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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-22931
INNOVA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
WASHINGTON 91-1453311
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
GATEWAY NORTH, BUILDING 2 98168-1974
3325 SOUTH 116TH STREET (ZIP CODE)
SEATTLE, WASHINGTON
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(206) 439-9121
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based on the closing price on March 25, 1998, as reported on
NASDAQ, was $100,320,918.(1)
The number of shares of the registrant's Common Stock outstanding as of
March 25, 1998, was 13,842,408.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1997 are incorporated by reference into Part II of this
Report and portions of the registrant's Proxy Statement relating to the
registrant's 1998 Annual Meeting of Stockholders to be held on June 16, 1998,
are incorporated by reference into Part III of this Report.
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(1) Excludes shares held of record on that date by directors and officers and
greater than 5% shareholders of the registrant. Exclusion of such shares
should not be construed to indicate that any such person directly or
indirectly possesses the power to direct or cause the direction of the
management of the policies of the registrant.
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PART I.
ITEM 1. BUSINESS
Innova was incorporated in 1989. Innova designs, manufactures and supports
millimeter wave radios for use as short- to medium-distance wireless
communication links in developed and developing telecommunications markets.
Innova's products enable telecommunications service providers to establish
reliable and cost-effective voice, data and video communications links within
their networks. Innova's products operate in frequencies ranging from 13-38 GHz
and may be used in various applications, including cellular and PCS/PCN
networks, broadband communications, local loop services and long distance
networks.
Innova's millimeter wave radio systems are designed to operate at multiple
E1/T1 rates, are based on a common system architecture and are software
configurable. Innova's radio systems consist of an Indoor Unit ("IDU"), which
interfaces with the user's network and is digitally linked to an Outdoor Unit
("ODU"), which transmits and receives the Radio Frequency ("RF") signal. The
common embedded software platform in the IDU and ODU is simple network
management protocol "SNMP"-compliant and provides the ability to remotely
monitor and manage Innova's radios within a network using the service provider's
network management system.
Innova markets its products principally to systems integrators with a
strong regional presence in Europe, Latin America and Asia. Innova seeks to
develop strategic relationships with these systems integrators, which provide
field engineering, installation, project financing and support to service
providers. To date, Innova has entered into distribution agreements with Bosch,
NERA, Wireless, Inc. and SAT. Innova also markets its products directly to
certain service providers in the U.S. and internationally. To date, the Company
has supplied products, either through distribution relationships or directly, to
Alestra (Mexico), Associated Communications (Teligent) (U.S.), Avantel (Mexico),
Bosch Telcom, Bouygues Telecom (France), Ericsson (Mexico), Romatel (Romania),
Globtel (Slovakia), Nortel (Canada), PacBell Mobile Services (U.S.) and Telcel
(Venezuela), among others.
INDUSTRY BACKGROUND
In recent years, worldwide demand for telecommunications services has
increased dramatically. In developed countries, much of the demand has been for
mobile services, while in developing countries demand has been principally for
basic voice service. This demand has been driven by the recognition that
effective communications enhance business productivity and can accelerate
economic growth. Demand has also been driven by the emergence of technologies
that allow the development and deployment of cost-effective, reliable
telecommunications systems.
Changes in the regulatory environment in many countries, including the
elimination of monopolies for public telecommunications services, privatization
of government-owned telecommunications organizations and allocation and
licensing of radio frequency spectrum by regulatory authorities, have led to an
increase in the number of telecommunications service providers seeking to meet
this demand. In Europe, for example, recent EU directives prohibit each member
country from restricting competitive access to mobile and local service after
January 1, 1998. In the U.S., the Telecommunications Act of 1996 mandated
competitive access to local telephone networks, and spectrum has been allocated
for five wireless carriers per market. Similar trends are occurring in
developing countries, creating significant opportunities for new entrants in the
telecommunications markets.
Telecommunications service providers are seeking to rapidly capture market
share by establishing new networks and expanding existing networks in response
to the opportunities created by deregulation, technological advances and
increasing consumer demand. As demand for telecommunications services has
increased, mobile and local service providers have committed significant amounts
of capital to the installation of network infrastructure. In developed
countries, new service providers have the option to lease network capacity from
existing service providers, but often choose not to do so since such leasing
arrangements may be with competitors, may be comparatively expensive and would
not allow the service provider to control the network. As a result, many new
service providers are seeking to build their own networks to provide new or
improved
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service. In addition, existing service providers have continued to upgrade and
expand their networks to respond to customer demand and increased competition.
In developing countries, both new and existing service providers are investing
heavily to build out network infrastructure to respond to the demand for basic
service.
Telecommunications links are a critical element of network infrastructure.
Service providers must choose between wireline or wireless equipment for each of
the many telecommunications links that connect various parts of their networks.
Wireless links are frequently used within telecommunications networks to
interconnect cell sites, switching systems, wireline transmission systems and
other fixed facilities. Wireless links generally involve relatively low initial
capital costs, and may be quickly deployed, especially in urban areas, as no
terrestrial rights of way need to be acquired or cables installed. In addition,
new wireless links can be rapidly added to upgrade or expand existing
telecommunications networks and installed links can be quickly relocated to
respond to shifts in demand.
Telecommunications infrastructure developers rely increasingly upon
millimeter wave radio systems for short- to medium-distance wireless links. The
narrower antenna-beam width of millimeter wave frequencies allows a higher
density of links in a given geographic area as compared to lower frequencies.
The atmospheric attenuation of millimeter wave frequencies also allows these
frequencies to be re-used after relatively short distances. As a result,
millimeter wave radios are particularly well-suited to provide wireless
transmission over short- to medium-distances, especially in areas of dense
usage.
As millimeter wave radios have become an increasingly critical component of
telecommunications networks, service providers have focused on the quality and
lifetime ownership cost of these systems. Thus, service providers now demand
more reliable millimeter wave radios in order to reduce costly service
interruptions resulting from the failure of critical links within their
telecommunications networks. Due to increased sensitivity to aesthetic concerns,
congestion in urban environments and use of wireless systems in developing
countries, base stations are becoming smaller and are being placed in less
suitable locations. As a result, service providers now seek radio systems which
are smaller and which perform reliably under adverse conditions. In addition,
larger and more complex telecommunications networks require millimeter wave
radios which can be easily integrated with other parts of the network, avoiding
the need for multiple network management systems. Moreover, the need to rapidly
deploy and upgrade networks requires millimeter wave radios which can be easily
installed without sophisticated tools or special skills, and which can be easily
and quickly reconfigured or field upgraded.
INNOVA SOLUTION
Innova's millimeter wave radio systems are reliable, intelligent,
feature-rich and easy to install, maintain and upgrade. The Company's XP4 radio
systems have been selected for deployment by major systems integrators and new
service providers since their introduction in 1996. The Company believes its
products provide the following benefits:
Reliability. The Company develops and manufactures radio systems capable
of performing reliably under extreme temperatures. The Company believes the low
parts count, low power consumption and high tolerance to temperature extremes of
its XP4 radio systems make them inherently more reliable than competing
products. In addition, the all-digital communications interface between the XP4
radio systems' IDU and ODU provides greater immunity to electromagnetic and
radio-frequency-induced interference.
Ease of Installation and Maintenance. The lightweight XP4 can be easily
installed by a single technician without a PC, additional software, specialized
tools or test equipment. The comprehensive embedded software program facilitates
accurate installation by alerting the installer to configuration mistakes with
blinking LEDs. The diagnostic features of the embedded software platform
simplify maintenance by permitting field technicians to determine proper
operation of an installed terminal without disconnecting the radio unit from the
antenna. The XP4 software platform allows control of the entire radio link from
either end of the link, or from a single remote location. In addition, the SNMP
interface allows operation of the entire system from a central, common network
management center. XP4 radio systems also feature a high degree of modular
commonality across frequency bands and data rates. This common architecture
reduces spare parts inventory and training costs.
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Adaptability. The Company believes it is the first to provide millimeter
wave radio systems which provide an open network management capability, thereby
facilitating inclusion of the systems into a variety of telecommunications
networks. Innova's compact XP4 radio systems are designed to occupy less space
and are well-suited to operate in various settings where small size and
resistance to temperature extremes are necessary. The high immunity to
interference provided by the digital communications link between the IDU and the
ODU also allows the XP4 to be deployed in less suitable sites currently
prevalent in developing countries and congested urban areas.
Ease of Reconfiguration and Upgradeability. Common hardware and a common
software platform across all XP4 radio systems facilitate integration into
network management systems and provide remote reconfiguration and upgrade
capabilities. The comprehensive embedded software platform common to all of
Innova's XP4 radio systems allows network operators to download new code into
the radio units without interrupting traffic or upgrading each unit on site. The
ability to easily reconfigure and upgrade the XP4 systems allow service
providers to enhance and expand their networks without having to replace
installed XP4s.
INNOVA STRATEGY
Innova's objective is to be a leading provider of digital millimeter wave
radios. Innova intends to address the needs of major systems integrators using
millimeter wave radios for wireless connectivity solutions in mobile and local
loop networks, including broadband capability. Innova's strategy includes the
following key elements:
Continue To Focus on Millimeter Wave Radio Market. The Company intends to
continue to focus its product development efforts on new and existing
point-to-point millimeter wave radios, and to maintain its competitive advantage
by continuing to focus its development efforts on small, lightweight systems
which perform reliably at extreme temperatures and can be produced, installed
and maintained on a cost-effective basis. The Company believes it was the first
to provide millimeter wave radio systems with a SNMP-compliant architecture, and
that it was the first to develop, produce and deliver 24 GHz equipment for use
in the U.S. market in response to allocation of 24 GHz spectrum by the FCC. The
Company intends to further expand the frequency range and traffic capacity of
its systems, and is in the process of developing prototypes of possible products
designed for new applications and upgrades of several of the existing products.
Expand Distribution Through Strategic Relationships. The Company intends
to expand the geographic coverage and increase the market penetration of its
products by strengthening existing, and establishing new, strategic
relationships with major systems integrators with strong regional presences
throughout the world. The Company believes that the cost-effective architecture
of its products provides a competitive advantage in developing relationships
with major systems integrators. The Company intends to focus on further reducing
the cost of its radio systems to maintain that advantage. The Company also
believes that service providers will rely more often on third parties to supply
and build their network infrastructure and, therefore, that its relationships
with major systems integrators will become increasingly important. The Company
believes the ability of many major systems integrators to offer financing on
larger projects, and supply complementary products and services necessary to
build telecommunications networks, facilitates sales of the Company's products.
Leverage System Architecture. The Company intends to leverage its system
architecture to realize efficiencies in its product design, assembly and test
processes. The Company believes these attributes will enable the Company to be
first to market with new, reliable products that are cost-effective and meet the
evolving demands of systems integrators and service providers. The Company plans
to continue to design its system architecture to minimize the number of
components in each system and to maximize the use of common components across
the full range of the Company's products. The Company believes its use of common
modules, components and a common software platform facilitates product
enhancement and new product development by reducing the number of components
that need to be re-engineered.
Simplify Product Assembly and Test Processes. The Company continually
seeks to refine and simplify its product design and assembly, calibration and
test processes, which are the most significant components of
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production cost. The Company believes its rigorous testing processes, including
operation of radio systems at extreme temperatures and use of proprietary
software and test stations, provide a significant competitive advantage. The
Company intends to continue to develop software that increases automation and
process reliability and improves productivity. The Company also believes that
increased automation could allow it to reduce dependence on skilled labor and
enable it to establish additional manufacturing facilities in developing markets
to increase market opportunity.
PRODUCTS
The Company's radio systems are designed to operate in millimeter wave
bands used for the transmission of voice, data and video traffic over short- to
medium- distances. The Company's XP4 products are based on a common system
architecture and are software configurable. The Company's XP4 systems operate at
data rates up to and including 4E1 and 4T1, and have been certified for use in
the Czech Republic, France, Germany, Mexico, Slovakia, Argentina, The
Philippines, Chile, Colombia, Brazil, Venezuela, Canada, Spain, the U.K. and the
U.S.
The following table provides transmission distances and the number of
access lines offered by the 13 GHz, 15 GHz, 18 GHz, 23 GHz, 24 GHz, 26 GHz and
38 GHz systems currently being marketed by the Company.
XP4 PRODUCT LINE
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NUMBER OF ACCESS LINES
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FREQUENCY IN 2E1/4E1 AND 4T1 OR OPERATIONAL
GHZ 4E1/8E1 4T1/8T1 RANGE IN MILES
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13 Yes Yes 15
15 Yes Yes 15
18 Yes Yes 10
23 Yes Yes 6
24 No Yes 5
26 Yes No 5
38 Yes Yes 3
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Indoor Unit. The IDU is the interface to the user's network. It is an
assembly mounted indoors, or in a base station, that contains digital signal
processing electronics, including line interface and digital multiplexing
circuitry. The IDU also includes the alarm and diagnostic ports, service channel
and SNMP-compliant network management capability. The IDU provides for the
ability to set capacity, frequency and power output of the radio link through
software configuration without requiring access to the outdoor unit.
Configuration of the Company's radio systems, including frequency
selection, power output setting, capacity and link ID, along with alarm
monitoring and receive signal level indications, are performed using the
five-button keypad located on the front panel of the IDU, or by using a PC and
the Company's proprietary XPView software interface. In contrast, many competing
millimeter wave systems require mechanical adjustment and manual tuning, which
involve sending maintenance personnel with test equipment to the radio's
installed location. Software embedded in the Company's radio system also
facilitates upgrades of system capacity, with minimal hardware changes.
Outdoor Unit. The ODU consists of a lightweight, compact, integrated RF
electronics enclosure that attaches directly to an antenna. The RF enclosure
contains electronics that, when transmitting, convert, modulate and amplify the
digital signal received from the IDU. Typically, the ODU is installed outdoors
on a tower or rooftop. A simple latch secures the ODU to the antenna, allowing
for vertical or horizontal polarization installation, and permits removal of the
ODU without tools and without affecting antenna alignment.
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Software. The Company's embedded software platform is common to all XP4
frequency bands and capacity models. It enables control of user configurable
features from the five-button keypad on the IDU. The embedded software code is
also compatible with the Company's custom manufacturing test and calibration
software. This approach facilitates automation of the final test process by
enabling adjustments to equipment parameters through software commands, rather
than the traditional method of manual dip-switches or pots.
The Company's XPView software provides a remote means of configuring the
Company's radio systems, as well as providing for advanced diagnostics and
maintenance capabilities, including code downloading. The optional SNMP feature
is implemented via a small plug card in the IDU which provides Ethernet, RS232,
and RS422 communication ports for remote link control and remote collection of
status and alarm data.
SYSTEM ARCHITECTURE
The Company's system architecture is designed to offer advantages in
reliability, cost, installation and maintenance when compared to competitive
systems. The Company employs a common set of modules and components for all data
rates and frequencies with the exception of the transmit and receive modules and
diplexer filters. This substantially simplifies the logistics of customer
support, purchasing, and manufacturing. The Company incorporates the four-level
FSK modulator/demodulator into the ODU, rather than including it in the IDU. The
Company believes this results in a more reliable design by permitting digital
communications between the IDU and ODU, thereby reducing interference from EMI
or ground loop, by permitting filtering of undesirable noise and eliminating
cable equalization circuitry completely. This also reduces the electronics
contained in the IDU, resulting in a compact indoor unit which occupies only one
rack unit mounting space in telecom cabinets or base stations.
The Company's ODU uses advanced miniature, multifunction transmit or
receive hybrid modules which provide for lower power consumption, smaller size
and fewer interconnection cables or assemblies than conventional millimeter wave
radio systems. In addition the Company's proprietary compact diplexer filter
design eliminates the need for bulky separate transmit and receive filters and
an associated circulator. This design approach results in a lighter, more
compact ODU than competing systems.
The embedded software platform reduces the number of manufacturing models
by facilitating production of radio systems for use with varying frequency plans
in different countries. In contrast, traditional systems require hardware
variations to adjust to different frequency plans in each country. In addition,
each ODU will support multiple traffic capacities without any hardware changes,
as these modifications are also governed by software. Transmit power level is
also controlled electronically from the IDU. As a result, no field adjustments,
switch settings or other modifications are required to operate an ODU within its
designated tuning range regardless of frequency plan, traffic capacity or
transmitter output power. The intuitive built-in software interface permits
terminal configuration without extensive training or special tests using the
five-button keypad on the face of the IDU. The embedded software platform also
facilitates accurate installation by alerting the installer to mistakes with
blinking LEDs. Software configurability enables the provision of advanced field
diagnostic tools such as RF terminal loopback. In this mode, the transmitter is
tuned to the frequency of the local receiver, enabling operation of the terminal
in RF loopback and verification of proper, error-free performance. In order to
perform similar functions, competing systems require either the use of a bulky,
external turnaround oscillator or the use of complex, internal mechanical
assemblies.
CUSTOMERS
The Company's customers consist principally of systems integrators, which
incorporate XP4 radio systems into a variety of telecommunications networks to
be sold to telecommunications service providers. Systems integrators may also
provide engineering and installation services and project financing for service
providers. These systems integrators develop the network design and provide the
field effort necessary to install, commission and maintain the Company's
systems. Systems integrators are extensively used by fixed and mobile service
providers in Europe, Asia and developing countries. The Company also sells its
products directly to service providers, principally in North America. Service
providers can use the Company's products for various applications, including
cellular and PCS/PCN networks, broadband communications, local loop
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services, and access to long distance networks. As of December 31, 1997, 85% of
the Company's sales have been to systems integrators, with the remaining 15%
being made directly to service providers.
The systems integrators and service providers set forth below have each
placed significant orders for XP4 radios since introduction of the product line
in the quarter ended September 30, 1996. The Company has also received orders
for lesser quantities, principally for use as demonstration units, from Lucent
Technologies and Mitec.
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SYSTEMS INTEGRATORS SERVICE PROVIDERS
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Bosch Airlink (Brazil)
Ericsson Alestra (Mexico)
NERA Associated Communications (Teligent U.S.)
Nortel Avantel (Mexico)
SAT Bachow Communications (U.S.)
Simtel Bouygues Telecom (France)(1)
Wireless Globtel (Slovakia)(1)
Iusacel (Mexico)
Mercury (Argentina)
PacBell Mobile Services (U.S.)
Romatel (Romania)
Smartcom (Philippines)
Telcel (Venezuela)(1)
</TABLE>
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(1) Indicates service providers that purchased equipment from a systems
integrator.
To date, approximately twenty-three customers have accounted for all of the
Company's sales of XP4 systems. Sales to Associated Communications (Teligent),
Bachow Communications and Nortel accounted for approximately 14.5%, 12% and 45%
of the Company's XP4 sales, respectively, in calendar 1996. Paul Bachow, a
director and greater-than-5% beneficial owner of the Company's Common Stock, is
the only shareholder and the President of Bachow Communications. For the year
ended December 31, 1997, Associated Communications (Teligent), Nortel and SAT
accounted for 5%, 24% and 46%, respectively, of the Company's XP4 sales, and as
of December 31, 1997, two customers, NERA and SAT, accounted for approximately
19% and 27%, respectively, or an aggregate of 46%, of the Company's backlog
scheduled for shipment in the six months subsequent to December 31, 1997. SAT is
a greater-than-5% beneficial owner of the Company's Common Stock. The Company
has entered into agreements with SAT for exclusive distribution in France,
Italy, Poland, Hungary, Andorra and Monaco and nonexclusive distribution in
other countries; with Bosch, for global distribution other than France, Italy,
Poland and Hungary; with NERA, for distribution principally in Asia, Latin
America and parts of Europe; and with Wireless for distribution primarily in
Latin America and Asia. The Company has also sold a significant portion of its
products to Nortel. The Company anticipates that its sales will continue to be
to a relatively small group of customers, consisting principally of
international systems integrators and, in North America, service providers. For
the nine month fiscal period ended December 31, 1996, 50% of total sales were to
a single customer in Canada, and 27% and 43% of total sales for the year ended
December 31, 1997 were to a single customer in each of Canada and France,
respectively. See Note 13 to Consolidated Financial Statements.
