275 Harbor Bay Parkway
Suite 100
Alameda, CA 94502
Attention: [Title]
1. EXERCISE OF OPTION. Effective as of today, ___________, 19__, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of UTStarcom, Inc. (the
"Company") under and pursuant to the 1997 Stock Plan (the "Plan") and the Stock
Option Agreement dated ________, 19 (the "Option Agreement").
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price of the Shares, as set forth in the Option Agreement.
3. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. RIGHTS AS STOCKHOLDER. Until the issuance of the Shares (as evidenced
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. TAX CONSULTATION. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
6. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Administrator shall be final and binding on
all parties.
<PAGE>
7. GOVERNING LAW; SEVERABILITY. This Agreement is governed by the
internal substantive laws but not the choice of law rules, of California.
8. ENTIRE AGREEMENT. The Plan and Option Agreement are incorporated
herein by reference. This Agreement, the Plan and the Option Agreement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.
Submitted by: Accepted by:
OPTIONEE: UTSTARCOM, INC.
- ----------------------------------- ----------------------------------------
Signature By
- ----------------------------------- ----------------------------------------
Print Name Its
ADDRESS: ADDRESS:
- ----------------------------------- 1275 Harbor Bay Parkway
- ----------------------------------- Suite 100
Alameda, CA 94502
----------------------------------------
Date Received
-2-
<PAGE>
UTSTARCOM, INC.
1997 STOCK PLAN
NOTICE OF STOCK OPTION GRANT
PRC NATIONALS IN THE PRC
[OPTIONEE'S NAME]
You have been granted an option (the "Option") to purchase Common Stock of
the Company, subject to the terms and conditions of the Company's 1997 Stock
Plan (the "Plan") and this Notice of Grant, as follows:
Grant Number
-------------------------
Date of Grant
-------------------------
Vesting Commencement Date
-------------------------
Exercise Price per Share $
------------------------
Total Number of Shares Granted
-------------------------
Total Exercise Price $
------------------------
Term/Expiration Date:
-------------------------
VESTING SCHEDULE:
Your Option shall be exercisable, in whole or in part, in accordance with
the Option Rules (attached hereto as EXHIBIT A) and the following vesting
schedule:
[25% OF THE SHARES SUBJECT TO THE OPTION SHALL VEST TWELVE MONTHS AFTER THE
VESTING COMMENCEMENT DATE, AND 1/48 OF THE SHARES SUBJECT TO THE OPTION SHALL
VEST EACH MONTH THEREAFTER, SUBJECT TO YOUR CONTINUING TO BE AN EMPLOYEE,
CONSULTANT OR DIRECTOR OF THE COMPANY (A "SERVICE PROVIDER") ON SUCH DATES.]
TERMINATION PERIOD:
Your Option shall be exercisable for [THREE] months after you cease to be a
Service Provider. Upon your death or disability, the Option may be exercised
for such longer period as provided in the Plan. In no event may you exercise
this Option after the Term/Expiration Date set forth above.
<PAGE>
EXHIBIT A
OPTION RULES
1. ESCROW. The Option, and any Shares or cash acquired pursuant thereto,
shall be held by the Company pursuant to the Escrow Provisions attached hereto
as EXHIBIT B.
2. EXERCISE OF OPTION. You may exercise the Option by delivering to the
Company the Exercise Notice attached hereto as EXHIBIT C.
3. METHOD OF PAYMENT. You may pay the aggregate Exercise Price by any of
the following, or a combination thereof:
(a) if you have funds held by you outside of the People's Republic
of China, you may pay by cash or check; or
(b) after an initial public offering of the Company's securities,
consideration received by the Company under a formal cashless exercise program
adopted by the Company in connection with the Plan.
4. NON-TRANSFERABILITY OF OPTION. Your Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution, and
only you may exercise the Option during your lifetime.
5. NO GUARANTEE OF CONTINUED SERVICE. THE VESTING OF SHARES PURSUANT TO
THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY YOUR CONTINUED STATUS AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). THIS NOTICE OF GRANT DOES
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT FOR THE
VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY
WITH YOUR RIGHT OR THE COMPANY'S RIGHT TO TERMINATE YOUR RELATIONSHIP AS A
SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
<PAGE>
EXHIBIT B
UTSTARCOM, INC.
1997 STOCK PLAN
ESCROW PROVISIONS
1. OPTION. As set forth in the Notice of Grant, you have been granted
the Option under the Plan. The Option shall be held by the Company under these
Escrow Provisions in an account in your name.
2. LEGAL AND EQUITABLE TITLE. Legal and equitable title to the Option
and any cash or securities acquired pursuant thereto, shall remain with you at
all times, notwithstanding that such items may be held by the Company pursuant
to these Escrow Instructions.
3. EXERCISE OF OPTION. You may instruct the Company to exercise the
Option on your behalf at such time or times as permitted by the Notice of Grant
and the Plan.
4. PROCEEDS OF EXERCISE. Shares acquired upon exercise of the Option
shall be retained in this Escrow. You may elect to keep any proceeds from the
sale of such shares in your account under these Escrow Provisions or to have
them distributed to you in RMB within ____________ hours of the sale, pursuant
to such channels as the Company reasonably determines appropriate.
5. POWERS OF COMPANY. The Company may take any and all actions, and is
hereby granted such powers and discretion, as may appear necessary or proper to
comply with the applicable laws of any jurisdictions and to effectuate and carry
out the terms and purposes of this Escrow, including, but not limited to, the
power to exercise the Option and hold or dispose of the proceeds of such
exercise in accordance with the terms of these Escrow Provisions.