The Company's ability to achieve or increase its sales in the future will
depend in significant part upon its ability to obtain and fulfill orders from
existing and new customers and maintain relationships with and provide support
to existing and new customers, its ability to manufacture systems on a timely
and cost-effective basis and to meet stringent customer performance and other
requirements and shipment delivery dates. As a result, any cancellation,
reduction or delay in orders by, or shipments to, any customer, as a result of
manufacturing difficulties or otherwise, may have a material adverse effect upon
the Company's business, financial condition and results of operations. There can
be no assurance that the Company's sales will continue to increase in the future
or that the Company will be able to retain and support existing customers or to
attract new customers.
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DISTRIBUTION RELATIONSHIPS
The Company markets its products principally to systems integrators with a
strong regional presence in countries in Europe, Latin America and Asia. The
Company believes these relationships are a critical component of its ability to
include its systems in major network buildout projects. To date, the Company has
entered into major agreements with NERA, Bosch and SAT (the material terms of
which are discussed below) as well as other systems integrators.
NERA Arrangements. NERA ASA has entered into an OEM Purchase and Limited
Licensing Agreement with the Company (the "NERA Agreement") pursuant to which
they have ordered in excess of $5 million of XP4 product kits and components.
The NERA Agreement authorizes NERA and its affiliated companies to purchase
products from the Company on most-favored-customer pricing and terms and to
distribute such products on a non-exclusive basis in all countries other than
France, Hungary, Poland, Italy, Monaco and Andorra (collectively, the "SAT
Territories"), where sales by NERA are to be coordinated with SAT on a
case-by-case basis. Under the NERA Agreement, the Company and NERA have
committed to cooperative development of certain new XP4 products and features,
and the Company has granted NERA certain design approval rights, as well as
testing rights on XP4 kits purchased from the Company. The Company has also
granted NERA a royalty-free right to manufacture and test XP4 indoor units
solely for sale with the Company's outdoor units; and a royalty-bearing right to
use the Company's designs and technologies for the purpose of manufacturing XP4
products, effective only upon the occurrence of one of the following restrictive
conditions: (i) the failure of the Company to timely deliver products for over
two months, (ii) the bankruptcy, termination of business or dissolution of the
Company, or (iii) the termination of manufacturing and promotion by the Company
of XP4 products under the NERA Agreement. The NERA Agreement provides for the
Company to pay penalties for late delivery, to the extent NERA is obligated to
make penalty payments to its customers due to the late delivery. The NERA
Agreement has a five-year term expiring May 30, 2002, at which time all
distribution, manufacturing and other rights will terminate. However, the
Company's warranty, maintenance and repair obligations survive termination. NERA
is obligated, during the term of the agreement and for a two-year period
following its termination, not to develop, manufacture or sell any product based
on the Company's products or technologies, except as described above. The
Company also has outsourced some circuit board assembly to NERA's Singapore
facility.
SAT Arrangements. The Company has entered into a Cooperation Agreement
with SAT under which it has granted distribution rights to SAT for its XP4
products, including exclusive rights in France, Hungary, Poland, Italy, Monaco
and Andorra (collectively, the "SAT Territories") and nonexclusive rights in all
other countries except in North America, Australia and New Zealand. The
Cooperation Agreement prohibits the Company from selling XP4 products directly
or indirectly in the SAT Territories. The Cooperation Agreement also grants
distribution rights to the Company with respect to certain SAT products; assures
each of the parties most-favored-customer pricing and terms; specifies the
maximum production capacity required to be allocated to SAT by the Company;
assures SAT access to the Company's supply relationships for custom design parts
and components, on comparable commercial terms; grants SAT the right to
advertise the XP4 products as its own; and provides for cooperation in the
development of certain features of the Company's XP4 product line, and sharing
of technical data on an ongoing basis, subject to confidentiality and other
restrictions on use.
The Cooperation Agreement also grants SAT a right to immediate use of the
Company's XP4 designs and technologies for the purpose of developing and
manufacturing (i) any product below 15 GHz within the SAT Territories and (ii)
certain products above 15 GHz, subject to limitations as to the place of
manufacture and, in certain cases, to quantity limitations. SAT is also granted
additional rights to use the Company's designs and technologies for the purpose
of manufacturing certain other XP4 products, subject to limitations as to the
place of manufacture but without quantity limitations. These additional rights
are effective only upon the occurrence of certain failures by the Company to
perform certain obligations under the Cooperation Agreement, such as failure of
the Company to timely deliver a minimum percentage of products for over three
months, discontinuation of manufacture of products, wrongful rejection of
purchase orders or failure to afford SAT "most favored customer" terms. In any
such case, the Company's failure must involve at least $100,000 of products. SAT
is required to pay specified royalties to the Company on products manufactured
pursuant to
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both its conditional and unconditional rights. The Cooperation Agreement has an
initial term of 5 years, expiring October 31, 2001, but is automatically renewed
for successive five-year terms unless terminated by either party with one year's
notice. Upon expiration of the initial term or upon termination of the
Cooperation Agreement due to an uncured material breach by the Company, all
manufacturing rights which are at that time effective will become irrevocable
and fully paid, and SAT will thereafter be entitled to manufacture certain XP4
products free of any royalties or other compensation to the Company.
In conjunction with the Cooperation Agreement, the Company and SAT have
also entered into a Master Purchase Agreement which includes conditional
commitments by SAT to purchase a fixed number of XP4 products in various
frequencies and configurations from the Company within an initial specified
period, and to purchase a specified dollar amount of XP4 products within a
subsequent specified period. The Master Purchase Agreement contains other
provisions regarding product acceptance testing procedures applicable to SAT's
purchase commitment.
RESEARCH AND DEVELOPMENT
The Company has an ongoing research and development program to enhance its
existing products and to introduce new products. The Company invested
approximately $4.5 million in the fiscal year ended March 31, 1996, $3 million
in the nine month fiscal period ended December 31, 1996 and $4.6 million for the
year ended December 31, 1997 in research and development efforts. The Company
expects to continue to invest significant resources in product research and
development.
The Company's research and development efforts focus on using existing
product architectures and technology to maintain commonality and minimize
time-to-market for new products and enhancements. The Company's research and
development efforts are currently focused on developing additional models of the
Company's XP4 product line to address both higher and lower capacity
applications and greater modulation efficiency, and on leveraging the Company's
temperature resistant technology to develop a low-cost, all-outdoor radio, and
the Company has developed prototypes of these products. The common architecture
of the Company's XP4 products, by limiting the number of new components needed
to develop products or new frequencies, also allows the Company to react quickly
to changing regulatory environments. The Company was the first manufacturer to
develop and ship radios operating in the 24 GHz range in response to the recent
licensing of the 24 GHz spectrum in the U.S. The Company's research and
development efforts continually strive to enhance software features contained in
its products, and to develop products which can be manufactured in a simple and
cost-effective manner.
The wireless communications market is subject to rapid technological
change, frequent new product introductions and enhancements, product
obsolescence, changes in customer requirements and evolving industry standards.
To be competitive, the Company must successfully develop, introduce and sell new
products or product enhancements that respond to changing customer requirements
on a timely and cost-effective basis. Any success of the Company in developing
new and enhanced products will depend on a variety of factors including: timely
and efficient completion of system design; timely and efficient implementation
of assembly, calibration, and test processes; development and completion of
related software; the reliability, cost and quality of its products; market
acceptance; and development and introduction of competitive products by
competitors. The Company has experienced and may experience delays from time to
time in completing development and introduction of new products. Moreover, there
can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products or product enhancements.
The inability of the Company to introduce in a timely manner new products or
product enhancements that contribute to sales could have a material adverse
effect on the Company's business, financial condition and results of operations.
MANUFACTURING
The Company performs final assembly and test, quality assurance, packaging
and shipping at its facility in Seattle, Washington. The Company purchases all
of the circuit boards, integrated circuits and other components used in its
products from third-party suppliers. The Company inspects these components for
8
<PAGE> 10
quality, groups the components into kits by production order and ships the kits
to its subcontractors for initial assembly. As a result of the use of common
components across the full range of XP4 products, the Company's manufacturing
process is flexible and can accommodate significant changes in the frequency or
data rate of radios produced on a daily basis. This flexibility also reduces the
Company's need to maintain a large inventory of finished goods, as radios may be
produced to meet specific customer requirements without the need for significant
lead times, setup costs or changes to the manufacturing process.
The Company designs its products to provide a high degree of reliability.
The Company inspects and tests its products during the assembly process and
tests finished products using internally developed procedures. The Company
believes its testing procedures at extreme temperatures are among the most
rigorous in the industry. The Company's quality inspection and testing also
include "burn-in" procedures throughout the assembly process to ensure the
quality and reliability of the Company's products. The Company has extensively
invested in computerized test stations reducing dependency on skilled labor and
facilitating a gradual increase in capacity. The Company believes that its
practice of conducting all testing and calibration internally has contributed to
the reliability of its products. The Company believes the reliability of its XP4
radio systems is the result of its quality assurance procedures. The Company
received ISO 9001 certification in May 1996.
Certain parts incorporated in the Company's products are only available
from single or limited sources, including the field programmable gate arrays
supplied by Xilinx, MMICs and hybrids of certain frequencies supplied by
Hewlett-Packard and C&S, saw filters supplied by Sawtek, microprocessors
supplied by Motorola and power supplies supplied by Calex and incorporated in
the Company's products. Certain other parts and components used in the Company's
products are available from a limited number of sources. The Company's reliance
on these single or limited source suppliers involves certain risk and
uncertainties, including the possibility of a shortage or discontinuation of
certain key components and reduced control over delivery schedules,
manufacturing capability, quality and cost. Any reduced availability of such
parts or components when required could materially impair the Company's ability
to manufacture and deliver its products on a timely basis and result in the
cancellation of orders which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the purchase of certain key components involves long lead times and, in the
event of unanticipated increases in demand for the Company's products, the
Company may be unable to obtain such components in sufficient quantities to meet
its customers' requirements. The Company has established dual sources for
transmit and receive hybrids with Hewlett-Packard Company ("Hewlett-Packard"),
among others, through blanket order arrangements covering estimated requirements
for 1998. The Company does not have guaranteed supply arrangements with many of
its single or limited source suppliers, does not maintain an extensive inventory
of parts or components and customarily purchases single or limited source parts
and components pursuant to purchase orders. Business disruptions, production
shortfalls or financial difficulties of a single or limited source supplier
could materially and adversely impact the Company by increasing product costs,
or reducing or eliminating the availability of such parts or components. In such
event, the inability of the Company to establish alternative sources of supply
quickly and on a cost-effective basis could materially impair the Company's
ability to manufacture and deliver its products on a timely basis and could have
a material adverse effect on its business, financial condition and results of
operations.
SALES, MARKETING AND CUSTOMER SUPPORT
Innova's sales and marketing efforts are headquartered in the Company's
executive offices in Seattle, Washington. The Company has also established and
staffed sales, service and customer support facilities in Shirley, England. In
addition, the Company has sales and customer support representatives in Nashua,
New Hampshire, Miami, Florida and Dallas, Texas. The Company has recently opened
a service and support facility in Mexico City, Mexico. The Company may increase
its overseas presence by opening sales and support offices in countries not
served by its distribution partners. The Company markets its products directly
to service providers in North America and certain other countries. The Company
believes that the contact it achieves with service providers through such direct
sales provides valuable feedback on product performance and customer needs,
which assists the Company in developing new and enhanced products. The Company
9
<PAGE> 11
promotes its products through participation and exhibition at trade shows in
North America and through promotion of its products by its system integrators in
Europe and Asia.
The Company believes that the ability of its customer service personnel to
work with systems integrators in resolving any technical problems experienced by
service providers is fundamental to its success. Although system integrators are
responsible for providing customer support to the service providers, the
Company's technical support team must work closely with the systems integrator's
support personnel to promptly and efficiently identify and resolve technical
issues.
If the Company is selected to submit a proposal or bid by a new customer,
the Company may also be required to conduct system trials or provide units for
customer approval. If system trials or testing are required and successfully
completed, the Company then negotiates a contract with the customer to set
technical and commercial terms of sale. The Company generally targets systems
integrators that are involved in multiple projects including large quantities of
radios. Once a radio system has been tested by a systems integrator, determined
to meet its specification and designed into a service provider's network,
further testing or contract negotiations are generally not required for
successive orders from that systems integrator, substantially shortening the
sales cycle. The process for sales directly to service providers by the Company
is similar to the sales process for the first sale to a systems integrator, in
that it may involve field trials, contract negotiation, and take from three to
six months to complete.
COMPETITION
The wireless communications market is intensely competitive. The Company's
millimeter wave radio systems compete with other wireless telecommunications
products and alternative telecommunications transmission media. The principal
competitive factors in this market include product performance and reliability,
ability to meet delivery requirements, price, and product features. The Company
believes that the relatively small size, light weight, low parts count and low
power consumption of its XP4 products, together with the embedded software
platform contained in those products, should allow the Company to compete
favorably with its principal competitors in terms of the reliability,
adaptability, upgradeability and ease of installation of its products. The
Company experiences intense competition worldwide from a number of leading
telecommunications companies that offer a variety of competitive products and
broader telecommunications product lines, including Alcatel Network Systems,
California Microwave, Inc., Digital Microwave Corporation, Ericsson Limited,
Harris Corporation -- Farinon Division, Nokia Telecommunications and P-COM,
Inc., most of which have substantially greater installed bases, financial
resources and production, marketing, manufacturing, engineering and other
capabilities than the Company. The Company may also face competition in the
future from new market entrants offering competing technologies. In addition,
the Company's current and prospective customers, including SAT and NERA, which
have access to the Company's technology or under some circumstances are granted
the right to use the technology for purposes of manufacturing, could develop or
manufacture products competitive with those that have been or may be developed
by the Company. The Company's future results of operations may depend in part
upon the extent to which the Company's customers elect to purchase from outside
sources rather than develop and manufacture their own radio systems. There can
be no assurance that such customers will rely on or expand their reliance on the
Company as an external source of supply for their radio systems.
Recently, certain of the Company's competitors have announced the
introduction of competitive products, and the acquisition of other competitors
and competitive technologies. Within the near future, the Company expects its
competitors to continue to improve the performance and lower the price of their
current products, and to introduce new products or new technologies that provide
added functionality and other features that may or may not be comparable to the
Company's products, which could cause a significant decline in sales or loss of
market acceptance of the Company's systems, or render the Company's systems or
technologies obsolete or noncompetitive. The Company expects to continue to
experience significant price competition that may materially adversely affect
its gross margins and its business, financial condition and results of
operations. The Company believes that to be competitive, it will continue to be
required to expend significant resources on, among other items, new product
development, and product enhancement and cost reduction. There can be no
assurance that the Company will be able to compete successfully.
10
<PAGE> 12
GOVERNMENT REGULATION
Radio communications are subject to extensive regulation by foreign and
U.S. laws and international treaties. The Company's systems must conform to a
variety of international and domestic requirements established to, among other
things, avoid interference among users of radio frequencies and to permit
interconnection of equipment. In order for the Company's radios to be used in a
foreign jurisdiction, regulatory approval for its systems must be obtained and
end users must comply with such regulations. Regulatory bodies worldwide are
continuing the process of adopting new standards for wireless communication
products. The delays inherent in this governmental approval process may cause
the cancellation, postponement or rescheduling of the installation of
communications systems by the Company's customers, which in turn may have a
material adverse effect on the sale of systems by the Company to such customers.
The Company's arrangements with its distributors generally provide for the
distributor to obtain the regulatory approvals applicable to use of the
Company's products in the countries into which they are sold by the
distributors. The Company believes that its XP4 products currently comply with
all applicable U.S. and foreign regulations in countries in which its sales are
material, but changes in these regulations, the need to comply with regulations
in additional countries in the event of sales into those countries, or a failure
by the Company's distributors to obtain necessary approvals or permits in
connection with sales to service providers in a country could require the
Company to change the features of its radio systems and thereby incur
substantial costs and experience delays in radio system installation or
operations by systems integrators or service providers in countries in which its
sales are material. Failure of the Company's radio systems to comply with
current or future regulations could result in delay, suspension or cessation of
radio systems installation or operations by systems integrators or service
providers. Such regulations could require the Company to change the features of
its radio systems and incur substantial costs and experience delays to comply
with such time-consuming regulations. Equipment to support new services can be
marketed only if permitted by suitable frequency allocations, auctions and
regulations, and the process of establishing new regulations is complex and
lengthy. To the extent systems integrators or service providers are delayed in
deploying these systems, the Company could experience delays in orders. These
delays could have a material adverse effect on the Company's business, financial
condition and results of operations.
The regulatory environment in which the Company operates is subject to
significant change. Regulatory changes, which are affected by political,
economic and technical factors, could significantly impact the Company's
operations by restricting network deployment efforts by the Company's customers
or end users, making current systems obsolete or increasing the opportunity for
additional competition. Any such regulatory changes could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company might deem it necessary or advisable to modify its
products to operate in compliance with such regulations. Such modifications
could be extremely expensive and time-consuming.
INTELLECTUAL PROPERTY
The Company relies on technological innovations, trade secrets and
expertise to develop and maintain its competitive position, and upon
confidentiality procedures, common law remedies and contractual provisions to
protect its proprietary rights. The Company does not hold any patents regarding
the technology and expertise involved in the assembly, calibration and testing
of its XP4 products. The Company has applied for patents on various elements of
its radio systems. There can be no assurance, however, that such pending patent
applications will ultimately issue as patents or, if patents do issue, that the
claims allowed will be sufficiently broad to protect the Company's proprietary
rights or provide any competitive advantage. In addition, there can be no
assurance that issued patents or pending applications will not be challenged or
circumvented by competitors, or that rights granted will provide any competitive
advantage to the Company. The Company's agreements with its distributors
generally contain noncompetition and non-disclosure provisions prohibiting the
distributor from manufacturing products based on the Company's designs for the
term of the agreement and for a short period thereafter. In general, the Company
has not entered into non-competition agreements with its management and other
employees or into confidentiality and nondisclosure agreements with system
integrators or service providers. Furthermore, it is likely that the Company's
competitors can obtain samples of
11
<PAGE> 13
the Company's products and, through reverse engineering, obtain access to
proprietary knowledge regarding the Company's product designs.
The Company's success will depend in part on its ability to protect its
technology and preserve its trade secrets through common law and contractual
restrictions. There can be no assurance that the trade secrecy or other measures
taken by the Company will be adequate to prevent misappropriation of its
technology, or that competitors will not be able to independently develop
technologies having similar or better functions or performance characteristics.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the U.S. There can be no
assurance that the Company will have adequate legal remedy to prevent or seek
redress for future unauthorized misappropriation of the Company's technology.
The telecommunications industry is characterized by rapid technological
change, with frequent introductions of new products and technologies. As a
result, industry participants often find it necessary to develop products and
features similar to those introduced by others, increasing the risk that their
products and processes may give rise to claims that they infringe the patents of
others. Accordingly, the Company's current and future products and processes, or
uses thereof, may conflict with patents that have been granted or may be granted
to competitors or others. Such competitors or others could bring legal actions
against the Company or its customers, claiming damages and seeking to enjoin
manufacturing, marketing or use of the affected product or processes. Similarly,
the Company may in the future find it necessary to commence litigation in order
to enforce and protect its proprietary rights. If the Company becomes involved
in any such litigation, it could consume a substantial portion of the Company's
resources and result in a significant diversion of management attention. If the
outcome of any such litigation were adverse to the Company or its customers, its
business, financial condition and results of operations could be materially
adversely affected. In addition to any potential liability for damages, the
Company or its customers could be enjoined from continuing to manufacture,
market or use the affected product or process, and could be required to obtain a
license in order to continue such manufacture, marketing or use. There can be no
assurance that the Company or its customers would prevail in any such action or
that any license required under any such patent would be made available on
acceptable terms, if at all.
EMPLOYEES
As of December 31, 1997, the Company employed 177 full-time and temporary
employees. None of the Company's employees is represented by a collective
bargaining agreement. The Company's future performance will depend in large
measure on its ability to attract and retain highly skilled employees. The
Company has never experienced a work stoppage and believes its relationship with
its employees to be good.
BACKLOG
The Company's backlog was approximately $20.4 million as of December 31,
1997. The Company includes in backlog only customer commitments for which it has
received signed purchase orders and assigned shipment dates within the following
180 days. The Company's experience has been that customers generally request
shipment within 60 days of their order date. Customer orders have exceeded the
Company's ability to manufacture radio systems. The Company intends to continue
increasing its manufacturing capacity and believes that backlog will decrease,
as a percentage of sales, as the Company becomes able to fill orders on a more
timely basis. Moreover, substantially all of the product orders comprising the
Company's backlog scheduled for shipment in the next six months can be canceled
with limited or no penalties at any time before shipment. Thus, backlog may not
result in revenues or, as of any particular date, be a reliable indicator of
sales for any future period.
ITEM 2. PROPERTIES
The Company's corporate offices and research, development and manufacturing
facilities are located in Seattle, Washington, in three adjacent leased
buildings aggregating approximately 85,000 square feet. The
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<PAGE> 14
Company also leases 2,200 square feet of office space in Shirley, England. The
Company believes its facilities are adequate to meet its needs for the next 12
months.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected annually at the meeting
of the Board of Directors held in conjunction with the annual meeting of
stockholders. The following are the current executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jean-Francois Grenon................... 42 President, Chief Executive Officer and Director
V. Frank Mendicino..................... 58 Chairman of the Board of Directors
Colin J.R. Pallemaerts................. 68 Executive Vice President -- Sales and Marketing
Barbara J. Williams.................... 54 Chief Operating Officer
John M. Hemingway...................... 51 Secretary and Chief Financial Officer
Randy J. Karr.......................... 41 Vice President -- Manufacturing
</TABLE>
JEAN-FRANCOIS GRENON joined the Company in February 1996 as its President
and Chief Executive Officer, and has served as a Director of the Company since
June 1996. From March 1994 to December 1995, Mr. Grenon served as President of
Microwave Radio Corporation, Digital Radio Group, a division of California
Microwave Radio that he helped found, which develops and manufactures digital
millimeter wave radios. From April 1990 to March 1994, Mr. Grenon served as Vice
President and General Manager of Microwave Radio Corporation, a developer of
microwave radio transmission equipment. Mr. Grenon holds an MBA from Harvard
Business School and a BSEE from Ecole Polytechnique, Universite de Montreal.
V. FRANK MENDICINO has served as a Director of the Company since July 1989
and as its Chairman since February 1992. Since 1983, Mr. Mendicino has served as
a General Partner of Woodside Fund, Woodside Fund II and Woodside Fund III, each
of which is a private investment fund. He has also served as a director of over
15 private companies.
COLIN J.R. PALLEMAERTS joined the Company in 1992 and now serves as
Executive Vice President of Sales and Marketing. From November 1991 to April
1992, Mr. Pallemaerts served as Vice President of Marketing at P-Com, a
manufacturer of millimeter wave radio equipment. From January 1989 through
November 1991, he served as Vice President International Marketing for Digital
Microwave Corporation, a leading manufacturer of digital microwave systems. Mr.
Pallemaerts holds a Higher National Certificate in Electrical Engineering from
the Mid Essex Technical College and is a Graduate Member of the British
Institute of Electrical Engineers, a BSEE equivalent.
BARBARA J. WILLIAMS has served as the Company's Chief Operating Officer
since November 1995. From May 1995 to November 1995, she served as the XP4
Project Manager and from November 1994 to May 1995 as the Company's
Manufacturing Information Systems Manager. From June 1984 to November 1994, she
held various product manager positions at Hewlett-Packard, an electronics
manufacturer, including (i) Project Manager of Research and Development, (ii)
Manager of Customer Support, Surface Mount Technology Center and (iii)
Production Manager, Surface Mount Technology Center. Ms. Williams holds a Ph.D.
in Biostatistics from the University of Washington, an M.S. in Mathematics from
the University of Alaska and a B.A. in Microbiology from the University of
Missouri.
JOHN M. HEMINGWAY has served as the Company's Secretary and Chief Financial
Officer since joining the Company in June 1991. From September 1988 to December
1990, Mr. Hemingway served as a consultant
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<PAGE> 15
to Disenos Industriales Plasticus, a manufacturer of video cassettes and similar
products located in Mexico and a wholly-owned subsidiary of Grupo Televisa. From
April 1978 to September 1988, Mr. Hemingway served as Chief Financial officer
and a director of Shape, Inc., a manufacturer of audio and video cassettes,
computer tape and diskettes, compact disks and automatic assembly equipment. Mr.
Hemingway holds a B.A. degree from Yale University in Latin American Studies and
an M.B.A. from Dartmouth College. He is a Certified Public Accountant.
RANDY J. KARR has served as Vice President-Manufacturing of the Company
since January 1997. He joined the Company as Director of Manufacturing in
December 1995. From December 1992 to December 1995, Mr. Karr served as Director
of Operations for MRC-Digital, a position he held since the inception of
MRC-Digital in 1992. From August 1982 to December 1992, Mr. Karr managed the
design and development of the Micro-Beam broad band microwave link business at
Channel Master, a division of AVNET Corporation, a distributor of electronic
components. Mr. Karr holds a BSEE from Missouri State University.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company effected its initial public offering of Common Stock on August
8, 1997, at a price to the public of $13.00 per share. Since that date, the
Company's Common Stock has traded on the NASDAQ National Market. The table below
sets forth for the fiscal quarters indicated the reported high and low last sale
prices of the Company's Common Stock, as reported on the NASDAQ National Market.
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ------- -------
<S> <C> <C>
Third quarter (from August 8, 1997)......................... $28.125 $18.125
Fourth quarter.............................................. $28.875 $12.000
</TABLE>
As of March 25, 1998, there were approximately 130 record holders of Common
Stock, although the Company believes that the number of beneficial owners of its
Common Stock is substantially greater.
The Company has not paid any cash dividends. The Company anticipates that
for the foreseeable future, all earnings, if any, will be retained for the
operation and expansion of its business and that it will not pay cash dividends.
The payment of dividends, if any, in the future will be at the discretion of the
Board of Directors and will depend upon, among other things, future earnings,
capital requirements, restrictions in future financing agreements, the general
financial condition of the Company and general business conditions.
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1997, the Company has issued and sold unregistered
securities as follows:
(1) In March 1997, 962,669 shares of Series E Preferred Stock were
issued at $5.1938 per share to 21 investors, all of whom were venture funds
and other accredited investors, for cash and upon conversion of various
promissory notes issued in the period of November 1996 through March 1997.
(2) In April 1997, the Company issued a warrant to purchase 21,500
shares of Common Stock to Greyrock Capital, a commercial lending
institution, in connection with the execution of a credit facility made
available to the Company.
(3) In June 1997, 502,867 shares of Series F Preferred Stock were
issued at a price of $6.96 per share to eleven investors, all of whom were
venture funds and other accredited investors.
(4) Employees, directors and consultants exercised compensatory stock
options received pursuant to Innova Corporation 1990 Stock Option Plan
(Amended and Restated 1992), stand alone stock options and warrants for an
aggregate of approximately 808,363 shares of Common Stock issued at prices
ranging from $0.024 to $9.84 per share.
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<PAGE> 16
No underwriters were engaged in connection with the sale of securities
described above. All sales of securities described above were made in reliance
upon the exemption from registration set forth in Section 4(2) of the Securities
Act relating to sales by an issuer not involving a public offering. Upon
consummation of the Company's initial public offering, all shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Senior Preferred Stock,
Series C1 Senior Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock were automatically converted into an equal
number of shares for Common Stock. Each of the investors in such financings
represented that the shares were being purchased with investment intent and that
they were accredited investors, and agreed to placement of a legend on the
securities restricting transfer.
USE OF PROCEEDS
The Company's Registration Statement on Form S-1 (File No. 333-29547) filed
with the Securities and Exchange Commission in connection with the Company's
initial public offering (the "Registration Statement") was declared effective at
9:30 a.m., EDT, on August 8, 1997 and the initial public offering commenced on
August 8, 1997. The offering terminated after the sale of all securities that
were registered under the Registration Statement. UBS Securities LLC, Hambrecht
& Quist LLC and Wessels, Arnold & Henderson, L.L.C. were the managing
underwriters of the offering. The Company registered and sold 3,162,500 shares
of common stock, no par value, at an aggregate price of $41.1 million. The
Company incurred a total of approximately $3.8 million of expenses in connection
with the issuance and distribution of common stock in the offering, of which
approximately $2.9 million were paid in underwriting discounts and commissions
and approximately $900,000 were paid to third parties for other expenses.
Offering proceeds, net of aggregate expenses of approximately $3.8 million, were
approximately $37.3 million. The Company used the $37.3 million net proceeds
from its initial public offering to repay the $2.0 million outstanding principal
and accrued interest on its credit line. In addition, the Company used $1.5
million of the net proceeds to repay the Company's outstanding principal balance
and accrued interest on its term loan. Approximately $7.0 million of the net
proceeds has been used to acquire equipment and the remainder of the net
proceeds, $26.8 million, has been used for working capital purposes and
investments in short-term securities with maturities of six months or less at
date of purchase. The Company expects to invest approximately $8.0 million in
additional equipment, leasehold improvements and information systems over the
next twelve months and to use the balance of the net proceeds for working
capital and other general corporate purposes, such as supporting growth in
inventory and receivables and hiring additional personnel in connection with the
Company's efforts to increase its production capacity, scope of operations,
research and development and sales and marketing activities. None of the
expenses paid in connection with the issuance and distribution of the common
stock in the offering, and none of the net offering proceeds, were paid directly
or indirectly to directors, officers, general partners of the Company or their
associates, persons owning ten percent (10%) or more of any class of equity
securities of the Company, or affiliates of the Company.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTH FISCAL
YEAR ENDED MARCH 31, PERIOD ENDED YEAR ENDED
---------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996(1) 1997
-------- ------- ------- ----------------- ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues:
Net product sales................ $ 877 $ 1,151 $ 445 $ 2,051 $ 36,100
Manufacturing contract service
revenues....................... -- 1,207 1,517 53 --
-------- ------- ------- ------- -----------
877 2,358 1,962 2,104 36,100
Total cost of products sold:
Cost of products sold............ 2,063 3,703 2,425 3,686 25,447
Manufacturing contract service
expenses....................... -- 812 1,517 53 --
-------- ------- ------- ------- -----------
2,063 4,515 3,942 3,739 25,447
Gross profit (loss)................. (1,186) (2,157) (1,980) (1,635) 10,653
Operating expenses:
Selling, general and
administrative................. 1,566 2,067 2,317 2,585 7,227
Research and development......... 2,482 1,892 4,519 2,966 4,602
-------- ------- ------- ------- -----------
Loss from operations................ (5,234) (6,116) (8,816) (7,186) (1,176)
Other income (expense)........... (166) (202) (245) (143) 116
Net loss......................... $ (5,400) $(6,318) $(9,061) $(7,329) $ (1,060)
======== ======= ======= ======= ===========
Historical basic and diluted net
loss per share(2)................ $(211.12) $(13.69) $(14.40) $ (8.27) $ (0.18)
Shares used in computing historical
basic and diluted net loss per
share(2)......................... 25,578 461,531 629,254 886,092 5,795,280
Pro forma basic and diluted net loss
per share(2)..................... $ (0.09)
===========
Shares used in computing pro forma
basic and diluted net loss per
share(2)......................... 11,332,037
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------------------- --------------------
1994 1995 1996 1996(1) 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 527 $ 1,922 $ 287 $ 173 $ 2,455
Short term investment
securities..................... -- -- -- -- 19,319
Working capital (deficit)......... (2,388) 1,815 2,156 (289) 37,516
Total assets...................... 2,798 5,093 6,747 7,305 56,795
Current liabilities............... 4,353 1,206 2,156 4,809 7,720
Long-term obligations............. -- 443 330 542 970
Mandatorily convertible notes
payable for preferred stock.... -- -- 6,984 -- --
Redeemable preferred stock........ 13,198 24,497 27,362 39,313 --
Common stock...................... 1,290 1,302 1,330 1,377 86,621
Additional paid-in capital........ 1,605 1,605 1,605 1,605 3,262
Accumulated deficit............... (17,667) (23,985) (33,046) (40,375) (41,435)
Total stockholders' equity
(deficit)...................... $(14,753) $(21,052) $(30,085) $(37,360) $ 48,105
</TABLE>
- ---------------
(1) Subsequent to March 31, 1996, the Company changed its fiscal year end to
December 31.
(2) See Note 1(o) to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Innova designs, manufactures and supports millimeter wave radios for use as
short- to medium-distance wireless communications links in developed and
developing telecommunications markets. The Company began shipping the 18, 23, 26
and 38 GHz models of its XP4 radio systems in the quarter ended September 30,
1996. In addition, the Company began shipments of the 13, 15 and 24 GHz models
of the XP4 line in the quarter ended September 30, 1997. As of December 31, 1997
the Company had sold its XP4 radios to a total of 23 customers, generating $38.1
million in total revenues, $13.1 million of which occurred in the quarter ended
December 31, 1997. Through December 31, 1997, approximately 69% of the Company's
XP4 sales have been to Northern Telecom and Societe Anonyme de
Telecommunications (SAT). Through December 31, 1997 approximately 94% of the
Company's XP4 sales have been made to customers located outside of the United
States. The Company anticipates that international sales will continue to
account for a majority of its sales for the foreseeable future. The Company was
a development stage company from its incorporation in 1989 through March 31,
1996. As of December 31, 1997, the Company had an accumulated deficit of
approximately $41.4 million.
The Company's net sales consist primarily of sales of point-to-point
millimeter wave radios to systems integrators, other equipment resellers and
service providers, principally for installation outside the U.S. Other revenues
are generated from the resale of related telecommunications equipment such as
antennas, cables and enclosures. The Company recognizes revenue upon shipment.
The Company launched the XP4 product line in late 1996. In light of the
fundamental changes in the character of the Company's operations during the past
three years, which resulted in the Company changing from a development stage
company to an operating company during the nine-month fiscal period ended
December 31, 1996, the Company believes that period-to-period comparisons of its
financial results should not be relied upon as an accurate indicator of future
performance.
In calendar 1995, the Company began making significant additions of
experienced management in the engineering, manufacturing, sales and
administrative areas, including a new Chief Executive Officer who took office in
early calendar 1996. From late calendar 1995 to the latter part of calendar
1996, the Company continued to invest in product development and manufacturing
infrastructure, in anticipation of the launch of the XP4 product line, which
occurred in the third quarter of calendar 1996. After an initial evaluation
period,
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orders for XP4 radios increased late in the final quarter of calendar 1996 and
continued to increase in 1997. Since launching the XP4 product line, the Company
has increased expenditures in an effort to increase sales and expand
manufacturing capacity.
Since introduction of the XP4 product line, orders have increased more
rapidly than the Company has been able to expand its manufacturing capacity,
resulting in delayed shipping dates and lost orders. The Company's backlog
increased in the fourth quarter of 1997 to $20.4 million with firm orders
equalling 114% of shipments. The Company includes as orders for purposes of
calculating the book to bill ratio only customer commitments for which the
Company has received signed purchase orders and assigned shipment dates within
the following 180 days. The Company's distribution agreements generally provide
that products are to be shipped not more than 60 days after the order and that
orders may be canceled prior to shipment. The Company believes the current level
of backlog, as a percentage of sales, is due to inadequate manufacturing
capacity and anticipates that the backlog will decrease as a percentage of sales
as manufacturing capacity increases and delivery times decrease. The Company
intends to continue its efforts to increase manufacturing capacity but expects
that sales may continue to be constrained by limited capacity through mid to
late 1998.
As sales have increased since introduction of the XP4 in the third quarter
of calendar 1996, the Company's gross margins have improved due to the Company's
ability to absorb fixed and semi-variable operating costs over larger
manufacturing volumes. The Company's gross profits over the past five quarters
have also been favorably affected by lower component costs, particularly
fabricated metal parts and transmit and receive hybrids. These component cost
savings are principally a result of higher volume purchasing, the substitution
of lower cost parts and the redesign of components and circuits. Realization of
further planned savings is necessary if the Company is to continue improving
gross margins.
The Company also expects that its gross margins will continue to be
affected by a variety of other factors, such as: increases in lower-margin sales
through large distributors; increased investment in manufacturing facilities or
equipment; changes in labor costs resulting from increasing manufacturing
capacity; increased manufacturing or testing arrangements with distributors;
changes in product mix; receipt of royalties under limited manufacturing
licenses; increased sourcing of components and subassemblies from third-party
manufacturers; and potential increased price competition.
During 1997 revenue derived from large customers and large-scale projects
represented a significant portion of its total revenues. However, significant
progress was made during 1997 in reducing the percentage that any one customer
represented in order backlog. The Company believes that as its manufacturing
capacity increases its sales will continue to be distributed over a broader base
of customers. Price competition among manufacturers of millimeter wave radios
increased during 1997 and is expected to continue to increase over time. This
may adversely affect the Company's margins.
The Company successfully launched 13, 15 and 24 GHz XP4 radios during 1997.
In addition, the Company also began manufacture and shipments of 8x data rate
XP4 systems late in the year. In addition to expanding the XP4 product line with
additional frequencies and data rates, the Company has continued to devote
resources to the development of point-to-point millimeter wave radios with
different architectures that are designed to address different market needs than
the XP4 and expects that research and development costs will increase over time.
The Company has entered into distribution agreements whereby it has agreed
to sell XP4 products at various fixed prices. Certain of these distribution
agreements include "most favored customer" pricing commitments which require the
Company to offer lower prices to such distributors in the event such prices are
offered under like terms and conditions to other customers. In addition, some of
these agreements grant limited manufacturing licenses under certain conditions
or impose penalties for late delivery. The Company anticipates that certain of
its distributors will manufacture a portion of the XP4 radios they sell. To
date, NERA and SAT have exercised to a limited extent manufacturing rights. To
the extent such manufacturing by the Company's distributors decreases the number
of XP4 units built by the Company, the Company's manufacturing gross profit will
be reduced.
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The Company invested $9.8 million in equipment and leasehold improvements
during 1997. This investment resulted in significant capacity expansion in 1997.