6. LIMITATION OF LIABILITY. The Company shall not be liable for any
damage caused by the exercise of its discretion as authorized by these Escrow
Provisions for any reason, except gross negligence or willful misconduct. The
Company shall not be liable for honest mistakes of judgment or for losses or
liabilities due to such honest mistakes of judgment.
7. COSTS AND EXPENSES OF THIS ESCROW. All costs and expenses of these
Escrow Provisions shall be borne by the Company.
8. GOVERNING LAW. This Escrow will be administered in the State of
California, and its validity, construction and all rights hereunder, shall be
governed by the laws of the State of California; provided, however, that all
matters affecting the title, ownership and transferability of any security,
whether created or held hereunder, shall be governed by all applicable federal,
state, or foreign securities laws.
<PAGE>
EXHIBIT C
1997 STOCK PLAN
EXERCISE NOTICE
[DATE]
UTStarcom, Inc.
1275 Harbor Bay Parkway
Suite 100
Alameda, CA 94502
Attention: [TITLE]
1. EXERCISE OF OPTION. I hereby elect to exercise the Option as to
_________ shares of the Company's Common Stock (the "Shares").
2. REPRESENTATIONS. I acknowledge that I have received, read and
understood the Plan, Escrow Provisions and the Notice of Grant, and I agree to
abide by and be bound by their terms and conditions.
3. TAX CONSULTATION. I understand that I may suffer adverse tax
consequences as a result of the receipt of the Option or the purchase or
disposition of the Shares. I have consulted with any tax consultants I deem
advisable in connection with the Option, and I am not relying on the Company for
any tax advice.
4. ENTIRE AGREEMENT. The Plan, Option Rules, Escrow Provisions and the
Notice of Grant are incorporated herein by reference. This Agreement, the Plan,
the Notice of Grant and the Escrow Provisions constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements between the Company and I with
respect to the subject matter hereof, and may not be modified adversely to my
interest except by means of a writing signed by the Company and me.
Submitted by: Accepted by:
UTSTARCOM, INC.
- ------------------------------ ------------------------------
Signature By
- ------------------------------ ------------------------------
Print Name Its
ADDRESS: ADDRESS: 1275 Harbor Bay Parkway
Suite 100
Alameda, CA 94502
- ------------------------------
- ------------------------------
------------------------------
Date Received
<PAGE>
EXHIBIT 10.5
UTSTARCOM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 2000 Employee Stock Purchase
Plan of UTStarcom, Inc.
1. PURPOSE. The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company through accumulated payroll deductions. It is the intention of the
Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of
the Plan, accordingly, shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company or any
committee thereof designated by the Board of Directors of the Company in
accordance with Section 14 of the Plan.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the common stock of the Company.
(d) "COMPANY" shall mean UTStarcom, Inc. and any Designated Subsidiary
of the Company.
(e) "COMPENSATION" shall mean all base straight time gross earnings
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "DESIGNATED SUBSIDIARY" shall mean any Subsidiary that has been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "EMPLOYEE" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "ENROLLMENT DATE" shall mean the first Trading Day of each
Offering Period.
(i) "EXERCISE DATE" shall mean the last Trading Day of each Purchase
Period.
<PAGE>
(j) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the date of determination, as
reported in THE WALL STREET JOURNAL or such other source as the Board deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock prior to the date of determination, as reported in THE WALL
STREET JOURNAL or such other source as the Board deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith
by the Board; or
(iv) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial
price to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "OFFERING PERIODS" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan
may be exercised, commencing on the first Trading Day on or after June 1 and
December 1 of each year and terminating on the last Trading Day in the
periods ending twenty-four months later; provided, however, that the first
Offering Period under the Plan shall commence with the first Trading Day on
or after the date on which the Securities and Exchange Commission declares
the Company's Registration Statement effective and ending on the last Trading
Day on or before April 30, 2002. The duration and timing of Offering Periods
may be changed pursuant to Section 4 of this Plan.
(l) "PLAN" shall mean this 1999 Employee Stock Purchase Plan.
(m) "PURCHASE PERIOD" shall mean the approximately six month period
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "PURCHASE PRICE" shall mean 85% of the Fair Market Value of a
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "RESERVES" shall mean the number of shares of Common Stock covered
by each option under the Plan which have not yet been exercised and the number
of shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
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<PAGE>
(p) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "TRADING DAY" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. ELIGIBILITY.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. OFFERING PERIODS. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after June 1 and December 1 each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
January 31, 2002. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without shareholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
-3-
<PAGE>
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription agreement,
he or she shall elect to have payroll deductions made on each pay day during the
Offering Period in an amount not exceeding fifteen percent (15%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 2,500
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of
-4-
<PAGE>
the Company's Common Stock an Employee may purchase during each Purchase
Period of such Offering Period. Exercise of the option shall occur as
provided in Section 8 hereof, unless the participant has withdrawn pursuant
to Section 10 hereof. The option shall expire on the last day of the Offering
Period.
8. EXERCISE OF OPTION.
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the number
of shares with respect to which options are to be exercised may exceed (i) the
number of shares of Common Stock that were available for sale under the Plan on
the Enrollment Date of the applicable Offering Period, or (ii) the number of
shares available for sale under the Plan on such Exercise Date, the Board may in
its sole discretion (x) provide that the Company shall make a pro rata
allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
shareholders subsequent to such Enrollment Date.
9. DELIVERY. As promptly as practicable after each Exercise Date on which a
purchase of shares occurs, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the shares purchased
upon exercise of his or her option.