The Company expects to continue to invest substantial amounts in increasing
manufacturing capacity. In addition to the investments in manufacturing
equipment and leasehold improvements, the Company plans on investing in software
and management information systems. The Company expects to invest approximately
$8.0 million in additional equipment, leasehold improvements and information
systems over the next twelve months.
The Company has granted non-qualified stock options to its employees which
in some cases have required attainment of performance goals prior to vesting.
Generally, these options have been granted at exercise prices which the Company
believed to be no less than the fair market value of the underlying Common Stock
as of the date of grant. In 1997, the Company amended previously granted options
to eliminate performance-related vesting criteria. In connection with these
amendments, the Company recorded a non-cash charge to operations of $1,192,727
for the year ended December 31, 1997, which is due primarily to the estimated
fair market value of these amended options exceeding the exercise price on the
amendment date. Additional compensation expense of up to $396,550 will be
recorded over the next 4 years as these options vest.
The Company accrues for warranty expenses on an estimated basis, based on a
fixed dollar amount for each radio system shipped. Due to the limited operating
history of the Company, this estimate is based in part on experience with the
XP4 and, to a greater extent, on management's experience in the millimeter wave
radio industry generally. Actual warranty expenses for XP4 sales may vary
significantly from the Company's estimates. If warranty expenses exceed the
Company's estimate, or if the Company is required to make in-the-field repairs
or adjustments to a significant number of radio systems, the Company's business,
financial condition and results of operations could be materially adversely
affected.
The Company's sales may also be affected by a variety of other factors
including the establishment of new distribution relationships, the addition of
direct sales personnel or sales offices, the introduction of new products by the
Company or its competitors, and competitive and other conditions affecting the
telecommunications industry generally. The Company remains dependent on
significant contracts from a limited number of customers. Such contracts are
often with systems integrators, which in turn provide the Company's products to
service providers as part of larger telecommunication system infrastructure
buildouts. Due to the Company's limited operating history and limited number of
customers to date, it is difficult, if not impossible for the Company to
accurately predict the mix or nature of infrastructure projects that provide the
basis for its product sales to systems integrators. The Company anticipates,
however, that revenue derived from current and future large customers and
large-scale projects will continue to represent a significant portion of its
total revenues. Because of the small size of the Company's customer base, the
loss of or reduced demand for products from any customer for any reason,
including business failure of the customer, abandonment of the underlying
project, or changes in government policy or general economic conditions, for
example, could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that price
competition among manufacturers of millimeter wave radios is likely to increase
over time, which could adversely affect the Company's sales and margins.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
from the Company's Consolidated Statements of Operations expressed as a
percentage of Total Revenues.
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED FISCAL PERIOD YEAR ENDED
MARCH 31, ENDED DECEMBER 31, DECEMBER 31,
1996 1996 1997
---------- ------------------- ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues:
Net product sales........................... 22.7% 97.5% 100.0%
Manufacturing contract service revenues..... 77.3 2.5 --
------- ------- ------
100.0 100.0 100.0
Total cost of products sold and manufacturing
contract services expenses:
Cost of products sold....................... 123.6 175.2 70.5
Manufacturing contract service expenses..... 77.3 2.5 --
------- ------- ------
200.9 177.7 70.5
Gross margin (deficit)......................... (100.9) (77.7) 29.5
Operating expenses:
Selling, general and administrative......... 118.1 122.9 20.0
Research and development.................... 230.3 141.0 12.7
Loss from operations........................... (449.3) (341.6) (3.3)
Other income (expense)...................... (12.5) (6.8) 0.3
------- ------- ------
Net loss.................................... (461.8)% (348.4)% (2.9)%
======= ======= ======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE NINE MONTH FISCAL PERIOD ENDED
DECEMBER 31, 1996
Total Revenue. Total Revenue increased to $36.1 million for the twelve
months ended December 31, 1997, as compared to $2.1 million for the nine months
ended December 31, 1996. The increase is primarily attributable to sales of XP4
radios, sales of which did not begin until the third quarter of calendar 1996.
International sales represented 95% of net product sales for the twelve months
ended December 31, 1997. Although XP4 unit shipment volumes have increased
steadily since introduction in late 1996, XP4 sales prices have declined over
time and are expected to continue to decline in the future due to increased
price competition, particularly with respect to larger orders.
Gross Profit (Loss). Gross profit increased to $10.7 million for the
twelve months ended December 31, 1997, as compared to a loss of ($1.6) million
for the nine months ended December 31, 1996. The increase in gross profit was
attributable to the increased sales of XP4 radios, increased manufacturing
volumes and reduced unit material and outside processing costs resulting from
higher-volume purchases and lower, negotiated vendor prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $7.2 million for the twelve months ended
December 31, 1997 as compared to $2.6 million for the nine months ended December
31, 1996. The increase was due primarily to a $1.2 million charge to
compensation expense in connection with amendments to stock options granted in
calendar 1996 as well as to increased compensation expense associated with the
addition of sales and marketing staff in the U.S. and UK offices to support the
XP4 product line and administrative staff to support increased business
activity. Selling, general and administrative expenses declined as a percentage
of revenue due to increase in sales. The Company opened small sales offices in
Mexico City and Miami in 1997 and may incur additional expense in connection
with opening additional sales offices, particularly in certain international
markets and in connection with adding administrative personnel. The Company
anticipates that administrative expenses will also increase during 1998 due to
substantial planned investments in information systems and personnel.
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<PAGE> 22
Research and Development. Research and development expenses increased to
$4.6 million for the twelve months ended December 31, 1997 as compared to $3.0
million for the nine months ended December 31, 1996. The increase in research
and development expenses was primarily due to increases in staffing which offset
a large reduction in consulting expenses. Research and development expenses
incurred for the twelve months ended December 31, 1997 were related to
improvements to and expansion of the XP4 product line along with the continued
development of similar products based on different system architectures (the
XP2) and targeted at different market segments. During 1997 the Company
completed development on and brought into manufacture 13, 15 and 24 GHz systems
along with 8x data rates.
Other Income (Expense). Other income (expense) increased to $116,000 for
the twelve months ended December 31, 1997 as compared to ($143,000) for the nine
months ended December 31, 1996. Increased interest expense was incurred as a
result of increases in capitalized leases and borrowings on the Company's
working capital line. This was more than offset by the interest income arising
from the investment in the third quarter of 1997 of the proceeds from the
Company's initial public offering which closed in August of 1997. The proceeds
were also used to repay borrowings under its working capital lines.
Income Taxes. No provision for income taxes has been recorded, as the
Company incurred net operating losses through December 31, 1997. As of December
31, 1997, the Company had remaining net operating loss carryforwards of $35.3
million and additional loss carryovers relating to its UK subsidiary. The U.S.
net operating loss carryforwards will begin to expire in 2005. Although the
application of these amounts is subject to certain annual limitations under the
Internal Revenue Code of 1986, as amended, the Company believes that the
availability of the cumulative Federal net operating loss carryforward is not
currently limited. However, there can be no assurances that future events, such
as the issuance of additional shares of common stock, or transfers of
outstanding shares of common stock by the Company's shareholders, will not cause
an ownership change to occur in the future and limit the availability of the
NOLs. The Company anticipates that its effective income tax rate will approach
the statutory rate after these amounts are applied or expire. The Company has
provided a full valuation allowance on the deferred tax assets because of the
uncertainty regarding realizability.
NINE MONTH FISCAL PERIOD ENDED DECEMBER 31, 1996 COMPARED TO THE FISCAL YEAR
ENDED MARCH 31, 1996
Total Revenue. Net product sales increased to $2.1 million for the nine
month fiscal period ended December 31, 1996, as compared to $445,000 for the
fiscal year ended March 31, 1996. The increase in net product sales for the nine
month fiscal period ended December 31, 1996 was due to the launch of the XP4
product line in the quarter ended September 30, 1996. International sales during
this nine month period represented 68% of net product sales. Manufacturing
contract service revenues in each of these periods related to manufacture of the
XP3 radios for SAT, which was substantially discontinued in the fiscal year
ended March 31, 1996.
Gross Profit (Loss). The Company's gross (loss) decreased to a loss of
$1.6 million for the nine month fiscal period ended December 31, 1996, as
compared to a loss of $2.0 million for the fiscal year ended March 31, 1996. The
decrease in gross loss for the nine month fiscal period ended December 31, 1996
was due to increased revenue resulting from sales of the XP4 products, which
more than offset increased expenses and the decrease in manufacturing contract
sales revenue and related costs resulting from termination of subcontracting
services. Losses in the fiscal year ended March 31, 1996 were the result of the
ramp-up of production capabilities for the XP3 and fixed manufacturing costs
associated therewith. Due to the planned introduction of the XP4, these fixed
costs were not reduced after the decision to end XP3 production.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2.6 million for the nine month fiscal
period ended December 31, 1996, as compared to $2.3 million for the fiscal year
ended March 31, 1996. The increase for the nine month fiscal period ended
December 31, 1996 was due to increased staffing, both in the U.S. and U.K.
offices, associated with launch of the XP4 product line. Selling, general and
administrative expenses for the fiscal year ended March 31, 1996 reflect
continued investment in marketing and other staff in anticipation of the launch
of the XP4 after ending production of XP3 radios.
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Research and Development. Research and development expenditures were $3.0
million for the nine month fiscal period ended December 31, 1996 as compared to
$4.5 million for the fiscal year ended March 31, 1996. The decrease for the nine
month fiscal period ended December 31, 1996, was due to the shorter period and
to the Company's decision to reduce consulting expenses, which were partially
offset by increases in internal research and development headcount. Research and
development expenses for the nine month fiscal period ended December 31, 1996
were devoted to development of the XP4 product line, including the development
of several frequency and data rate product variations. The Company anticipates
research and development expenses will increase as the Company focuses on new
products in addition to the XP4 product line.
Other Income (Expense). Other expense for the nine month fiscal period
ended December 31, 1996 decreased as compared to the fiscal year ended March 31,
1996. The decrease was due to interest income from investment of proceeds of
equity financing. The Company anticipates that interest expense may increase
substantially over time if sales and, therefore, eligible accounts receivable
and working capital line borrowings, increase and the Company expands its
manufacturing capacity. The Company, however, intends to use the proceeds from
the Offering to pay down working capital borrowings and reduce interest expense.
The paragraphs entitled "Selling, General and Administrative Expenses,"
"Research and Development," and "Other Income (Expense)" in the Section entitled
"Year Ended December 31, 1997 Compared to the Nine Month Fiscal Period Ended
December 31, 1996," and the paragraphs entitled "Selling, General and
Administrative Expenses," "Research and Development," and "Other Income
(Expense)" in the Section entitled "Nine Month Fiscal Period Ended December 31,
1996 Compared to the Fiscal Year Ended March 31, 1996," contain Forward Looking
Statements. Actual results could differ materially from those anticipated or
projected in the Forward Looking Statements as a result of a number of factors,
including those set forth in the Section entitled "Issues and Uncertainties
Affecting Future Performance."
LIQUIDITY AND CAPITAL RESOURCES.
In August 1997 the Company completed the sale of 3,162,500 shares of common
stock through an initial public offering at a price of $13.00 per share. The net
proceeds of the Offering totaled approximately $37.3 million. The Company also
raised an additional $8.5 million from the private placement of equity
securities in March and June of 1997. Concurrent with the Company's initial
public offering all of the outstanding redeemable preferred stock, totaling
8,682,287 shares with a carrying value of $47,768,859 immediately prior to the
closing of the Company's initial public offering, were converted into an equal
number of shares of common stock.
The Company used the $37.3 million net proceeds from its initial public
offering to repay the $2.0 million outstanding principal and accrued interest on
its credit line. In addition, the Company used $1.5 million of the net proceeds
to repay the Company's outstanding principal balance and accrued interest on its
term loan. Approximately $7.0 million of the net proceeds has been used to
acquire equipment and the remainder of the net proceeds, $26.8 million, has been
used for working capital purposes and investments in short-term securities with
maturities of six months or less at date of purchase. The Company expects to
invest approximately $8.0 million in additional equipment, leasehold
improvements and information systems over the next twelve months and to use the
balance of the net proceeds for working capital and other general corporate
purposes, such as supporting growth in inventory and receivables and hiring
additional personnel in connection with the Company's efforts to increase its
production capacity, scope of operations, research and development and sales and
marketing activities.
The Company had $21.8 million and $200,000 of cash, cash equivalents and
short-term marketable securities at December 31, 1997 and December 31, 1996
respectively. Although working capital increased from ($0.3) million as of
December 31, 1996 to $37.5 million as of December 31, 1997, it is expected to
decrease as a result of planned investments in equipment and leasehold
improvements.
Accounts receivable increased to $11.2 million at December 31, 1997 as
compared to $1.7 million at December 31, 1996. This was the result of increased
sales volumes in the twelve months ended December 31, 1997. Inventories also
increased to $12.0 million at December 31, 1997 compared to $2.5 million at
22
<PAGE> 24
December 31, 1996. This increase was related to the increase in manufacturing
levels necessary to support increased sales. Accounts payable increased to $5.8
million at December 31, 1997 as compared to $1.9 million at December 31, 1996
largely due to the ramp-up related to the XP4 product and to the large balance
of payables related to equipment purchases made in the three months ended
December 31, 1997.
The Company believes that its current working capital, together with funds
provided by operations, will be sufficient to meet its liquidity requirements
for at least the next 12 months. To the extent additional capital is necessary,
the Company could be required to obtain additional credit facilities or to sell
additional equity, debt or convertible securities. There can be no assurance
that additional financing will be available at the time or in the amounts that
may be needed, or that any financing which is available will be on terms
favorable to the Company and its shareholders.
Approximately 85% of the Company's XP4 sales through December 31, 1997 were
made to customers located outside the United States. While the operating income
the Company will rely upon to meet a portion of its liquidity needs will come in
significant part from international customers, the Company has experienced no
appreciable difference in pricing, inventory levels or receivables realization
between its domestic and international customers. Additionally, as all of the
Company's sales to date have been denominated in U.S. dollars and the Company
anticipates that this will substantially continue for the foreseeable future,
the Company's operating revenues are not subject to significant exchange rate
risk and the Company has consequently not implemented any programs to
specifically address such risk.
QUARTERLY RESULTS OF OPERATIONS.
The Company's historical quarterly operating results have fluctuated
significantly, principally due to the fact that the Company was, until mid-1996,
a development stage company. In consequence, these fluctuations are largely
explained by variation in expenses incurred in connection with the development
of the Company's XP4 systems. The Company may continue to experience significant
quarterly fluctuations in sales, gross margins and operating results; however,
these fluctuations are likely to be caused by different factors than those that
existed in the past, making prediction of the Company's performance difficult,
if not impossible. Because of the many factors which may affect the Company's
performance in any particular period and because the Company changed from a
development stage Company to an operating Company only recently, the Company
believes that period-to-period comparisons are not necessarily meaningful and
should not be relied upon as indications of future performance.
ISSUES AND UNCERTAINTIES AFFECTING FUTURE PERFORMANCE
The Company does not provide forecasts of future financial performance or
sales volumes, although this annual report contains other forward-looking
statements that involve risks and uncertainties. The Company may, in discussions
of its future plans, objectives and expected performance in periodic reports
filed by the Company with the Securities and Exchange Commission (or documents
incorporated by reference therein), and in written and oral presentations made
by the Company include forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 or Section 21E of the Securities and Exchange
Act of 1934, as amended. Such forward-looking statements are based on
assumptions which the Company believes are reasonable, but are by their nature
inherently uncertain. In all cases, there can be no assurance that such
assumptions will prove correct or that projected events will occur. Actual
results could differ materially from those projected, depending on a variety of
factors, including but not limited to those discussed below. While Company
management is optimistic about the Company's long-term prospects, the following
issues and uncertainties, among others, should be considered in evaluating the
Company's growth outlook and its forward-looking statements.
Rapidly Changing Technology and Product Development Uncertainties. The
wireless communications market is subject to rapid technological change,
frequent new product introductions and enhancements, product obsolescence,
changes in customer requirements and evolving industry standards. The inability
of the Company to introduce in a timely manner new products or product
enhancements that contribute to sales could have a material adverse effect on
the Company's business, financial condition and results of operations.
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To be competitive, the Company must successfully develop, introduce and sell new
products or product enhancements that respond to changing customer requirements
on a timely and cost-effective basis.
Manufacturing Uncertainties. The Company believes that its present
manufacturing capacity continues to be inadequate to meet anticipated demand on
a timely basis. In order to meet its business objectives, the Company must
continue to increase its production capacity. There can be no assurance that the
Company will be able to increase production capacity at an acceptable cost or
rapidly enough to fill orders. The failure to assemble and ship products on a
timely basis could damage relationships with customers, result in cancellation
of orders or lost orders and could result in penalties for late delivery, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Cost Reductions. In order to increase profitability in light of declining
product prices, the Company must reduce component costs and the costs of
manufacturing its products. An inability to reduce costs sufficiently to respond
to competitive market or cost factors could have an adverse effect on revenues
and gross margin.
International Sales. The Company anticipates international sales will
continue to account for at least a majority of its sales for the foreseeable
future. As a result, the Company's operations and results are subject to
fluctuations resulting from changes in regulatory requirements, tariffs and
other trade barriers, political and economic instability, difficulties in
staffing and managing foreign operations, difficulties in managing distributors,
customs requirements, potentially adverse tax consequences, the burden with
complying with a wide variety of complex foreign laws and treaties, difficulties
in obtaining necessary equipment authorizations and the possibility of
difficulty in accounts receivable collections.
Limited Sources of Supply. A number of the Company's components are
manufactured by a single source or distributed through a limited number of
outlets. There can be no assurance that the Company will be able in the future
to obtain key components in a timely manner, in sufficient quantities, or on
favorable price terms.
Competition. The wireless communications market is intensely competitive.
The principal competitive factors in this market include product performance and
reliability, ability to meet delivery requirements, price, ease of installation,
adaptability and upgradeability and other product features. Many of the
Company's competitors have substantially greater installed bases, financial
resources and production, marketing, manufacturing, engineering and other
capabilities than the Company. The Company may also face competition in the
future from new market entrants offering competing technologies. The Company
expects to continue to experience significant price competition that may
materially adversely affect its gross margins and its business, financial
condition and results of operations.
Government Regulation. The regulatory environment in which the Company
operates is subject to significant change. Regulatory changes, which are
affected by political, economic and technical factors, could significantly
impact the Company's operations by restrictive network development efforts by
the Company's customers or users, making current systems obsolete or increasing
the opportunity for additional competition.
Dependence on Key Personnel. The Company's future operating results depend
in significant part upon the continued contributions of its key technical and
management personnel. The development and manufacture of high-frequency radios
is extremely complicated, and the knowledge and experience of each of the
Company's key technical and management personnel is critical to the Company's
ability to develop new products and product enhancements.
Management of Growth. The growth of the Company's operations since the
introduction of the XP4 product line has imposed, and will continue to impose, a
significant strain on the Company's financial resources as well as its product
design, assembly, test and calibration capabilities. To alleviate the impact of
the strain, the Company must successfully manage the transition to higher
manufacturing volumes, establishment of additional facilities, control of
overhead expenses and inventories, development, introduction, marketing and
sales of the new products and product enhancements, management and training of
its employees, and monitoring of third party contractors and suppliers.
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<PAGE> 26
Distribution Relationships. The Company's product distribution strategy is
to rely principally on developing relationships with wireless systems
integrators. There can be no assurance that the Company will be able to
establish satisfactory distribution relationships with new systems integrators
or that existing relationships will be successful. In addition, these
relationships may grant limited manufacturing licenses under certain conditions
or may impose penalties for late delivery. Because of this distribution
strategy, the Company is dependent upon the financial viability, reputation and
success of its distributors with the result that the Company's business,
financial condition and results of operations could be adversely affected by
factors unrelated to the Company's performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INNOVA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Independent Auditors' Report................................ 26
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1997......................................... 27
Consolidated Statements of Operations for the Year Ended
March 31, 1996, the Nine Month Fiscal Period Ended
December 31, 1996, and the Year Ended December 31, 1997... 28
Consolidated Statements of Stockholders' Equity (Deficit)
for the Year Ended March 31, 1996, the Nine Month Fiscal
Period Ended December 31, 1996, and the Year Ended
December 31, 1997......................................... 29
Consolidated Statements of Cash Flows for the Year Ended
March 31, 1996, the Nine Month Fiscal Period Ended
December 31, 1996, and the Year Ended December 31, 1997... 30
Notes to Consolidated Financial Statements.................. 31
</TABLE>
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Innova Corporation:
We have audited the accompanying consolidated balance sheets of Innova
Corporation and subsidiary as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year ended March 31, 1996, the nine month fiscal period ended
December 31, 1996, and the year ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Innova
Corporation and subsidiary as of December 31, 1996 and 1997, and the results of
their operations and their cash flows for year ended March 31, 1996, the nine
month fiscal period ended December 31, 1996 and the year ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
February 3, 1998
26
<PAGE> 28
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 172,764 $ 2,454,763
Short-term investment securities.......................... -- 19,319,495
Accounts receivable, net of allowance for doubtful
accounts of $14,892 and $204,658 at December 31, 1996
and 1997, respectively................................. 1,740,383 11,163,938
Inventories............................................... 2,533,970 12,048,058
Other current assets...................................... 73,157 250,125
------------ ------------
Total current assets................................... 4,520,274 45,236,379
Equipment and leasehold improvements, at cost, net.......... 2,647,361 11,133,961
Other assets................................................ 137,230 425,117
------------ ------------
$ 7,304,865 $ 56,795,457
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable............................................. $ 506,180 $ --
Current installments of obligations under capital
leases................................................. 503,827 1,103,509
Notes payable to stockholders............................. 1,500,000 --
Accounts payable.......................................... 1,944,073 5,779,991
Accrued liabilities....................................... 355,282 836,583
------------ ------------
Total current liabilities.............................. 4,809,362 7,720,083
------------ ------------
Obligations under capital leases, excluding current
installments.............................................. 542,259 969,962
Redeemable preferred stock, no par value. Authorized
11,874,998 shares at December 31, 1996, and 5,000,000
shares at December 31, 1997 issued and outstanding
7,216,751 shares at December 31, 1996 and 0 shares at
December 31, 1997 (liquidation preference of $40,022,239
at December 31, 1996 and $0 and December 31, 1997 and
redemption value of $36,474,201 at December 31, 1996 and
$0 at December 31, 1997).................................. 39,312,836 --
Stockholders' equity (deficit):
Common stock, no par value. Authorized 15,625,000 shares
at December 31, 1996, and 30,000,000 shares at December
31, 1997; issued and outstanding 941,334 shares at
December 31,1996 and 13,679,593 shares at December 31,
1997................................................... 1,376,715 86,621,122
Additional paid-in capital................................ 1,604,997 3,261,674
Deferred stock compensation expense....................... -- (396,550)
Cumulative translation adjustment......................... 33,599 54,088
Accumulated deficit....................................... (40,374,903 (41,434,922)
------------ ------------
Total stockholders' equity (deficit)................... (37,359,592) 48,105,412
------------ ------------
Commitments and contingencies............................... $ 7,304,865 $ 56,795,457
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------- ------------
<S> <C> <C> <C>
Net product sales................................. $ 445,229 $ 2,050,245 $36,099,884
Manufacturing contract service revenues........... 1,516,870 53,257 --
----------- ----------- -----------
Total revenues............................... 1,962,099 2,103,502 36,099,884
----------- ----------- -----------
Cost of products sold............................. 2,425,473 3,685,395 25,447,057
Manufacturing contract service expenses........... 1,516,870 53,257 --
----------- ----------- -----------
Total cost of products sold and manufacturing
contract service expenses.................. 3,942,343 3,738,652 25,447,057
----------- ----------- -----------
Gross profit (loss).......................... (1,980,244) (1,635,150) 10,652,827
----------- ----------- -----------
Operating expenses:
Selling, general and administrative............. 2,316,302 2,584,423 7,226,836
Research and development........................ 4,519,095 2,965,933 4,602,004
----------- ----------- -----------
Total operating expenses..................... 6,835,397 5,550,356 11,828,840
----------- ----------- -----------
Loss from operations......................... (8,815,641) (7,185,506) (1,176,013)
Other income (expense):
Interest income................................. 37,962 102,422 594,538
Interest expense................................ (287,253) (249,294) (546,161)
Other income.................................... 3,754 3,542 67,617
----------- ----------- -----------
(245,537) (143,330) 115,994
----------- ----------- -----------
Net loss..................................... $(9,061,178) $(7,328,836) $(1,060,019)
=========== =========== ===========
Historical basic and diluted net loss per share... $ (14.40) $ (8.27) $ (0.18)
=========== =========== ===========
Shares used in computing historical basic and
diluted net loss per share...................... 629,254 886,092 5,795,280
Pro forma basic and diluted net loss per share.... $ (0.09)
===========
Shares used in computing pro forma basic and
diluted net loss per share...................... 11,332,037
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFERRED
COMMON STOCK ADDITIONAL STOCK CUMULATIVE TOTAL
------------------------ PAID-IN COMPENSATION TRANSLATION ACCUMULATED STOCKHOLDERS'
DESCRIPTION SHARES AMOUNT CAPITAL EXPENSE ADJUSTMENT DEFICIT EQUITY (DEFICIT)
----------- ---------- ----------- ---------- ------------ ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1995..................... 523,810 $ 1,302,020 $1,604,997 $ -- $25,536 $(23,984,889) $(21,052,336)
Sale of common stock for
cash..................... 340,467 8,171 -- -- -- -- 8,171
Common stock issued upon
exercise of stock
options.................. 18,565 19,678 -- -- -- -- 19,678
Net loss.................. -- -- -- -- -- (9,061,178) (9,061,178)
Translation adjustment.... -- -- -- -- 827 -- 827
---------- ----------- ---------- ----------- ------- ------------ ------------
Balances at March 31,
1996..................... 882,842 1,329,869 1,604,997 -- 26,363 (33,046,067) (30,084,838)
Common stock issued upon
exercise of stock
options.................. 10,684 11,900 -- -- -- -- 11,900
Stock issued to vendors
for services............. 47,808 34,946 -- -- -- -- 34,946
Net loss.................. -- -- -- -- -- (7,328,836) (7,328,836)
Translation adjustment.... -- -- -- -- 7,236 -- 7,236
---------- ----------- ---------- ----------- ------- ------------ ------------
Balances at December 31,
1996..................... 941,334 1,376,715 1,604,997 -- 33,599 (40,374,903) (37,359,592)
Deferred compensation
expense related to common
stock options............ -- -- 1,589,277 (1,589,277) -- -- --
Amortization of deferred
stock compensation....... -- -- -- 1,192,727 -- -- 1,192,727
Estimated fair value of
warrant issued in
connection with note
payable.................. -- -- 67,400 -- -- -- 67,400
Common stock issued upon
exercise of stock
options.................. 104,191 173,882 -- -- -- -- 173,882
Common stock issued upon
conversion of preferred
stock.................... 8,682,287 47,768,859 -- -- -- -- 47,768,859
Common stock issued in
connection with initial
public offering, net of
issuance expenses of
$3,810,897............... 3,162,500 37,301,603 -- -- -- -- 37,301,603
Common stock issued upon
exercise of warrants..... 789,281 63 -- -- -- -- 63
Net loss.................. -- -- -- -- -- (1,060,019) (1,060,019)
Translation adjustment.... -- -- -- -- 20,489 -- 20,489
---------- ----------- ---------- ----------- ------- ------------ ------------
Balances at December 31,
1997..................... 13,679,593 $86,621,122 $3,261,674 $ (396,550) $54,088 $(41,434,922) $ 48,105,412
========== =========== ========== =========== ======= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
INNOVA CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL PERIOD
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(9,061,178) $(7,328,836) $ (1,060,019)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 759,273 633,616 1,331,338
Stock issued to vendors for services................... -- 48,677 --
Amortization of deferred stock compensation............ -- -- 1,192,727
Amortization of note payable discount.................. -- -- 50,550
Change in certain assets and liabilities:
(Increase) decrease in accounts receivable........... 159,999 (1,662,356) (9,423,555)
Increase in inventories.............................. (22,048) (1,925,805) (9,514,088)
(Increase) decrease in other current assets.......... 3,173 (16,402) (419,968)
Increase in accounts payable and accrued
liabilities....................................... 797,900 700,485 4,334,069
----------- ----------- ------------
Net cash used in operating activities............. (7,362,881) (9,550,621) (13,508,946)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of short-term investment securities............. -- -- (19,319,495)
Purchase of equipment and leasehold improvements......... (549,426) (324,944) (7,895,150)
Increase in other assets................................. (42,694) (25,026) (44,887)
----------- ----------- ------------
Net cash used in investing activities............. (592,120) (349,970) (27,259,532)
----------- ----------- ------------
Cash flows from financing activities:
Repayments of obligations under capital leases........... (560,602) (404,277) (895,403)
Net proceeds from (repayments of) notes payable.......... -- 506,180 (506,180)
Net proceeds from notes payable to vendor................ 1,000,000 -- --
Net repayment of notes payable to vendor................. (1,000,000) -- --
Proceeds from (repayments of) notes payable to
stockholders........................................... 69,869 (69,869) --
Net proceeds from issuance of convertible notes
payable................................................ 3,702,219 4,781,871 --
Proceeds from sale of redeemable preferred stock......... 3,079,829 4,953,121 6,956,023
Proceeds from sale of common stock....................... 8,171 -- 37,301,603
Proceeds from exercise of common stock options........... 19,678 11,900 173,882
Proceeds from exercise of common stock warrants.......... -- -- 63
----------- ----------- ------------
Net cash provided by financing activities......... 6,319,164 9,778,926 43,029,988
----------- ----------- ------------
Effect of translation and exchange rate changes on cash
flows.................................................... 827 7,236 20,489
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents..................................... (1,635,010) (114,429) 2,281,999
Cash and cash equivalents at beginning of period........... 1,922,203 287,193 172,764
----------- ----------- ------------
Cash and cash equivalents at end of period................. $ 287,193 $ 172,764 $ 2,454,763
=========== =========== ============
Supplemental disclosure of cash flow information -- cash
paid during the period for interest...................... $ 17,273 $ 364,227 $ 546,161
=========== =========== ============
Supplemental schedule of noncash financing activities:
Notes payable to stockholders converted into redeemable
preferred stock........................................ $ -- $ 6,984,090 $ 1,500,000
Notes payable to stockholders converted into mandatorily
convertible notes payable.............................. 1,000,000 -- --
Estimated fair value of warrant issued in connection with
note payable........................................... -- -- 67,400
Capital lease obligations incurred to acquire
equipment.............................................. 530,516 632,845 1,922,788
Conversion of redeemable preferred stock into common
stock.................................................. -- -- 47,768,859
Stock subscriptions receivable........................... 3,281,871 -- --
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 32
INNOVA CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Innova Corporation (Company) was formed to develop, manufacture and market
communication systems utilizing conical horn technology. In November 1993, the
Company shipped the first production units of a line of point-to-point radios.
In November 1994, the Company discontinued manufacture for its own account of
the original radio line; however, production of this product was continued under
a "Processor For Hire Agreement" for the account of one of Innova's stockholders
[see note 7(a), Related Party Transactions] until approximately March 31, 1996.
Also in 1994, a program to redesign the original radios was launched. The
redesign program was undertaken due to changing market demands. For the period
from January 17, 1989 (inception) through March 31, 1996, the Company was
considered to be in the development stage as the Company had not generated
significant revenues from its research and development efforts and "Processor
For Hire Agreement" and operations had been financed primarily through the
issuance of equity securities. Subsequent to March 31, 1996, the Company
effected a change in its year-end to December 31. During the nine month fiscal
period ended December 31, 1996, the Company began manufacturing and selling
redesigned radios and emerged from the development stage.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the Company and its
wholly-owned subsidiary, Innova Europe Limited.
Innova Europe Limited was formed to sell products developed and
manufactured by the Company to customers in Europe. All significant intercompany
balances and transactions have been eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt securities with a maturity of
three months or less at date of purchase to be cash equivalents.
The Company classifies its short-term investments as available-for-sale.
Accordingly, these investments are carried at fair value. The fair value of such
securities approximated cost, and there were no unrealized holding gains or
losses at March 31, 1996, December 31, 1996 and December 31, 1997. Realized
gains and losses are determined using the specific identification method. At
December 31, 1997, all short-term investments consisted of U.S. government
agency securities with a maturity of less than one year.
(d) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
(e) DEPRECIATION AND AMORTIZATION
Depreciation of equipment and amortization of leasehold improvements is
provided on the straight-line method over the estimated useful lives of the
assets which range from two to five years, not to exceed lease terms for
leasehold improvements.
(f) PATENTS
The Company has filed several patent applications in the United States and
other countries. Costs associated with filing patent applications are
capitalized and are amortized using the straight-line method over the estimated
economic lives of the patents ranging from two to five years.
31
<PAGE> 33
(g) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, software development
costs incurred by the Company between the establishment of technological
feasibility and the point at which the product is ready for general release have
not been significant.
(h) REVENUE RECOGNITION
The Company recognizes revenue on product sales upon shipment. Under the
Processor For Hire Agreement -- (PFHA) as discussed in note 7(a), manufacturing
contract service revenues were recognized as the services were performed.
The Company provides warranties, which generally last for two years, on the
products that it sells. The provision for warranty expense is based on
historical industry and Company experience and is accrued when products are
sold.
(i) INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established for deferred tax
assets to the extent there is uncertainty regarding the Company's ability to
generate taxable income in the future and when it is more likely than not that
such deferred tax assets will not be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in net deferred tax assets and liabilities.
(j) FOREIGN CURRENCY TRANSLATION
The functional currency of Innova Europe Limited is the British Pound
Sterling. Assets and liabilities of Innova Europe Limited have been translated
to U.S. dollars using rates of exchange in effect at the balance sheet date.
Income and expense accounts have been translated to U.S. dollars using average
rates of exchange during the periods. The net gain or loss resulting from
translation is shown as a cumulative translation adjustment in stockholders'
equity.
(k) RECLASSIFICATIONS
Certain reclassifications have been made to the March 31 and December 31,
1996 amounts to conform to the December 31, 1997 presentation.
32
<PAGE> 34
(l) CONCENTRATION OF CREDIT RISK AND SUPPLIER CONCENTRATION
The Company currently purchases an important component of its products from
two principal suppliers. Although there are a limited number of potential
manufacturers of such component, management believes that other suppliers could
provide similar components on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing and a possible loss of sales, which could
have a material adverse effect on the manufacturing and delivery of the
Company's products. Purchases from these principal suppliers were as follows:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED FISCAL PERIOD ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
---------- ------------------- ------------
<S> <C> <C> <C>
Supplier A................... $64,000 $945,000 $4,792,000
Supplier B................... -- 131,000 2,628,000
</TABLE>
The Company also purchases other components of lesser significance which
are available from a limited number of manufacturers. Credit is extended to
customers based on an evaluation of their financial condition and collateral is
generally not required. The Company's customers consist principally of
telecommunications service providers and system integrators. The Company
maintains an allowance for doubtful accounts to reduce the effects of credit
losses. As of December 31, 1997, actual credit losses have not been significant
and, therefore, a limited allowance for doubtful accounts has been recorded. See
major customers and segment information at note 13.
(m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, on April 1, 1996. This Statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not have
a material impact on the consolidated financial statements.
(n) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation arrangement in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense under fixed plans would be recorded on the date of
grant only if the fair value of the underlying stock at the date of grant
exceeded the exercise price. Statement of Financial Accounting Standard (SFAS)
No. 123, Accounting for Stock-Based Compensation, requires entities that
continue to apply the provisions of APB Opinion No. 25 for transactions with
employees to provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied to these
transactions.
(o) NET LOSS PER SHARE
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
128, Earnings Per Share. SFAS No. 128 requires the presentation of basic
earnings per share, and for companies with complex capital structures, diluted
earnings per share. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period.
33
<PAGE> 35
The Company has presented historical basic and diluted net loss per share in
accordance with SFAS No. 128. As the Company had a net loss in each of the
periods presented, basic and diluted net loss per share is the same.
Excluded from the computation of historical diluted earnings per share for
1997 are options to acquire 1,759,368 shares of Common Stock with a
weighted-average exercise price of $3.60 and warrants to acquire 2,151,760
shares of Common Stock with a weighted average exercise price of $0.4328 because
their effects would be anti-dilutive. Also excluded from the computation of
historical diluted earnings per share for 1997 are the common equivalent shares
resulting from the assumed conversion of 8,682,287 shares of redeemable
preferred stock because the effects were antidilutive prior to the conversion of
the preferred stock into common stock upon the closing of the Company's initial
public offering on August 8, 1997. The accretion of the difference between the
carrying value of the redeemable preferred stock and the redemption price has
not been reflected in the net loss per share calculations because the amounts
were not significant for the year ended March 31, 1996, the nine month fiscal
period ended December 31, 1996, and the year ended December 31, 1997.
In January 1998 when the Company announced their results of operations for
1997, the Company had computed pro forma basic and diluted net loss per share
using the provisions of Staff Accounting Bulletin (SAB) No. 83 which requires
that all common and common equivalent shares issued during the twelve months
immediately preceding the initial filing of a registration statement for the
Company's IPO be included in the calculation of common and common equivalent
shares outstanding as if they were outstanding for all periods presented,
including loss years where the impact is antidilutive. Additionally, the
provisions of SAB No. 83 allowed the presentation of pro forma net loss per
share in place of historical net loss per share when management has deemed a pro
forma presentation to be more meaningful than the historical presentation.
Because of the significance of the conversion of preferred stock to common
stock upon the closing of the Company's initial public offering, the Company has
presented pro forma basic and diluted net loss per share as if 8,682,287 shares
of redeemable preferred stock had been converted into common stock on January 1,
1997.
The following table reconciles the shares used to compute 1997 historical
basic and diluted net loss per share to shares used to compute pro forma basic
and diluted net loss per share:
<TABLE>
<S> <C>
Shares used to compute historical basic and diluted net loss
per share................................................. 5,795,280
Impact of assumed conversion of preferred stock as of
January 1, 1997........................................... 5,251,383
Impact of shares included pursuant to SAB 83................ 285,374
----------
Shares used to compute pro forma basic and diluted net loss
per share................................................. 11,332,037
==========
</TABLE>
On February 3, 1998, the SEC issued SAB No. 98 which superseded SAB No. 83.
Had the Company computed pro forma basic and diluted net loss per share using
the provisions of SAB No. 98, antidilutive common equivalent shares previously
included pursuant to SAB No. 83 would have been omitted and pro forma basic and
diluted net loss per share for 1997 would have been $(0.10).