10. WITHDRAWAL.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant
-5-
<PAGE>
promptly after receipt of notice of withdrawal and such participant's option
for the Offering Period shall be automatically terminated, and no further
payroll deductions for the purchase of shares shall be made for such Offering
Period. If a participant withdraws from an Offering Period, payroll
deductions shall not resume at the beginning of the succeeding Offering
Period unless the participant delivers to the Company a new subscription
agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. TERMINATION OF EMPLOYMENT.
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. INTEREST. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. STOCK.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 1,000,000 shares plus an annual increase to be added on the first
day of the Company's fiscal year beginning in 2001, equal to the lesser of 2%
of the outstanding shares on such date, 2,000,000 shares or a lesser amount
determined by the Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. ADMINISTRATION. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. DESIGNATION OF BENEFICIARY.
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<PAGE>
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. TRANSFERABILITY. Neither payroll deductions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and distribution
or as provided in Section 15 hereof) by the participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds from
an Offering Period in accordance with Section 10 hereof.
17. USE OF FUNDS. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. REPORTS. Individual accounts shall be maintained for each participant
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION,
MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that
-7-
<PAGE>
respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number or
price of shares of Common Stock subject to an option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. AMENDMENT OR TERMINATION.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain shareholder approval in such a manner
and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a
-8-
<PAGE>
participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
participant properly correspond with amounts withheld from the participant's
Compensation, and establish such other limitations or procedures as the Board
(or its committee) determines in its sole discretion advisable which are
consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering Period ends
on a new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any
of the aforementioned applicable provisions of law.
23. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten
(10) years unless sooner terminated under Section 20 hereof.
24. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock
-9-
<PAGE>
on any Exercise Date in an Offering Period is lower than the Fair Market
Value of the Common Stock on the Enrollment Date of such Offering Period,
then all participants in such Offering Period shall be automatically
withdrawn from such Offering Period immediately after the exercise of their
option on such Exercise Date and automatically re-enrolled in the immediately
following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
UTSTARCOM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date:___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the UTStarcom,
Inc. Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
and subscribes to purchase shares of the Company's Common Stock in
accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 0 to 15%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise
my option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and Spouse only).
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of
the Offering Period during which I purchased such shares) or one year
after the Exercise Date, I will be treated for federal income tax
purposes as having received ordinary income at the time of such
disposition in an amount equal to the excess of the fair market value
of the shares at the time such shares were purchased by me over the
price which I paid for the shares. I HEREBY AGREE TO NOTIFY THE
COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY DISPOSITION OF
MY SHARES AND I WILL MAKE ADEQUATE PROVISION FOR FEDERAL, STATE OR
OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON THE
<PAGE>
DISPOSITION OF THE COMMON STOCK. The Company may, but will not be
obligated to, withhold from my compensation the amount necessary to
meet any applicable withholding obligation including any withholding
necessary to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by
me. If I dispose of such shares at any time after the expiration of
the 2-year and 1-year holding periods, I understand that I will be
treated for federal income tax purposes as having received income only
at the time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of
(1) the excess of the fair market value of the shares at the time of
such disposition over the purchase price which I paid for the shares,
or (2) 15% of the fair market value of the shares on the first day of
the Offering Period. The remainder of the gain, if any, recognized on
such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent
upon my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)
--------------------------------------------------
(First) (Middle) (Last)
------------------------- -------------------------------------------
Relationship
-------------------------------------------
(Address)
-2-
<PAGE>
Employee's Social
Security Number:
-----------------------------------------
Employee's Address:
-----------------------------------------
-----------------------------------------
-----------------------------------------
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
------------------------- -----------------------------------------
Signature of Employee
-----------------------------------------
Spouse's Signature (If beneficiary
other than spouse)
-3-
<PAGE>
EXHIBIT B
UTSTARCOM, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the UTStarcom,
Inc. Employee Stock Purchase Plan which began on ____________, 200_ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
--------------------------------
--------------------------------
--------------------------------
Signature:
--------------------------------
Date:
---------------------------
<PAGE>
Exhibit 10.13(A)
AMENDMENT#1
TO TECHNICAL LICENSE AND ASSISTANCE AGREEMENT
This Amendment is dated and entered into as of 21st day of February, 2000 by
and between UTStarcom, Inc., a Delaware corporation with its place of
business at 1275 Harbor Bay Parkway, Alameda, CA 94502, USA (hereinafter
referred to as "UTStarcom") and Mitsubishi Electric Corporation, acting
through its Mobile Communication Business Division, a Japanese corporation
with offices at 8-1-1 Tsukaguchi-honmachi, Amagasaki, Hyogo 661-8661, Japan
(hereinafter referred to as "Mitsubishi"). UTStarcom and Mitsubishi may
collectively be referred to as the "Parties". Each may also be referred to
individually as a "Party".
WHEREAS, The Parties entered into a contractual relationship on November 2nd,
1999 (documented as the "TECHNICAL LICENSE AND ASSISTANCE AGREEMENT"
- ---hereinafter referred to as "Agreement") for UTStarcom to develop PHS
(Personal Handyphone System) handsets based on Mitsubishi's technology which
is essential to or helpful in the development of PHS handset.