(p) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130). Statement 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. Statement
130, which is effective for fiscal years beginning after December 15, 1997,
requires reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company anticipates that implementing the
provisions of Statement 130 will not have a significant impact on the Company's
existing disclosures. The Company has not determined the manner in which it will
present the information required by Statement 130.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information (Statement 131). Statement 131 establishes
standards for the way that public business
34
<PAGE> 36
enterprises report information about operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Statement 131 is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years must be restated. The Company has not determined the manner in
which it will present the information required by Statement 131.
(2) USE OF ESTIMATES
The preparation of consolidated 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Raw materials................................ $1,874,765 $10,382,812
Work-in-progress............................. 503,984 1,611,832
Finished goods............................... 155,221 53,414
---------- -----------
$2,533,970 $12,048,058
========== ===========
</TABLE>
(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Equipment.................................... $5,152,170 $14,616,360
Leasehold improvements....................... 140,840 494,588
---------- -----------
5,293,010 15,110,948
Less accumulated depreciation and
amortization............................... 2,645,649 3,976,987
---------- -----------
$2,647,361 $11,133,961
========== ===========
</TABLE>
Included in equipment and leasehold improvements are the gross cost of
equipment and related accumulated amortization recorded under capital leases as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Equipment..................................... $2,632,721 $4,609,965
Less accumulated amortization................. 1,181,895 1,869,248
---------- ----------
$1,450,826 $2,740,717
========== ==========
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
(5) NOTES PAYABLE
In October 1996, the Company entered into a $5 million revolving credit
agreement which bore interest at the LIBOR rate plus 4.875% with a minimum of 8%
per annum (10.545% at December 31, 1996). Amounts outstanding were $506,180 and
$0 at December 31, 1996 and 1997, respectively. Under the terms of
35
<PAGE> 37
the agreement, advances under the credit facility were limited to 80% of billed
trade receivables outstanding. The agreement was subject to automatic renewals
for successive one-year terms. In April 1997, the Company amended the credit
agreement to include an additional term loan for $1,500,000 due on the earlier
of:
(a) April 30, 1998;
(b) the date the initial October 1996 revolving credit agreement
terminated; or
(c) the date the Company first issued equity, debt or other
securities, other than the Series F financing discussed in note 8,
subsequent to April 1997.
In connection with the term loan, the Company issued to the lender a
warrant, expiring in April 2003, to purchase 21,500 shares of the Company's
common stock, at $6.96 per share. The estimated value of the warrant, $67,400,
was recorded as debt discount and was amortized to interest expense over the
period that the debt was outstanding. This agreement was terminated as of
December 1997 and all amounts borrowed thereunder repaid.
(6) ACCRUED LIABILITIES
A summary of accrued liabilities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Accrued compensation expense................. $ 288,965 $ 686,854
Provision for warranty....................... 20,479 149,729
Other accruals............................... 45,838 --
----------- ----------
$ 355,282 $ 836,583
=========== ==========
</TABLE>
(7) RELATED PARTY TRANSACTIONS
(a) SALES, MANUFACTURING AND SERVICE REVENUES
Sales totaling approximately $212,000 and $15,000 were made to one of the
Company's major stockholders during the nine month fiscal period ended December
31, 1996, and the year ended December 31, 1997, respectively.
Substantially all of the total revenues recognized in the year ended March
31, 1996 were to Societe Anonyme de Telecommunications (SAT), a stockholder of
the Company. In November 1994, the Company entered into a Processor For Hire
Agreement -- (PFHA) with SAT whereby SAT purchased substantially all of the
Company's inventories as of November 1994 for cash. The PFHA called for the
Company to continue to manufacture radios for SAT; however, SAT was responsible
for supplying the materials used in the manufacture of these radios. Under the
PFHA, SAT reimbursed the Company for the costs incurred by the Company in the
assembly and testing of the radios. In addition, SAT paid to the Company a fee
to cover administrative costs plus a profit. This fee was based on the volume of
materials purchased for SAT for the production of the radios. The Company
managed all of the manufacturing and purchasing functions associated with the
manufacture of radios and the purchase of radio components. The PFHA was
substantially terminated as of March 31, 1996.
The reimbursement of the costs of manufacture along with the administration
fee during the year ended March 31, 1996 and the nine month fiscal period ended
December 31, 1996 have been recorded as manufacturing contract service revenues
in the consolidated statements of operations. The identifiable costs associated
with the manufacture of the radios covered by the PFHA have been summarized in
the consolidated statements of operations as manufacturing contract service
expenses.
Product sales made to SAT for the nine month fiscal period ended December
31, 1996 were approximately $3,000 and for the year ended December 31, 1997,
were approximately $15.4 million.
36
<PAGE> 38
(b) ACCOUNTS RECEIVABLE
Accounts receivable due from SAT were $58,283 and $5,472,805 at December
31, 1996 and 1997, respectively.
(c) MANDATORILY CONVERTIBLE NOTES PAYABLE FOR PREFERRED STOCK, STOCK
SUBSCRIPTIONS RECEIVABLE AND RELATED EQUITY TRANSACTIONS
On March 27, 1996, the Company entered into stock subscription agreements
with certain existing stockholders for the purpose of selling Series D preferred
stock for an aggregate price of $7,000,000. The $7,000,000 includes $1,000,000
in unsecured notes payable to stockholders issued in November and December 1995
as discussed in the following paragraph. As of March 31, 1996, proceeds of
$3,702,219 net of offering costs of $15,910, had been received by the Company
related to the stock subscription agreements. The remaining $3,281,871 was
received during the nine month fiscal period ended December 31, 1996.
Mandatorily convertible notes payable were issued as the cash was received by
the Company. Mandatorily convertible notes payable accrued interest at 16%
annually and were convertible into Series D preferred shares at the earlier of a
"qualified financing" event or April 26, 1996. A "qualified financing" event, as
defined in the stock subscription agreements, was consummated on April 26, 1996
when the Company issued 1,548,940 shares of Series D preferred stock, at $3.228
per share to a new stockholder for proceeds of $4,953,121. The mandatorily
convertible notes payable outstanding at April 26, 1996 were then converted into
2,168,523 shares of Series D preferred stock at $3.228 per share, and contingent
common stock purchase warrants (contingent upon the pricing of the "qualified
financing" event) totaling 367,082 with an exercise price of $0.024 per share,
were issued to the former holders of the mandatorily convertible notes payable.
No separate value has been assigned to the warrants as the value was not
significant at the date of issuance.
Unsecured notes payable to stockholders were issued in November and
December 1995 totaling $1,000,000, bearing interest at rates ranging from
16%-21%. In connection with these notes, 193,611 warrants were issued to
purchase common stock for $2.5824 per share which expire April 26, 2001. No
separate value has been assigned to the warrants as the value was not
significant at the date of issuance. On March 27, 1996, these unsecured notes
payable were exchanged for mandatorily convertible notes payable as part of the
stock subscription agreements described above.
Interest expense on unsecured borrowings from stockholders amounted to
$107,648, $70,101 and $62,934 for the year ended March 31, 1996, the nine month
fiscal period ended December 31, 1996 and the year ended December 31, 1997,
respectively.
In November 1996, the Company issued $1,500,000 in unsecured 12%
convertible promissory notes payable to stockholders, which were subsequently
converted into Series E preferred stock in March 1997.
(d) COMPENSATION EXPENSE
In May 1996, the Company paid a representative of a stockholder $217,500
for services rendered from January 1995 to February 1996, who served as the
acting Chief Operating Officer of the Company.
37
<PAGE> 39
(8) COMMON AND REDEEMABLE PREFERRED STOCK
The Company had authorized issuance of redeemable preferred stock at
December 31, 1996 as follows:
<TABLE>
<CAPTION>
SHARES ISSUED LIQUIDATION
SHARES AND OUTSTANDING PREFERENCE
TYPE SERIES AUTHORIZED 12/31/96 PER SHARE
---- ------ ---------- --------------- -----------
<S> <C> <C> <C> <C>
A Preferred............................. A.1 833,333 667,120 $13.2360
A Preferred............................. A.2 833,333 -- 0.8400
A Preferred............................. A.3 2,500,000 907,023 7.9176
B Preferred............................. B 2,083,333 804,553 6.0600
C Senior Preferred...................... C 833,333 664,298 6.3672
C Senior Preferred...................... C.1 625,000 456,294 6.3672
D Preferred............................. D 4,166,666 3,717,463 3.2280
</TABLE>
The following table summarizes activity of the Company's preferred stock
for the year ended March 31, 1996, the nine month fiscal period ended December
31, 1996 and the year ended December 31, 1997:
<TABLE>
<CAPTION>
PREFERRED STOCK
-------------------------
DESCRIPTION PRICE PER SHARE SHARES AMOUNT
----------- --------------- ---------- -----------
<S> <C> <C> <C>
Balances at March 31, 1995........................ $ -- 3,042,994 $24,496,571
Sale of Series C1 senior preferred stock, net of
issuance costs of $21,633....................... 6.3672 422,625 2,669,359
Sale of Series C1 senior preferred stock, net of
issuance costs of $3,472........................ 6.3672 31,320 195,964
-------- ---------- -----------
Balances at March 31, 1996........................ -- 3,496,939 27,361,894
Sale of Series D preferred stock for cash, net of
issuance costs of $46,879....................... 3.228 1,548,940 4,953,121
Conversion of convertible notes for Series D
preferred stock, net of issuance costs of
$15,910......................................... 3.228 2,168,523 6,984,090
Series C1 preferred stock issued to vendors for
services........................................ -- 2,349 13,731
-------- ---------- -----------
Balances at December 31, 1996..................... -- 7,216,751 39,312,836
Conversion of notes payable to Series E preferred
stock........................................... 5.19384 288,799 1,500,000
Sale of Series E preferred stock for cash, net of
issuance costs of $13,530....................... 5.19384 673,870 3,486,465
Sale of Series F preferred stock for cash, net of
issuance costs of $30,425....................... 6.96000 502,867 3,469,558
Conversion of preferred to common stock........... -- (8,682,287) (47,768,859)
-------- ---------- -----------
Balances at December 31, 1997..................... $ -- -- $ --
======== ========== ===========
</TABLE>
The shares of preferred stock were convertible into an equal number of
common shares at any time, were automatically convertible upon the consummation
of an initial public offering (IPO), had certain liquidation and dividend
preferences over common shares, and also had certain antidilution rights. The
preferred shares were redeemable, at the holder's option (subject to approval by
50% of all preferred shares then outstanding), at any time after October 1,
1997. The redemption value was $7.9176 per share for the Series A preferred
shares. The redemption value was equal to the liquidation preference for all
other preferred shares (appropriately adjusted for stock splits, stock
dividends, combinations, recapitalizations, reclassification and similar
corporate rearrangements) plus the amount of all declared and unpaid dividends
thereon. All Series C Senior Preferred and Series D Preferred shares had
preference over other preferred shares with regard to liquidation. Holders of
all preferred shares had the right as a group to elect three members of the
Company's Board of Directors. The remaining directors were elected by the
holders of all outstanding preferred and common shares. The voting rights were
the same for all preferred and common shares. Pursuant to the rules of the
Securities and Exchange Commission, the Company had classified redeemable
preferred stock outside
38
<PAGE> 40
stockholders' equity (deficit). All of the shares of preferred stock converted
to common stock in conjunction with the Company's successful consummation of an
IPO on August 8, 1997.
In March 1997, the Company revised its Articles of Incorporation,
increasing the authorized number of preferred shares to 12,874,998 of which
1,000,000 shares were designated as Series E Preferred stock which had identical
preferences as the Series C Senior Preferred and Series D Preferred, except that
the liquidation preference was $5.1936 per share. In June 1997, the Company
revised its Articles of Incorporation, increasing the authorized number of
common shares to 16,666,666 and preferred shares to 13,379,164 of which 504,166
shares were designated as Series F Preferred stock which had identical
preferences as the Series C Senior Preferred and Series D Preferred, except that
the liquidation preference was $6.96 per share.
During 1997, the Board of Directors authorized a 24:1 reverse stock split
on its common and preferred stock and eliminated the par values related thereto.
In addition, the Board approved changes in the authorized number of preferred
shares to 5,000,000 and common shares to 30,000,000 effective upon closing of
the IPO in August 1997. These consolidated financial statements and notes
thereto have been restated for these actions.
In conjunction with various financing rounds, warrants have been issued. No
separate value has been assigned to the warrants as the values were not
significant at the date of issuance, other than 21,500 warrants with an exercise
price of $6.96 per share issued in connection with debt financing in April 1997.
Outstanding warrants at December 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
--------------------- EXERCISE PRICE
ISSUED IN CONJUNCTION WITH 12/31/96 12/31/97 OF WARRANT EXPIRE
-------------------------- --------- --------- -------------- ----------------------
<S> <C> <C> <C> <C>
Series A.2 preferred stock........ 481,977 327,078 $0.8400 May 31, 1999
Series C and D preferred stock.... 2,252,049 1,622,002 0.0240 February 13, 2000
through April 26, 2001
Series D preferred stock.......... 193,611 181,180 2.5824 April 26, 2001
Term loan......................... -- 21,500 6.9600 April 30, 2002
--------- ---------
Total........................ 2,927,637 2,151,760
========= =========
</TABLE>
In June 1997, the Company amended the terms of the warrants to purchase
481,977 of Series A.2 preferred stock to provide that if the outstanding
preferred shares of the Company are converted into common shares, the warrants
will be for the purchase of 481,977 shares of common stock.
As of December 31, 1997, there are 2,151,760 warrants exercisable to
purchase common stock.
(9) STOCK OPTION PLAN
The Company has two stock option plans (the Plans) to compensate directors,
key employees, consultants and vendors for past and future services and has
authorized a total of 2,203,333 shares of common stock (2,083,333 for the
employee and vendor plan and 120,000 for the director plan) reserved for grants.
Options may be granted under the Plans as either incentive stock options or as
nonqualified stock options.
Incentive stock options may be granted at prices not less than fair market
value of the stock, generally are exercisable based on continued employment over
a five-year period in equal increments each year beginning one year from the
date of grant, and expire ten years from the date of grant. The Company has
granted no incentive stock options to date.
Nonqualified options may be granted at prices determined by the Company and
generally expire ten to twenty years from the date of grant. The options vest
and become exercisable over one to four years in cumulative increments beginning
one year from the date of grant. A distinction is made between nonqualified time
vesting and nonqualified time and performance vesting options. Nonqualified time
and performance vesting options require the attainment of certain performance
goals in addition to the passage of time prior to vesting. As of December 31,
1997, no performance vesting options were outstanding.
39
<PAGE> 41
In accounting for the options requiring the attainment of certain
performance goals, the Company must include a determination of compensation cost
at the end of each period if the market value of the shares of the Company's
stock exceeds the exercise price. Any compensation cost shall be charged to
expense over the periods the employee performs the related service. During the
first quarter of 1997, the Company amended the terms of 460,633 stock options by
eliminating the performance criteria. The table below reflects these performance
options as being amended to time vesting. The Company recorded deferred stock
compensation totaling $1,589,277 during 1997. The 1997 deferred stock
compensation relates principally to the 460,633 options with performance goals
outstanding prior to the elimination of the performance criteria. In addition,
the deferred stock compensation includes some amounts recorded for nonqualified
time vesting grants where the estimated market value of the shares of the
Company's stock exceeded the exercise price at the date of the grant. The
estimated market value of the Company's common stock used in calculating the
majority of the deferred stock compensation was approximately $4.32 per share.
Additional deferred stock compensation relates principally to the authorization
by the Board of Directors for the grant of 56,247 options to employees that vest
upon the attainment of certain performance goals. The estimated fair market
value of the Company's Common Stock used in calculating deferred stock
compensation related to the 56,247 future option grants was approximately $10.00
per share. In June 1997, the Company amended the terms of these stock option
grants by eliminating the performance criteria.
A summary of nonqualified time vesting and time and performance vesting
stock options is as follows:
<TABLE>
<CAPTION>
EMPLOYEE & VENDOR PLAN
OUTSTANDING OPTIONS
NUMBER OF SHARES
-----------------------------------------------------------
SHARES TIME AND WEIGHTED
AVAILABLE FOR TIME PERFORMANCE AVERAGE
FUTURE GRANT VESTING VESTING EXERCISE PRICE
------------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Balances at March 31, 1995............... 69,392 347,033 -- $1.0584
Plan amendment........................... 1,041,667 -- -- --
Options granted.......................... (1,235,293) 602,780 632,513 1.5840
Options expired.......................... 299,657 (136,338) (163,319) 0.8736
Options exercised........................ -- (18,565) -- 1.0608
---------- --------- -------- -------
Balances at March 31, 1996 .............. 175,423 794,910 469,194 1.5120
Options granted.......................... (409,896) 255,138 154,758 1.7280
Options expired.......................... 238,753 (75,434) (163,319) 0.7560
Options exercised........................ -- (10,684) -- 1.1136
---------- --------- -------- -------
Balances at December 31, 1996............ 4,280 963,930 460,633 1.6128
Plan amendment........................... 625,000 --
Options granted.......................... (917,194) 860,947 56,246 5.6488
Options canceled......................... 526,461 (526,461) -- 2.7255
Options exercised........................ -- (95,928) -- 0.8854
Options amended.......................... -- 516,880 (516,880) 2.2435
---------- --------- -------- -------
Balances at December 31, 1997............ 238,547 1,719,368 -- $3.4548
========== ========= ======== =======
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
DIRECTOR PLAN
OUTSTANDING OPTIONS
NUMBER OF SHARES
--------------------------------------------
SHARES WEIGHTED
AVAILABLE FOR TIME AVERAGE
FUTURE GRANT VESTING EXERCISE PRICE
------------- --------- --------------
<S> <C> <C> <C>
Balances at December 31, 1996......................... -- -- --
Plan adoption......................................... 120,000 -- --
Options granted....................................... (48,263) 48,263 $ 9.84
Options exercised..................................... -- (8,263) 9.84
---------- --------- -------
Balances at December 31, 1997......................... 71,737 40,000 $ 9.84
========== ========= =======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plans, and
accordingly compensation cost is recognized only for those options in which the
fair value of the underlying common stock exceeds the exercise price at the date
of grant. Had the Company determined compensation cost of employee stock options
based on the fair value of the option at the grant date for its stock options
under SFAS No. 123, the Company's net loss would have been increased to the pro
forma amount indicated below:
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
----------- ------------- ------------
<S> <C> <C> <C>
Net Loss:
As reported....................................... $(9,061,178) (7,328,836) (1,060,019)
Pro forma......................................... (9,065,378) (7,339,036) (992,673)
Net loss per share:
As reported....................................... $ (14.40) (8.27) (0.18)
Pro forma......................................... (14.40) (8.28) (0.38)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to stock
options granted before April 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The weighted-average fair value per share of the grants made during the
year ended March 31, 1996, the nine month fiscal period ended December 31, 1996
and the year ended December 31, 1997 was approximately $0.02, $0.054 and $3.392,
respectively. The fair value of the stock options granted prior to the Company's
IPO was estimated on the date of grant using the minimum-value method with the
following weighted-average assumptions: expected dividend yield 0%, risk-free
interest rate averaging approximately 6.3%, and an expected life ranging from
two to six years. The fair value of the stock options granted after the
Company's IPO was estimated on the date of grant using the Black-Scholes method
with the following weighted average assumptions: expected dividend yield 0%,
volatility 50%, risk-free interest rate averaging approximately 6.0%, and an
expected life ranging from two to six years.