WHEREAS, UTStarcom desires to obtain from Mitsubishi additional license to
manufacture and sell PHS handsets for itself, and
WHEREAS, The Parties wish to amend certain licensing and other terms of the
Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and conditions herein contained, the Parties mutually agree as follows:
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
1. 2. GRANT OF LICENSE
1.1 Article 2.1 (1) is hereby deleted in its entirety, and the following
sentence is added:
"(1) Subject to the terms and conditions of this Agreement, Mitsubishi hereby
grants to UTStarcom a [*] license to use the
Licensed Technology for the term of this Agreement for the purpose of
(i) using or making UTStarcom's PHS handset within the territory of the
[*] and
(ii) selling UTStarcom's PHS handset on a [*]
1.2 Article 2.3 is hereby added to the Agreement as follows:
"2.3 SUPPLY OF PHS HANDSET
For purposes of resale or Mitsubishi internal use, at the request of
Mitsubishi, UTStarcom shall supply PHS handsets made by UTStarcom hereunder
in accordance with mutually acceptable negotiated terms, prices, delivery
times and conditions established at the time of purchase. Such prices,
delivery times, terms and conditions shall not be [*]
2. 6. DISCLAIMER OF WARRANTY AND LIABILITY
2.1 Article 6(1) is hereby amended by added by inserting the words
"NON-INFRINGEMENT OF ANY THIRD PARTY'S RIGHT " between the word "TITLE," and
the word "ARISING" on the fifth (5th) line.
2.2 Article 6(1) is hereby amended by added by inserting the words "USE, MAKE
OR SELL" between the word "DEVELOP" and the word "UTSTARCOM'S" on the ninth
(9th) line.
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
2.3 Article 6 (2) is hereby deleted in its entirety, and the following
sentence is added:
"(2) Notwithstanding the forgoing, for the period of one [*] or [*] after the
date when UTStarcom's PHS handset come onto the market, whichever comes
earlier, if a technical problem of the Licensed Technology is found, the
Parties will confer in order to find a mutually agreeable solution of the
problem."
2.4 Article 6(4) is hereby added to the Agreement as follows:
"(4) UTStarcom understands there may be a possibility of claims of
intellectual property infringement related to this Agreement against
UTStarcom. UTStarcom shall be responsible for taking all necessary steps to
avoid and settle such claims of infringement at its own risk and expense."
3. 8. TERM
Article 8 is hereby deleted in its entirety, and the following sentence is
added:
"8.TERM
The term of this Agreement shall commence on the Effective Date and will
continue until the date upon which this Agreement is terminated in accordance
with Article 9."
4. 9. TERMINATION
Article 9.4 is hereby amended in its entirety as follows by adding Article
2.3 as a survival clause of the Agreement:
"9.4 SURVIVAL
The provisions of Articles 2.3, 4, 5, 6, 7, 8, 10, and 11 hereof shall
survive any termination of this Agreement."
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be
executed by their respective duly authorized representatives as of the date
first above written. All copies of this Amendment, signed by both Parties,
shall be deemed originals.
MITSUBISHI UTSTARCOM
By: By:
------------------------------- ----------------------------
Name: Name:
----------------------------- --------------------------
Title: Title:
---------------------------- -------------------------
Date: Date:
----------------------------- --------------------------
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
Exhibit 10.14(A)
ADDENDUM
This ADDENDUM made and entered into, by and between
Matsushita Communication Industrial Co., Ltd., Communication Systems Division, a
Japanese corporation, having its principal offices at 3-1 Tsunashima-Higashi
4-chome, Kohoku-ku, Yokohama 223-8639, Japan (hereinafter called "MCI"), and
UTStarcom Inc., a Delaware corporation, having its principal offices at 1275
Harbor Bay Parkway, Suit 100, Alameda, California 94502, U.S.A. (hereinafter
called "UTStarcom")
WITNESSETH
RECITALS:
MCI and UTStarcom have concluded a certain technical assistance agreement.
MCI and UTStracom desire to make an amendment and confirm an interpretation of
such technical assistance agreement as described herein.
NOW, THEREFORE, the parties agree as follows:
Article 1. Definition
1.01 The "Technical Assistance Agreement" shall mean the technical assistance
agreement made and entered into, by and between MCI and UTStarcom as of October
1, 1999.
1.02 The "Supply Agreement" shall mean the supply agreement made and entered
into as of February 17, 2000 by and among UTStarcom, MCI, and Matsushita
Electric Industrial Co., Ltd., acting through its Corporate Management Division
for China, a Japanese corporation having its principal office at 3-2
Minami-Semba 4-chome, Chuo-ku, Osaka, Osaka 542-8588, Japan.
Article 2. Amendment and Interpretation
2.01 The parties agree to amend the Technical Assistance Agreement as follows;
Everywhere in the Technical Assistance Agreement, the phrase "P.R.China" shall
be replaced by the phrase "P.R. China except for Hong Kong".
2.02 The parties agree to the following interpretation of the Technical
Assistance Agreement;
If, as of the expiration or termination of the Technical Assistance Agreement,
there are
<PAGE>
any Components (as defined in the Supply Agreement) ordered but not delivered
yet under the Supply Agreement, such Components shall be deemed to be
included in "the Products then in the process or manufacture or assembly" in
(2) of Article 5.06 of the Technical Assistance Agreement.
2.03 The parties agree to make the following correction;
"Except as to Products completed and/or in process as referred to in Article
5.05 hereof" in the first line of Article 8.09 of the Technical Assistance
Agreement shall be corrected to "Except as to Products completed and/or in
process as referred to in Article 5.06 hereof".
Article 3 Effect
This Addendum shall come into effect on October 1, 1999.
Article 4 Disputes
Any disagreement in connection herewith shall be finally settled by arbitration.
If MCI 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 UTStarcom initiates the arbitration, the
arbitration shall be held in Tokyo, Japan in accordance with the arbitration
rules of Japan Commercial Arbitration Association.
Article 5 Applicable Law
This Addendum shall be interpreted and governed in accordance with the laws of
Japan, without reference to its conflicts of laws principles.
Article 6 Entire Agreement and Amendment
This Addendum contains the entire and only agreement between the parties hereto
with respect to the subject matter herein, and supersedes and cancels all
previous agreements, negotiations, commitments and writing with respect to the
subject matter hereof. This Addendum may not be amended, modified, superseded or
canceled, nor may any of the terms, provisions or conditions hereof be waived,
except by a written instrument duly executed by an authorized officer of each of
the parties hereto. No waiver by either party of any condition of this Addendum,
in any one instance, shall be deemed to be or construed as a further or
continuing waiver of any such condition.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum in two (2)
original counterpart instruments, to be executed and delivered in English, as of
the date written below, by their duly authorized officers.
<PAGE>
Matsushita Communication Industrial UTStarcom Inc.
Co., Ltd., Communication Systems
Division
By: By:
Name: Name:
Title: Title:
Date: Date:
<PAGE>
Exhibit 10.36
AGREEMENT NO.
SUPPLY AGREEMENT
THIS AGREEMENT, made and entered into as of this 18th day of February, 2000,
by and among Matsushita Electric Industrial Co., Ltd., acting through its
Corporate Management Division for China, a Japanese Corporation, having its
principal office at 3-2 Minami-Semba 4-chome, Chuo-ku, Osaka, Osaka 542-8588,
Japan (hereinafter "MEI"), Matsushita Communication Industrial Co., Ltd.,
acting through its Communication Systems Division, a Japanese corporation,
having its principal office at 3-1 Tsunashima-Higashi 4-chome, Kohoku-ku,
Yokohama, Kanagawa 223-8639, Japan (hereinafter "MCI") ("MEI" and "MCI" are
collectively called "Seller") and UTStarcom Inc., a Delaware corporation,
having its principal office at 1275 Harbor Bay Parkway, Suite 100, Alameda,
California 94502, U.S.A. (hereinafter "Buyer").
WITNESSETH:
WHEREAS, Buyer is desirous of purchasing from Seller certain Components of
wireless local loop system (hereinafter defined) to have its affiliate in P.
R. China assemble those Components into complete sets for sale thereof in P.
R. China except for Hong Kong based on the technical assistance provided by
MCI to Buyer pursuant to the Technical Assistance Agreement executed between
MCI and Buyer on the 1st day of October, 1999 (hereinafter "Technical
Assistance Agreement"), and
WHEREAS, Seller is willing to supply such components to Buyer under the terms
and conditions herein contained,
NOW, THEREFORE, in consideration of the mutual promises set forth herein and
the mutual covenants herein contained, both parties hereto agree as follows:
CLAUSE 1
DEFINITIONS
1.01 The term "Products" means radio port controller (hereinafter "RPC")
and the radio port (hereinafter "RP") with Buyer's brand name or no brand
name (designated by Buyer) of which model numbers are described in SCHEDULE A
attached hereto as an integral part hereof. The parties hereto also agree
that even during the term of this Agreement, models of the Products may be,
in writing, added to and/or removed from the SCHEDULE A upon mutual
agreement. The diagrams of the Products shall be mutually discussed and
agreed by the parties hereto in written instruments to be attached hereto as
an integral part hereof, SCHEDULE B.
1.02 The term "Components" means such electric, electronic and/or
mechanical components, parts, pieces or sub-assemblies including packaging
comprising Products, as will be from time to time so identified by Seller.
The specifications of the Components shall be separately agreed by the
parties hereto in writing.
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
1.03 The term "Buyer's Affiliate" means UTStarcom (Hangzhou) Telecom Co.,
Ltd., a Chinese corporation, having its principal office at 3 Yile Industrial
Park, Bldg 2/3 129 Wen Yi Road, Hangzhou 310012, P. R. China, which purchases
the Components from Buyer and assembles the Components into complete sets for
the sale thereof in P. R. China except for Hong Kong under the terms and
conditions hereof.
CLAUSE 2
BUYER'S AFFILIATES
2.01 Seller hereby agrees and acknowledges that Buyer's Affiliate
purchases the Components through Buyer and assembles them into complete sets
of Products for the resale in P. R. China except for Hong Kong, provided that
Buyer shall have Buyer's Affiliate assume the same obligation of Buyer herein
and Buyer shall obtain 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 P. R.
China and resale of the Components in the form of the Products shall be at
the responsibility and cost of Buyer.
CLAUSE 3
SUPPLY OF COMPONENTS
3.01 For the effective term of this Agreement and subject to the terms
and conditions herein contained, Seller agrees to sell to Buyer and Buyer
agrees to purchase from Seller on non-exclusive basis certain Components only
for the purpose of the assemble of the Components and the sale of the
Products by Buyer's Affiliate in P. R. China except for Hong Kong, solely in
the manner set forth in Clause 4 hereof.
CLAUSE 4
MANNER OF SUPPLY
4.01 Firm (non-cancelable) orders for the Components shall be placed by
Buyer to Seller, in writing and in accordance with this Clause 4 hereof, [*].
Such orders shall be placed to Seller in writing 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.
4.02 All deliveries of the Components shall be made on basis of [*],
which shall be interpreted in accordance with the latest [*].
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
4.03 The parties hereto agree to establish the contracted minimum
quantities as to each category of the Components to be assembled into
Products shall purchase from Seller for P. R. China except for Hong Kong
market during each term of this Agreement as follows:
<TABLE>
<CAPTION>
CATEGORY OF COMPONENTS CONTRACTED MINIMUM QUANTITIES ON SHIPMENT BASE
---------------------- ----------------------------------------------
<S> <C> <C> <C>
YEAR 2000 YEAR 2001 YEAR 2002
for RPC [*] [*] [*]
for RP [*] [*] [*]
</TABLE>
4.04 The payment for the Components 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
Components, provided that any shipment of Components should be made by air.