41
<PAGE> 43
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.240 6,794 12.21 years.. $ 0.240 6,794 $0.2400
0.790 384,091 17.57 years.. 0.790 235,668 0.7900
1.920 - 1.970 994,631 18.45 years.. 1.969 359,357 1.9700
2.880 34,387 14.6 years... 2.880 33,242 2.8800
3.600 - 4.320 53,190 18.23 years.. 3.684 4,175 3.6000
6.000 21,093 19.46 years.. 6.000 -- --
9.840 170,416 9.65 years... 9.840 40,242 9.8400
13.00 - 18.750 28,857 9.76 years... 16.379 -- --
20.500 - 21.625 53,786 9.75 years... 21.260 -- --
24.750 12,123 9.81 years... 24.750 -- --
--------- -------
1,759,368 16.82 years.. $ 3.599 679,478 $2.0641
========= =======
</TABLE>
(10) EMPLOYEE BENEFIT PLAN
In January 1996, the Company implemented a 401(k) plan that covers all
employees who satisfy certain eligibility requirements relating to minimum age,
length of service and hours worked. Under the profit sharing portion of the
plan, the Company may make an annual contribution for the benefit of eligible
employees in an amount determined by the Board of Directors. As of December 31,
1997, the Company had not made any contributions to the plan. Under the 401(k)
portion of the plan, eligible employees may make pretax elective contributions
of up to 15% of their compensation, subject to maximum limits on contributions
prescribed by law. The Company elected, in 1998, to match employee contributions
to the plan, not to exceed 4% of each employee's base pay.
(11) INCOME TAXES
The expected U.S. federal income tax benefit is different than the amount
computed by applying the U.S. federal income tax rate of 34% to pretax loss for
the year ended March 31, 1996, the nine month fiscal period ended December 31,
1996, and the year ended December 31, 1997 as a result of the following:
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
% OF PRE-TAX NET LOSS 1996 1996 1997
--------------------- ---------- ------------- ------------
<S> <C> <C> <C>
Computed "expected" income tax benefit............... (34.0%) (34.0%) (34.0%)
Permanent tax differences............................ .1 .1 .1
Other................................................ (.2) -- --
Valuation allowance change........................... 34.2 33.9 33.9
----- ----- -----
Effective tax rate................................... 0% 0% 0%
===== ===== =====
</TABLE>
The Company has not recorded an income tax benefit for the year ending
March 31, 1996, the nine month fiscal period ended December 31, 1996 and the
year ended December 31, 1997, due to the recording of a valuation allowance as
an offset to net deferred tax assets. A valuation allowance is provided due to
uncertainties relating to the realization of deferred tax assets.
42
<PAGE> 44
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Writedown of inventories, deductible in
different years for tax purposes............. $ 203,000 $ 158,500 $ 185,000
Equipment and leasehold improvements,
principally due to differences in
depreciation and amortization................ 92,000 99,100 53,000
Accrued liabilities deductible in different
years for tax purposes....................... 219,000 181,600 128,000
Amortization of stock option expense deductible
in different years for tax purposes.......... 292,600 292,600 208,000
Net operating loss carryforwards............... 9,983,000 12,544,900 13,062,000
------------ ------------ ------------
Total gross deferred tax assets........... 10,789,600 13,276,700 13,636,000
Less valuation allowance....................... (10,789,600) (13,276,700) (13,636,000)
------------ ------------ ------------
Net deferred tax assets................... $ -- $ -- $ --
============ ============ ============
</TABLE>
The valuation allowance for deferred tax assets increased $3,103,40000 for
the year ended March 31, 1996, $2,487,100 for the nine month fiscal period ended
December 31, 1996 and $359,300 for the year ended December 31, 1997.
Approximately $491,000 of the valuation allowance is attributable to stock
options, the benefit of which will be credited to additional paid-in capital
when realized.
At December 31, 1997, the Company had U.S. federal tax net operating loss
carryforwards available to offset future Federal taxable income, if any, of
approximately $35 million that begin to expire in 2005. At December 31, 1997,
the Company also has net operating tax loss carryforwards available to offset
future United Kingdom taxable income, if any, of approximately $2.5 million that
begin to expire in 2006.
The utilization of the tax net operating loss carryforwards are limited due
to ownership changes that have occurred as a result of the sale of common and
preferred stock. Consequently, utilization of approximately $19 million of net
operating loss carryforwards will be limited to approximately $1,400,000 per
year.
43
<PAGE> 45
(12) COMMITMENTS
(a) LEASE COMMITMENTS
The Company is obligated under various capital leases for certain equipment
that expire at various dates during the next three years. The Company also has
certain noncancelable operating leases that expire over the next four years and
require the Company to pay certain executory costs such as maintenance and
taxes. Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of December 31, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Years ending December 31:
1998...................................................... $1,178,983 $ 613,440
1999...................................................... 985,811 665,116
2000...................................................... 452,052 688,550
2001...................................................... -- 614,308
2002...................................................... -- 137,061
---------- ----------
Total minimum lease payments........................... 2,616,846 $2,718,475
========== ==========
Less amount representing interest (at rates averaging
15%)...................................................... 543,375
----------
Present value of net minimum capital lease payments.... 2,073,471
Less current installments of obligations under capital
leases.................................................... 1,103,509
----------
Obligations under capital leases, excluding current
installments.......................................... $ 969,962
----------
</TABLE>
Rental expense for operating leases totaled $235,003 for the year ended
March 31, 1996, $240,917 for the nine month fiscal period ended December 31,
1996 and $543,089 for the year ended December 31, 1997.
(b) INVENTORIES
The Company is obligated by contract to purchase inventory from a foreign
supplier. The obligation is denominated in Singapore dollars and at December 31,
1997, the obligation in U.S. dollars was $867,927. In 1997, the Company recorded
a foreign exchange gain of approximately $32,000 as a result of purchases of
components denominated in foreign currencies pursuant to this obligation.
(13) MAJOR CUSTOMERS AND SEGMENT INFORMATION
The Company currently operates in a single segment selling millimeter wave
radio systems. Product sales during the nine month fiscal period ended December
31, 1996 and the year ended December 31, 1997 to individual customers and by
geographic region accounting for more than 10% of total revenues are shown
below:
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD
ENDED YEAR ENDED
GEOGRAPHIC DECEMBER 31, DECEMBER 31,
CUSTOMER REGION 1996 1997
-------- ---------- ------------- ------------
<S> <C> <C> <C>
A................................. Canada 50% 27%
B................................. U.S. 13 4
C................................. U.S. 10 --
D................................. France -- 43
</TABLE>
44
<PAGE> 46
The Company actively markets its products in numerous geographical
locations, including North America, Europe, Asia, and South America. The
following customers individually account for more than 10% of accounts
receivable as shown below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
CUSTOMER 1996 1997
-------- ------------ ------------
<S> <C> <C>
A............................................. 60% 6%
B............................................. 15 --
D............................................. -- 49
</TABLE>
Also see related discussion for SAT in note 7(b).
Product sales to customers domiciled in the indicated geographic region
were as follows (end users of the Company's products may be located in different
geographic regions than the Company's customers):
<TABLE>
<CAPTION>
NINE MONTH
FISCAL PERIOD
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- ------------
<S> <C> <C>
Canada....................................... $1,035,002 $ 9,871,574
Europe....................................... -- 17,403,214
U.S.......................................... 656,248 1,908,360
Latin America................................ 279,567 5,210,467
Other........................................ 79,428 1,706,269
---------- -----------
$2,050,245 $36,099,884
========== ===========
</TABLE>
Manufacturing contract service revenues for all periods presented were to a
single customer located in France (see note 7a).
(14) CONTINGENCIES
The Company is subject to various legal proceedings and claims which have
arisen in the ordinary course of its business. These actions when ultimately
concluded and determined will not, in the opinion of management, have a material
effect on results of operations or the financial condition of the Company.
(15) FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investment securities, accounts receivable, accounts
payable, accrued liabilities, notes payable and notes payable to stockholders.
The carrying amount of obligations under notes payable and notes payable to
stockholders approximates their fair values based on current rates available to
the Company. The remaining financial instruments have a short-term until
maturity or settlement in cash and, therefore, the carrying value approximates
fair value.
45
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The business of the Company is managed under the direction of a Board of
Directors consisting of six directors. The following individuals are currently
serving as directors and are the director nominees to be re-elected at the
Company's 1998 Annual Meeting of Shareholders on June 16, 1998, to serve until
the 1999 Annual Shareholders Meeting or until their earlier retirement,
resignation or removal: Jean-Francois Grenon, V. Frank Mendicino, Paul S.
Bachow, Frances N. Janis, Harold O. Shattuck and Bernard D. Tarr, Jr.
JEAN-FRANCOIS GRENON (age 42) joined the Company in February 1996 as its
President and Chief Executive Officer, and has served as a Director of the
Company since June 1996. From March 1994 to December 1995, Mr. Grenon served as
President of Microwave Radio Corporation, Digital Radio Group, a division of
California Microwave Radio that he helped found, which develops and manufactures
digital millimeter wave radios. From April 1990 to March 1994, Mr. Grenon served
as Vice President and General Manager of Microwave Radio Corporation, a
developer of microwave radio transmission equipment. Mr. Grenon holds an MBA
from Harvard Business School and a BSEE from Ecole Polytechnique, Universite de
Montreal.
V. FRANK MENDICINO (age 58) has served as a Director of the Company since
July 1989 and as its Chairman since February 1992. Since 1983, Mr. Mendicino has
served as a General Partner of Woodside Fund, Woodside Fund II and Woodside Fund
III, each of which is a private investment fund. He has also served as a
director of over 15 private companies.
PAUL S. BACHOW (age 47) has served as a Director of the Company since
January 1993. He has been President of Bachow & Associates, Inc. ("Bachow &
Associates"), since its formation in December 1989. Mr. Bachow also acts as
President of the General Partner of each of Paul S. Bachow Co-Investment Fund,
L.P., and Bachow Investment Partners III, L.P. Mr. Bachow serves as a director
of Deb Shops, Inc., a publicly traded company in the women's clothing business,
Anadigics, Inc., a publicly traded manufacturer of gallium arsenide chips for
use in a broad array of communications devices, Crusader Holding Corporation, a
publicly traded savings and loan, and several private companies. He has a B.A.
from American University, a J.D. from Rutgers University and a Masters Degree in
tax law from New York University, and is a C.P.A.
FRANCES N. JANIS (age 39) has served as a Director of the Company since
April 1996. Since February 1994, Ms. Janis has been the Executive Vice President
of Pomona Partners Inc., which is the General Partner of Pomona Capital II,
L.P., where she is responsible for making direct investments in private
companies and purchasing limited partnership interests in Venture
Capital/Leveraged Buyout funds. From 1983 to 1994 she served as General Partner
in Hambro International Venture Fund II, a private investment firm, where Ms.
Janis' responsibilities included investing in early-stage private companies.
HAROLD O. SHATTUCK (age 61) has served as a Director of the Company since
February 1992. Since May 1991, he has been President of MC Tecinvest Inc., a
consulting company specializing in operations, executive consulting and
financial advising to early- and growth-stage companies in the computer,
software and communications industries. In that capacity, he has advised such
clients as Xerox Venture Capital and MC Partners I and II, offshore funds
investing in U.S. venture capital funds.
BERNARD D. TARR, JR. (age 38) has served as a Director of the Company since
February 1995. Since April 1997, Mr. Tarr has served as a Managing Director of
Arete Ventures, Inc. and as a Managing Director of Arete Ventures, LLC. From
September 1990 to April 1997 he served as a Vice President of Arete Ventures,
Inc. Arete Ventures, Inc. is the Managing Partner of UVCC Fund II and UVCC II
Parallel Fund, L.P. Arete Ventures, LLC is the Managing Member of the Utility
Competitive Advantage Fund, LLC, which invests in private telecommunications,
information technology and customer service companies.
46
<PAGE> 48
Biographical information of the executive officers of the registrants
required by this Item is set forth as Item 4A in Part I of this report under the
caption "Executive Officers of the Registrant."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires that the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, file reports of ownership and changes of ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than ten percent shareholders are required by SEC regulation to furnish the
Company with copies of all such reports they file.
Based solely on its review of the copies of such reports received by the
Company, and on written representations by the Company's officers and directors
regarding their compliance with the applicable reporting requirements under
Section 16(a) of the Exchange Act, the Company believes that, with respect to
its fiscal year ended December 31, 1997, all filing requirements applicable to
its officers and directors, and all of the persons known to the Company to own
more than ten percent of its Common Stock were complied with by such persons,
except for the following: (i) Mr. Randy J. Karr, an executive officer of the
Company on the effectiveness of the Company's initial public offering in August
1997, filed his Form 3 on March 1998; (ii) Mr. Jean-Francois Grenon filed a Form
4 on March 1998 to report Mr. Grenon's exercise of stock options for 300 shares
of the Company's Common Stock and his gifting of such shares in September 1997;
(iii) Mr. V. Frank Mendicino filed a Form 5 on March 1998 to reflect the
purchase of 1,000 shares of Common Stock in August 1997 by a general partnership
in which Mr. Mendicino is a general partner.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
Compensation Summary. The following table sets forth information regarding
compensation earned during the Company's fiscal year ended December 31, 1997,
the twelve-month period ended December 31, 1996, and the fiscal year ended March
31, 1996, by the Chief Executive Officer and the other executive officers whose
total annual salary and bonus for the fiscal year ended December 31, 1997,
exceeded $100,000 (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------
ANNUAL COMPENSATION SECURITIES
FISCAL --------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) STOCK OPTIONS(#)
--------------------------- ------ --------- -------- ----------------
<S> <C> <C> <C> <C>
Jean-Francois Grenon........................ 1997 $154,698 305,875(1)
President, Chief Executive Officer 1996(2) 131,539 $ 10,000 611,750(3)
and Director 1996(4) 26,154 611,750
Colin J.R. Pallemaerts...................... 1997 126,782 110,984 46,099(5)
Executive Vice President - Sales 1996(2) 137,198 67,198(3)
and Marketing 1996(4) 127,500 38,022
Barbara J. Williams......................... 1997 118,981 45,147(6)
Chief Operating Officer 1996(2) 119,246 90,294(3)
1996(4) 90,209 30,687
John M. Hemingway........................... 1997 119,711 43,659(7)
Secretary and Chief Financial Officer 1996(2) 117,692 62,318(3)
1996(4) 115,058 13,050
Randy J. Karr............................... 1997 103,576 44,851(8)
Vice President - Manufacturing 1996(2) 88,561 20,000 89,702(3)
1996(4) 27,228 10,146
</TABLE>
47
<PAGE> 49
- ---------------
(1) Represents options to purchase 305,875 shares of the Company's Common Stock
granted in 1997 to replace and amend options granted in 1996 that were
subject to performance vesting criteria. The reissued options vest over time
instead. See footnote 3.
(2) Subsequent to March 31, 1996, the Company changed its fiscal year end to
December 31. The amount shown is for the 12-month period ended December 31,
1996. The amount reflects an overlap of three months compensation (January,
February, and March) for 1996 for the listed executive officers. Overlap
compensation detail for January through March 1996 is as follows: Mr.
Grenon: $26,154 in salary and 611,750 stock options; Mr. Pallemaerts:
$27,952 salary; Ms. Williams: $27,861 salary; Mr. Hemingway: $26,308 salary;
Mr. Karr: $23,768.
(3) One half of the options were subject to performance vesting criteria when
granted, but were cancelled and regranted in 1997 to provide for vesting
over time.
(4) The amount shown is for the fiscal year ended March 31, 1996. See also
footnote 2, above.
(5) Includes options to purchase 33,599 shares of the Company's Common Stock
granted in 1997 to replace and amend options granted in 1996 that were
subject to performance vesting criteria. The reissued options vest over time
instead. See footnote Number 3.
(6) Represents options to purchase 45,147 shares of the Company's Common Stock
granted in 1997 to replace and amend options granted in 1996 that were
subject to performance vesting criteria. The reissued options vest over time
instead. See footnote 3.
(7) Represents options to purchase 31,159 shares of the Company's Common Stock
granted in 1997 to replace and amend options granted in 1996 that were
subject to performance vesting criteria. The reissued options vest over time
instead. See footnote 3.
(8) Represents options to purchase 44,851 shares of the Company's Common Stock
granted in 1997 to replace and amend options granted in 1996 that were
subject to performance vesting criteria. The reissued options vest over time
instead. See footnote 3.
Option Grants. The following table shows information concerning stock
options granted to executive officers during the Company's fiscal year ended
December 31, 1997.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES PRICE(1) EXPIRATION ---------------------------
GRANTED(#) IN FISCAL YEAR ($ PER SHARE) DATE 5% 10%
---------- -------------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jean-Francois Grenon.......... 305,875(3) 33.3% $1.97 02/20/2016 $2,730,937 $7,417,248
Colin J.R. Pallemaerts........ 33,599(3) 3.7 1.97 12/17/2016 314,964 886,537
12,500(4) 1.4 9.84 06/17/2007 11,791 91,632
Barbara J. Williams........... 45,147(3) 4.9 1.97 12/17/2016 423,217 1,191,240
John M. Hemingway............. 31,159(3) 3.4 1.97 12/17/2016 292,091 822,156
12,500(4) 1.4 9.84 06/17/2007 11,791 91,632
Randy J. Karr................. 44,851(3) 4.9 1.97 12/17/2016 420,442 1,183,430
</TABLE>
- ---------------
(1) The exercise price of each option was determined by the Board of Directors
to be not less than the estimated fair value of the Common Stock on the date
of Grant.
(2) Based upon the market price on the date of grant and assumed appreciation
over the term of the options at the respective annual rates of stock
appreciation shown. These amounts are not intended to forecast possible
future appreciation, if any, in the market price of the Company's Common
Stock.
(3) Represents options granted in 1997 to replace and amend options granted in
1996 that were subject to performance vesting criteria. The reissued options
vest as to 25% of the shares on the first anniversary of
48
<PAGE> 50
the date of grant of the cancelled options, with the remaining shares
vesting ratably over the next 36 months. See footnote 3 to Summary
Compensation Table.
(4) The options vest as to 25% of the shares on the first anniversary of the
date of grant, with the remaining shares vesting ratably over the next 36
months.
Option Exercises. The following table shows information concerning stock
options exercised by the named executive officers during the Company's fiscal
year ended December 31, 1997, including the aggregate value of any gains
realized on such exercise. The table also shows information regarding the number
and value of unexercised in-the-money options held by the named executive
officers at the end of that fiscal year.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END(#) AT FISCAL YEAR-END(2)($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED(1)($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jean-Francois Grenon...... 300 $7,284 280,084 331,366 $3,369,411 $3,986,333
Colin J.R. Pallemaerts.... -- -- 70,026 66,369 893,995 702,304
Barbara J. Williams....... -- -- 40,018 85,129 504,221 1,042,424
John M. Hemingway......... -- -- 52,077 60,538 661,588 629,897
Randy J. Karr............. -- -- 25,764 74,354 316,086 900,624
</TABLE>
- ---------------
(1) Represents the aggregate fair market value on the respective dates of
exercise of the shares of Common Stock received on exercise of the options,
less the aggregate exercise price of the options.
(2) Represents the aggregate fair market value on December 31, 1997, of the
shares of Common Stock subject to outstanding options, less the aggregate
exercise price of the options.