Notwithstanding the foregoing, in case Buyer desires and Seller agrees, the
payment for the Components 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. Further, the parties hereto
acknowledge that upon the prior consent of Seller, some transactions of the
Components may be made through a third party on condition that the payment
terms of such transactions shall be made in advance of delivery by
telegraphic transfer with some restrictions as separately agreed in writing
between MEI and the third party, and/or Buyer and the third party.
4.05 The prices of the Components shall be separately discussed and
mutually agreed from time to time by the parties hereto based on the
following conditions:
(a) that prices of all items of the Components shall be quoted on basis of
[*];
(b) that the prices of all items of the Components shall be quoted in the
currency of [*]; 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.
4.06 The quantities of below mentioned item of Components for the
Products under [*] 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 the Components for the 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 COMPONENTS MINIMUM ORDER QUANTITY
------------------ ----------------------
<S> <C>
for RPC [*]
for RP [*]
</TABLE>
CLAUSE 5
USE OF COMPONENTS AND TRADEMARK
5.01 Seller shall affix Buyer's brand name and/or its trade name
designated by Buyer ("Buyer's Mark") on such items of the Components as
mutually agreed.
5.02 Seller acknowledges that Buyer has appropriate interest in the
Buyer's Mark and that no tight, 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 Components/Products. Buyer agrees to
indemnify and hold harmless Seller from and against any claim of trademark
infringement by reason of the use of Buyer's brand on or in connection with
the Components/Products hereunder.
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
CLAUSE 6
WARRANTY
6.01 Buyer shall submit to Seller a [*] report detailing the quality
problem of the Components occurring in the market during the [*] the last
delivery of the Components hereunder. Further, Buyer shall submit to Seller
samples of the Components alleged to be defective upon request of Seller.
6.02 Buyer shall be responsible for warranty/servicing of the Products
and any claims made by any third party against the Products once Buyer
distributes or has distributed the Products in the market.
6.03 Seller agrees to provide, with no charge to Buyer, the quantities of
each item of the Components equivalent to the percentages respectively set
forth below of the quantities on relative individual purchase order accepted
by Seller;
<TABLE>
<CAPTION>
ITEM OF COMPONENTS PERCENTAGE
------------------ ----------
<S> <C>
for RPC [*]
for RP [*]
</TABLE>
In the event that the malfunctions or defects in any item of the Components,
which Seller admits to be attributable to the manufacturer thereof as defects
in design, parts or workmanship of Components based on data on quality
problem occurring in market and Seller's analysis of samples of Components
alleged to be defective, should occur in more than the respective percentages
set forth above of total quantities of such item of the Component which have
been delivered within last [*], Seller and Buyer will meet and discuss how to
deal with such situation, on condition that Buyer performs its obligations
stipulated in Clause 6.01.
6.04 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 Components which have been delivered within latest [*], Seller
shall remedy all such malfunctions or defects in excess of such [*] in the
way selected by Seller, on condition that Buyer performs its obligations
stipulated in Clause 6.01.
6.05 Seller shall supply the Components of the Products to Buyer and
Buyer shall purchase such Components from Seller, in the manner set forth in
Clause 4 hereof, without any warranty by Seller and/or any of its affiliates
that (i) the complete sets of Products assembled by Buyer's Affiliate from
Components hereunder and (ii) the assembling process or method of the
Components into the Products. Licenses or permissions if any necessary to
assemble, sell or otherwise dispose of the complete sets of Products under
any right owned or controlled by third parties shall be acquired by Buyer at
its own risk and account.
6.06 (a) Seller agrees to indemnify and hold harmless Buyer from and
against any claim made by any third party that the Component supplied
hereunder infringe the rights of such
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
third party in respect to patent, design, copyright or any other intellectual
property right in P. R. China except for Hong Kong (hereinafter "Intellectual
Property Right"), and Seller shall assume the defense of any action, suit or
proceeding against Buyer relating thereto and shall pay any damages assessed
against or otherwise payable by Buyer as a result of the final disposition of
any such claim, action, suit or proceeding, provided, that Buyer promptly
notifies Seller of the commencement of any action, suit or proceeding, or
threats thereof, and furnished to Seller all documents relating thereto, and
further provided, that Seller is afforded the opportunity, in its sole and
absolute discretion, to determine the manner in which such action, suit or
proceeding shall be handled or otherwise disposed of. Buyer shall give Seller
the cooperation Seller reasonably required, at Seller's sole cost and expense
for reasonable out-of-pocket expenses incurred by Buyer and paid to third
parties (except for salaries for Buyer's employees and fees and expenses of
any counsel retained by Buyer in the defense of such claim, suit, action or
proceeding). Notwithstanding the foregoing, Buyer may be represented in any
suit by its own counsel at its own cost and expense; provided, however, that
Buyer shall not consent to any settlement, judgment or decree in any such
suit or pay or agree to pay any sum of money or agree to do any other act in
compromise of such claim of a third party without first obtaining Seller's
consent thereto in writing.
(b) In the event that the use or sale of the Components as a part of
Products is preliminary or permanently enjoined by reason of any third party
Intellectual Property Right, Seller shall use its best effort, at Seller's
sole cost and expense, take any of the following actions, in Seller's sole
and absolute discretion: (i) procure for Buyer the right to continue the use
and/or sale of the Components as part of Products; or (ii) provide Components
which do not infringe such Intellectual Property Right and upon Seller's
fulfillment of (i) or (ii) above, Seller shall thereafter be relieved of any
further obligation or liability to Buyer as the result of or in connection
with such infringement; provided, however, that if Seller elects either (i)
or (ii) above, then to the extent that Seller is required to incur additional
costs, the prices for the affected Components shall be renegotiated in good
faith by the parties to take into such increased costs,
(c) Notwithstanding anything herein to the contrary, the provisions
of this CLAUSE 6.06 shall not apply to (i) any designs, specifications, or
modifications supplied by Buyer or any items incorporated into the Components
by Seller at Buyer's request (whether or not such items are manufactured by
Seller or supplied by Buyer or third parties) or (ii) any combination or use
of the Components by Buyer or its customer(s) with other equipment or
devices; but, rather, in such cases, Buyer shall indemnify, defend and hold
harmless Seller from and against any and all liabilities, costs, expenses,
losses and damages of any nature, including counsel fees and expenses arising
out of or relating to all claims that the same infringe on any Intellectual
Property Right of any third parties.
(d) In any event, Seller's responsibility stipulated in this CLAUSE
shall be limited to the total amount of the payment by Buyer for the
Components.
6.07 Business operations of Buyer (including assembly, sale or other
disposition, quality guarantee to customers, product liability, servicing and
advertising of complete set of any Product assembled by Buyer's Affiliate)
shall be entirely for Buyer's own account and at Buyer's sole responsibility,
and Seller (including Seller's affiliates and subsidiaries) shall not be
responsible to Buyer, Buyer's Affiliate and any third party. Buyer shall
indemnify for and hold Seller (including Seller's affiliated companies and
subsidiaries) harmless from any losses, damages, costs and expenses arising
out of or connection with business
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
operations as provided in this CLAUSE.
6.08 EXCEPT FOR THE ABOVE EXPRESS LIMITED WARRANTY, SELLER MAKES AND
BUYER RECEIVES NO WARRANTY ON THE COMPONENTS, EXPRESS OR IMPLIED. STATUTORY,
OR IN ANY OTHER PROVISION OF THIS AGREEMENT OR COMMUNICATION WITH BUYER, AND
SELLER SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, INCLUDING, WITHOUT LIMITATION, FITNESS FOR
COMBINATION WITH ANY INTERFACE DEVICES TO BUILD UP ANY SYSTEM.
CLAUSE 7
SERVICE AFTER SALE
7.01 Repair and other service after sale for the users of the Components
as Products shall be at the cost and responsibility of Buyer. Seller will
provide Buyer with replacement parts for the Components on terms and
conditions to be mutually agreed upon by the parties from time to time during
the retention period provided for in Schedule C attached hereto as an
integral part hereof.
7.02 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 [*].
CLAUSE 8
TERM & TERMINATION
8.01 This Agreement shall become effective as of the date first above
written (herein referred to as Effective Date), and thereafter shall remain
in force and effect for a period of three (3) years, unless earlier
terminated in accordance with any other provisions of this Agreement.
By mutual agreement at least ninety (90) days prior to expiration
hereof, this Agreement may be extended for a period of one (1) year under the
terms and conditions to be then mutually agreed to in writing.
8.02 Either party hereto has the right to terminate this Agreement by
giving a written notice to the other party in case such other party shall
have been in a breach and/or default of the provisions of this Agreement, and
such breach and/or default shall not have been corrected within sixty (60)
days after receipt of notice specifying the nature of such breach and/or
default.
8.03 Seller may at any time terminate this Agreement immediately by
giving a written notice to Buyer upon any of the following events:
1) Any arrangement with direction or any application for
bankruptcy, receivership, winding up or other similar
proceeding against Buyer and/or Buyer's Affiliate
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
shall be made by Buyer, Buyer's Affiliate or any other person;
2) All of or, in the opinion of Seller, substantial part of the
assets of Buyer and/or Buyer's Affiliate shall be seized or
attached in conjunction with any action against Buyer and/or
Buyer's Affiliate by any third party;
3) A sale of all of or in the opinion of Seller substantially all
of the assets of Buyer is made, or this Agreement is assigned
by Buyer and/or Buyer's Affiliate without the prior written
consent of Seller;
4) There occurs any such change in the capital ownership and/or
management control of Buyer and/or Buyer's Affiliate as, in the
opinion of Seller, may adversely affect the performance of this
Agreement and/or the benefits or rights of Seller in this
Agreement;
5) There occurs any difficulties, in Seller's opinion, to perform
the obligation under this Agreement due to any of significant
changes of the political, economic or taxation policy by the
governmental or quasi-governmental organization or agencies in
the US or P. R. China;
6) the Technical Assistance Agreement is, in any reason,
terminated;
7) Seller judges that the quality of the Products assembled by
Buyer's Affiliate hereunder is found to be insufficient and
such insufficiency seems not to be corrected within a
reasonable period of time; and
8) An import license of the Components into the US and/or an
import license of the Components from Buyer to Buyer's
Affiliate is not obtained from the competent authority of the
Government of the US or P. R. China, (to the extent that such
license is required by law), within one hundred and eighty
(180) days from the Effective Date hereof.
8.0 Termination or expiration of this Agreement shall not affect the
right of Seller or Buyer which shall have accrued hereunder including,
without limitation, the Seller's right to receive payment of the Components
and the Buyer's right to receive the Components ordered but not delivered
yet. However, if this Agreement is terminated due to any breach of this
Agreement by either party, the other party shall have the right to cancel any
firm order accepted by Seller without any liability to the breaching party.
8.05 No failure or delay on the part of either party hereto to exercise
its right of termination of this Agreement for any one or more of the causes
specified herein, shall be construed to prejudice its rights of termination
hereof for any other or subsequent reason.
CLAUSE 9
GENERAL PROVISIONS
9.01 The supervision of the installation of the Products may be made by
Seller upon a Buyer's reasonable request and the Seller's acceptance thereof,
provided that Buyer shall reimburse Seller for [*].
9.02 EXCEPT FOR THE EXPRESS LIMITED WARRANTY IN CLAUSE 6 HEREOF AND THE
EXPRESS WARRANTY IN CLAUSE 10.05 HEREOF, EACH PARTY'S LIABILITY FOR ANY LOSS
OR DAMAGE ARISING OUT OF OR RESULTING FROM THESE TERMS AND CONDITIONS OR FROM
ITS PERFORMANCE OR
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
BREACH, OR IN CONNECTION WITH THE COMPONENTS PURCHASED HEREUNDER SHALL IN NO
CASE EXCEED THE PURCHASE PRICE FOR THE SPECIFIC COMPONENT 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.
9.03 Neither this Agreement nor any rights or obligations hereunder shall
be assignable or otherwise transferable by either party hereto, voluntarily
or by operation of law or otherwise, without the prior written consent of the
other party, and any assignment or transfer without such consent shall be
null and void.
9.04 Neither party hereto shall be liable for delay or failure in the
performance of this Agreement and/or individual purchase orders under this
Agreement arising from any of the following matters: (i) acts of God or
public enemy or war (declared or undeclared); (ii) acts of persons engaged in
subversive activities or sabotage; (iii) fires, floods, explosions, or other
catastrophes; (iv) epidemics or quarantine restrictions; (v) strikes,
slowdowns, lockouts or labor stoppage or disputes of any kind; (vi) freight
embargo or interruption of transportation; (vii) unusually severe weather;
(viii) delays of a supplier of Seller due to any the above causes or events;
and the time for performance by such party shall be extended by the period of
any such delay. Notwithstanding the foregoing, should any delay resulting
from such an event of Force Majeure set forth above exceed one-hundred-eighty
(180) days, either party may terminate this Agreement or the portion of this
Agreement so delayed.
9.05 Any confidential information owned by Seller prior to this Agreement
or developed by Seller (or its parent, subsidiaries affiliates) during the
term hereof and disclosed to Buyer in connection with subject matter hereof
and the contents and existence of this Agreement shall not be disclosed by
Buyer to any third party.
9.06 This Agreement shall be governed and construed in accordance with
the laws of Japan without reference to its conflict of law principles.
9.07 Any and all disputes, controversies or differences which may arise
between the parties hereto out of or in relation to this Agreement shall be
settled between the parties hereto by their amicable endeavors.
However, if in spite of such amicable endeavors of the parties
hereto, no such solution can be reached within sixty (60) days after
occurrence of such disputes, controversies or differences, then, they shall
be finally settled (without being submitted to any court), except as
otherwise expressly provided herein. In case Seller initiates the
arbitration, the arbitration shall tale place in San Francisco, California,
U. S. A., in accordance with the arbitration rules of American Arbitration
Association. In case Buyer
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
initiates the arbitration, the arbitration shall tale place in Tokyo, Japan
in accordance with the arbitration rules of Japan Commercial Arbitration
Association. Judgment upon the award rendered may be entered in any court
having jurisdiction or application may be made to such court for a judicial
acceptance of the award and an order of enforcement, as the case may be.
9.08 The CLAUSES 2.01, 3.01, 5.02, 6.04, 6.05, 6.06, 6.07, 7.01, 8.03,
8.05, 9.02, 9.05, 9.06 9.07, 9.08 and 10 hereof shall survive the expiration
or the termination of this Agreement.
9.08 This Agreement contains the entire and only agreement between the
parties hereto with respect to the subject matter herein contained, and this
Agreement supersedes and cancels all previous agreements, negotiations,
commitments and writings with respect thereto, and may not be released,
discharged, abandoned, changed or modified in any manner, orally or
otherwise, except by an instrument in writing signed by a duly authorized
officer or representative of the parties hereto.
CLAUSE 10
EXPORT CONTROL
10.01 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.
10.02 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 Law 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).
10.03 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 Clause, "Military Purposes" means the design, development,
manufacture or use of any weapon
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
including without limitation nuclear weapon, biological weapon, chemical
weapon and missiles.
10.04 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.
10.05 In the case of any breach of this Clause, 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement in three
(3) original instruments, to be executed and delivered in the English
language as of the date first above written, in a manner legally binding upon
them, by their duly authorized officers, each of which shall be retained by
Seller and Buyer respectively.
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
Seller: MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD.
CORPORATE MANAGEMENT DIVISION FOR CHINA
By:
Name: Yukio Shotoku
Title: Managing Director, Member of the Board
MATSUSHITA COMMUNICATION INDUSTRIAL CO., LTD.
COMMUNICATION SYSTEMS DIVISION
By:
Name: Yasuo Katsura
Title: Director, Member of the Board
Buyer: UTSTARCOM INC.
By:
Name: Hong Liang Lu
Title: President & CEO
[*] 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 UNDER 17.C.F.R. SECTIONS 200.80(b)(4), 200.83 AND
230.406.
<PAGE>
Exhibit 21.1
List of Subsidiaries
UTStarcom China Ltd., a company organized under the laws of the People's
Republic of China.
Hangzhou UTStarcom Telecommunications Co., Ltd., a company organized under
the laws of the People's Republic of China.
Guangdong UTStarcom Telecom Co., Ltd., a company organized under the laws of
the People's Republic of China.
Wacos, Inc., a company organized under the laws of Delaware.
AbacusChina, Inc., a company organized under the laws of the Cayman Islands.
<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 February 18, 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
February 22, 2000