COMPENSATION OF DIRECTORS
The Board of Directors granted Mr. Shattuck, as compensation for his
service as a director during 1996, (i) $1,000 in cash for each regularly
scheduled Board meeting attended and (ii) options to purchase 1,420 shares of
Common Stock, with an exercise price of $1.968 per share and, as compensation
for his service as a director during 1997, $1,000 in cash for each regularly
scheduled Board meeting attended, and options to purchase 1,736 shares of Common
Stock, with an exercise price of $2.88 per share of Common Stock.
Nonemployee directors participate in the Innova Corporation Director Stock
Option Plan (the "Director Plan") and are reimbursed for out-of-pocket expenses
incurred attending Board and Committee meetings. The Director Plan was adopted
in June 1997. In connection with the adoption of the Director Plan, each non-
employee director received options to purchase 10,000 shares of Common Stock
(other than Mr. Shattuck, whose option was reduced to reflect the grant of an
option to purchase Common Stock for service in 1997) resulting in the grant of
options covering an aggregate of 48,263 shares of Common Stock. These options
vested on the date of grant and had an exercise price of $9.84 per share, which
was determined by the Board of Directors to be not less than the fair market
value of the Common Stock on the date of grant. The Director Plan provides for
additional grants to non-employee directors of options to purchase 4,000 shares
of Common Stock commencing on January 1, 1998 and thereafter at each annual
shareholder's meeting, commencing in 1999. Under the Director Plan, the exercise
price of options granted in the future under the Director Plan is to be
determined by a formula based on the trading price of the Common Stock for the
20 trading days preceding the grant. One quarter of the options granted in the
future vest after one year, with the remainder vesting in 36 equal monthly
increments. Unvested options under the Director Plan expire upon termination of
service other than by death, or disability, to the extent not exercised. Future
options are to be granted automatically without further action from the Board of
Directors, except to the extent necessary to determine the fair market value of
the Common Stock on the date of grant.
49
<PAGE> 51
COMMITTEES OF THE BOARD
The Board of Directors has a standing Audit Committee and Compensation
Committee. The Audit Committee, currently composed of Messrs. Tarr and Shattuck,
and Ms. Janis, reviews the Company's internal accounting procedures and consults
with and reviews the services provided by the Company's independent accountants.
The Compensation Committee, currently composed of Messrs. Bachow, Mendicino and
Shattuck, reviews and makes recommendations to the full Board of Directors with
respect to the compensation and benefits to be provided to the Company's
officers and directors and general policy matters relating to employee
compensation and benefits.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP INFORMATION
The following table sets forth, as of March 31, 1998, certain information
regarding beneficial ownership of the Company's Common Stock (a) by each person
known to the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (b) by each director and nominee for director, (c) by
the Chief Executive Officer and the other executive officers of the Company
whose total annual salary and bonus, for the fiscal year ended December 31,
1997, exceeded $100,000, and (d) by all of the Company's executive officers and
directors as a group. Unless otherwise noted, the named beneficial owner has
sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENT OF
COMMON STOCK COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED(1) OUTSTANDING(1)
---------------- --------------------- --------------
<S> <C> <C>
Paul S. Bachow(2)............................. 4,155,450 28.1%
c/o Bachow & Associates
3 Bala Plaza, Suite 502
Bala Cynwyd, PA 19004
V. Frank Mendicino(3)......................... 2,318,650 15.9
c/o Woodside Funds
4133 Mohr Avenue, Suite H
Pleasanton, CA 94566
Frances N. Janis(4)........................... 1,333,894 9.6
c/o Pomona Capital II, L.P.
780 Third Avenue, 28th Floor
New York, NY 10017-7076
The Bessemer Group, Incorporated(5)........... 758,405 5.5
100 Woodbridge Center Drive
Woodbridge, NJ 07095-0980
Bernard D. Tarr, Jr.(6)....................... 584,292 4.2
c/o Arete Ventures, Inc.
6110 Executive Blvd., Suite 1040
Rockville, MD 20852
Jean-Francois Grenon(7)(8).................... 344,108 2.4
Harold O. Shattuck(7)(9)...................... 20,003 *
Colin J.R. Pallemaerts(7)(10)................. 78,580 *
John M. Hemingway(7)(11)...................... 58,569 *
Barbara J. Williams(7)(12).................... 54,737 *
Randy J. Karr(7)(13).......................... 54,312 *
All Directors and Executive Officers as a
Group (10 persons)(14)...................... 9,002,595 55.1
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes shares over which the
indicated beneficial owner exercises voting and/or investment power. Shares
of Common Stock subject to options currently exercisable or exercisable
within 60 days of March 31, 1998 are deemed outstanding for computing the
percentage ownership of the person
50
<PAGE> 52
holding the options but are not deemed outstanding for computing the
percentage ownership of any other person. Except as indicated, and subject
to community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) Includes 2,615,090 shares held by Bachow Investment Partners III, L.P.
("Bachow Investment Partners"), and 277,457 shares held by Paul S. Bachow
Co.-Investment Fund, L.P. ("Bachow Co-Investment Fund"), both limited
partnerships. Mr. Bachow is the President of the General Partner of the
General Partner of each of Bachow Investment Partners and Bachow
Co-Investment Fund. Also includes 89,013 shares issuable upon exercise of
warrants to purchase Common Stock held by Mr. Bachow, 786,887 shares
issuable upon exercise of warrants to purchase Common Shares held by Bachow
Investment Partners, and 73,052 shares issuable upon exercise of warrants
to purchase Common Shares held by Bachow Co-Investment Fund. Also includes
options held by Mr. Bachow under the Director Plan to purchase 10,000
shares of Common Stock exercisable within 60 days of March 31, 1998.
Excludes options to purchase 4,000 shares of Common Stock exercisable more
than 60 days after March 31, 1998.
(3) Represents 9,000 shares held by V. Frank Mendicino Defined Benefit Pension
Plan (the "Mendicino Benefit Plan"), 243,212 shares held by Woodside Fund,
130,912 shares held by Woodside Fund II, 1,185,413 shares held by Woodside
Fund III (Woodside Fund, Woodside Fund II and Woodside Fund III are
collectively referred to as "Woodside Funds") and 1,000 shares held by
Campus Mall, G.P. ("Campus Mall"). Also represents 294,006 shares issuable
upon exercise of warrants to purchase shares of Common Stock held by
Woodside Fund, 149,509 shares issuable upon exercise of warrants to
purchase shares of Common Stock held by Woodside Fund II, and 293,198
shares issuable upon exercise of warrants to purchase shares of Common
Stock held by Woodside Fund III. Mr. Mendicino is a General Partner of
Woodside Funds and has shared investment power and shared voting power over
such shares with the two other General Partners, Vincent M. Occhipinti and
Robert E. Larson. Mr. Mendicino is a General Partner of Campus Mall and has
shared investment power and shared voting power over such shares with the
Kent Boswell, Michael Mendicino, Flory Mendicino and John Mendicino. Also
includes options held by Mr. Mendicino under the Director Plan to purchase
10,000 shares of Common Stock exercisable within 60 days of March 31, 1998.
Excludes options to purchase 4,000 shares of Common Stock exercisable more
than 60 days after March 31, 1998.
(4) Represents 953,065 shares held by Pomona Capital II, L.P. ("Pomona
Capital") and 369,029 shares held by Baupost Limited Partnership 1983 C-1
("Baupost"), both limited partnerships. Ms. Janis is Executive Vice
President of Pomona Partners, Inc., the General Partner of Pomona Capital,
and Executive Vice President of Pomona Management Co., Inc.,
attorney-in-fact of Baupost. Ms. Janis has shared investment power and
shared voting power over such shares with each of (i) Michael D. Granoff,
President of Pomona Partners, Inc., and Pomona Management Co., Inc., and
(ii) Stephen Futrell, Treasurer of Pomona Partners, Inc., and Pomona
Management Co., Inc. Also includes options held by Ms. Janis under the
Director Plan to purchase 10,000 shares of Common Stock exercisable within
60 days of March 31, 1998. Excludes options to purchase 4,000 shares of
Common Stock exercisable more than 60 days after March 31, 1998.
(5) Represents 317,705 shares held by Bessemer Trust Company ("BTC"), 346,830
shares held by Bessemer Trust Company, National Association ("BTNA"), and
93,870 shares held by Bessemer Trust Company of Florida ("BTF"; and
collectively with BTC and BTNA, the "Bessemer Group"). The Bessemer Group,
Incorporated ("BGI") is the parent holding company of the Bessemer Group.
BTC has shared voting power over 8,680 shares and shared investment power
over 309,025 shares of the shares it holds. BTNA has shared voting power
over 76,400 shares and shared investment power over 76,400 of the shares it
holds. BTF has shared voting power over 7,300 shares and shared investment
power over 7,300 shares of the shares it holds. BGI has shared voting power
and shared investment power over all 758,405 shares.
(6) Represents 196,322 shares held by UVCC Fund II and 196,322 shares held by
UVCC II Parallel Fund, L.P. (UVCC Fund II and UVCC II Parallel Fund, L.P.
are collectively referred to as "UVCC"). Also
51
<PAGE> 53
includes 90,824 shares issuable upon exercise of warrants to purchase
shares of Common Stock held by UVCC Fund II, and 90,824 shares issuable
upon exercise of warrants to purchase shares of Common Stock held by UVCC
II Parallel Fund, L.P. Mr. Tarr is Managing Director of Arete Ventures, the
General Partner of the UVCC funds. Also includes options held by Mr. Tarr
under the Director Plan to purchase 10,000 shares of Common Stock
exercisable within 60 days of March 31, 1998. Excludes options to purchase
4,000 shares of Common Stock exercisable more than 60 days after March 31,
1998.
(7) The address for each of these shareholders is that of the Company.
(8) Represents options to purchase 344,108 shares of Common Stock exercisable
within 60 days of March 31, 1998. Excludes options to purchase 267,642
shares of Common Stock exercisable more than 60 days after March 31, 1998.
(9) Includes 1,048 shares issuable upon exercise of warrants to purchase shares
of Common Stock held by Mr. Shattuck. Includes options held by Mr. Shattuck
under the Director Plan to purchase 8,263 shares of Common Stock
exercisable within 60 days of March 31, 1998. Excludes options to purchase
4,000 shares of Common Stock exercisable more than 60 days after March 31,
1998.
(10) Represents options to purchase 78,580 shares of Common Stock exercisable
within 60 days of March 31, 1998. Excludes options to purchase 57,815
shares of Common Stock exercisable more than 60 days after March 31, 1998.
(11) Represents options to purchase 58,569 shares of Common Stock exercisable
within 60 days of March 31, 1998. Excludes options to purchase 54,046
shares of Common Stock exercisable more than 60 days after March 31, 1998.
(12) Includes options to purchase 53,055 shares of Common Stock exercisable
within 60 days of March 31, 1998. Excludes options to purchase 72,092
shares of Common Stock exercisable more than 60 days after March 31, 1998.
(13) Includes options to purchase 36,193 shares of Common Stock exercisable
within 60 days of March 31, 1998. Excludes options to purchase 63,925
shares of Common Stock exercisable more than 60 days after March 31, 1998.
(14) Includes options to purchase an aggregate of 618,768 shares of Common
Stock, and an aggregate of 1,868,361 shares of Common Stock issuable upon
exercise of warrants to purchase shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The Company has adopted a policy prohibiting transactions with its
directors, officers or controlling shareholders or their affiliates other than
those that result from competitive bidding or that a majority of the Company's
disinterested directors conclude are expected to benefit the Company and are on
terms no less favorable to the Company than could be obtained in arm's-length
transactions with unaffiliated third parties.
FINANCING TRANSACTIONS
November 1996 Through March 1997 Bridge Financing. In November 1996 and
December 1996, Bachow Investment Partners, Baupost and Pomona Capital, Brian
Flynn, UVCC, Woodside Fund III and 11 other unaffiliated persons lent the
Company an aggregate of $1,500,000, and received notes in exchange (the "1996
Series D Notes"). In this transaction, Bachow Investment Partners, Baupost and
Pomona Capital, Brian Flynn (a former acting CEO), UVCC and Woodside Fund III
lent the Company $572,513, $326,535, $6,507, $71,114 and $282,450, respectively.
The 1996 Series D Notes bore interest at 12% per year and were payable on demand
90 days after issuance. The 1996 Series D Notes were convertible into Series D
Preferred Stock at the option of the holder 90 days from the date of issuance if
not repaid by the Company prior to 91 days from the date of issuance, at a
conversion price of $3.228 per share. In a second related bridge
52
<PAGE> 54
financing in January through March 1997, Bachow Investment Partners and Paul S.
Bachow ("Bachow") advanced $1,541,395, Baupost and Pomona Capital advanced
$371,303, UVCC advanced $172,902, Woodside Fund III advanced $686,739, and 15
other unaffiliated persons advanced $227,661, or an aggregate of $3,000,000, for
additional notes (the "Series E Notes'). The Series E Notes bore interest at 12%
per year and were payable on demand 90 days after issuance. The Series E Notes
were convertible into Series E Preferred Stock at the option of the holder 90
days from the date of issuance if not repaid by the Company prior to 91 days
from the date of issuance, at a conversion price $5.19384 per share. The 1996
Series D Notes were retired with $1,500,000 of the amount received in connection
with the issuance of the Series E Notes. Series E Notes with an aggregate
principal amount of $3,000,000 were converted into Series E Preferred Stock are
a conversion price of $5.19384 per share in connection with the Series E
financing described below.
Series E Financing. In March 1997 Bachow Investment Partners and Bachow,
UVCC, Woodside Fund III and Pomona Capital and Baupost converted all of their
Series E Notes into shares of Series E Preferred Stock with an aggregate
purchase price of $2,336,581, $287,314, $1,141,171 and $618,838, respectively,
at a price of $5.19384 per share. In this transaction, the Company issued Series
E Preferred Stock with an aggregate purchase price of $4,999,999.
Each of the 962,669 shares of Series E Preferred Stock was automatically
converted into one share of Common Stock upon consummation of the initial public
offering of the Company's Common Stock and all contractual covenants by the
Company in favor of the holders of Series E Preferred Stock was automatically
terminated, other than certain registration rights.
1997 Bridge Loans. In May 1997, Bachow & Associates and Woodside Fund III
each advanced the Company $250,000 at an interest rate of 12% per annum in
anticipation of the Series F Financing described below. These amounts were
repaid in full at the closing of the Series F Financing.
Series F Financing. In June 1997, the Company sold Series F Preferred Stock
with an aggregate purchase price of $3,500,000 at a price per share of $6.96 to
V. Frank Mendicino and the Mendicino Benefit Plan and 10 other unaffiliated
investors. Mr. Mendicino and the Mendicino Benefit Plan purchased $87,355 of
Series F Preferred Stock at a price per share of $6.96.
Each of the 502,867 shares of Series F Preferred Stock was automatically
converted into one share of Common Stock upon consummation of the initial public
offering of the Company's Common Stock, and all contractual covenants by the
Company in favor of the holders of Series F Preferred Stock was automatically
terminated, other than certain registration rights.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
1. Financial Statements and Financial Statement Schedules.
Schedule II: Valuation and Qualifying Accounts
See also Index to Consolidated Financial Statements at Item 8 on page
25 of this report. All other financial statement schedules are omitted
because they were not required or the required information is included in
the Financial Statements or Notes thereto.
2. Exhibit Index is included in the Form 10-K filed with Securities and
Exchange Commission.
53
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Innova Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on April 27, 1998.
INNOVA CORPORATION
By /s/ JOHN M. HEMINGWAY
------------------------------------
John M. Hemingway
Secretary and Chief Financial
Officer
54
<PAGE> 56
INNOVA CORPORATION
REPORT OF MANAGEMENT
To the Stockholders and Directors of
Innova Corporation:
The accompanying financial statements have been prepared by management in
conformity with generally accepted accounting principles. The fairness and
integrity of these financial statements, including any judgments, estimates and
selection of appropriate generally accepted accounting principles, are the
responsibility of management, as is all other information presented in this
Annual Report.
In the opinion of management, the financial statements are fairly stated,
and, to that end, the Company maintains a system of internal control which:
provides reasonable assurance that transactions are recorded properly for the
preparation of financial statements; safeguards assets against loss or
unauthorized use; maintains accountability for assets; and requires proper
authorization and accounting for all transactions. Management is responsible for
the effectiveness of internal control. This is accomplished through established
accounting and other control systems, policies and procedures, employee
selection and training, appropriate delegation of authority and segregation of
responsibilities.
Our independent auditors provide an objective independent review by their
audit of the Company's financial statements, their audit is conducted in
accordance with generally accepted auditing standards and includes a review of
internal accounting control to the extent deemed necessary for the purposes of
their audit.
The Audit Committee of the Board of Directors is composed entirely of
Directors who are not employees of the Company. They meet regularly with the
independent auditors and management to review the work of each and to ensure
that each is properly discharging its financial reporting and internal control
responsibilities. To ensure complete independence, the independent auditors have
full and free access to the Audit Committee to discuss the results of their
audits, the adequacy of internal accounting controls and the quality of
financial reporting.
March 31, 1998.
/s/ JOHN M. HEMINGWAY
--------------------------------------
John M. Hemingway
Secretary and Chief Financial Officer
55
<PAGE> 57
EXHIBIT INDEX
EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS
<TABLE>
<C> <S>
3.1 Restated Articles of Registrant(1)
3.3 Amended and Restated Bylaws of Registrant(1)
</TABLE>
EXHIBIT NO. 10: MATERIAL CONTRACTS
EXECUTIVE COMPENSATION PLANS AND AGREEMENTS
<TABLE>
<C> <S>
10.1 Innova Corporation 1990 Stock Option Plan (Amended and
Restated July 31, 1992), as amended(1)
10.2 Director Stock Option Plan(1)
10.3 Form of Stock Option Agreement(1)
</TABLE>
OTHER MATERIAL CONTRACTS
<TABLE>
<C> <S>
10.4 Form of Warrant to Purchase Common Stock(1)
10.5 Form of Warrant to Purchase Series A Preferred Stock(1)
10.6 Warrant to Purchase 516,000 shares of the Company's Common
Stock issued to Greyrock (including Antidilution
Agreement)(1)
10.7 Registration Rights Agreement dated as of May 2, 1994, by
and among the Registrant, Bachow Investment Partners III,
L.P., Paul S. Bachow Co-Investment Fund, L.P., and Paul S.
Bachow, as amended April 26, 1996, April 30, 1997 and June
13, 1997 (All holders of the Company's Preferred Stock and
Greyrock were granted the same registration rights as in the
Registration Rights Agreement as if deemed parties to such
agreement)(1)
10.8 Business Park Net Lease, dated April 16, 1996, between
Gateway Corporate Properties, L.L.C., a Delaware limited
liability corporation, as lessor, and Innova Corporation, as
lessee (amended by Exhibit 10.9)(1)
10.9 Lease Amendment No. 1, dated January 28, 1997, between
Gateway North Properties, L.L.C., a Delaware limited
liability corporation, as lessor, and Innova Corporation, as
lessee(1)
10.10 Sublease Agreement, dated January 21, 1997, between Yamato
Transport USA, Inc., a New York corporation, as sublessor,
and Innova Corporation, as sublessee(1)
10.11 Cooperation Agreement, dated October 31, 1996, between SAT
(Societe Anonyme de Telecommunications) Networks and
Telecommunications Division and Innova Corporation (amended
by Exhibits 10.16 and 10.17)(1)
10.12 Master Purchase Agreement, dated October 31, 1996, between
SAT (Societe Anonyme de Telecommunications) Networks and
Telecommunications Division and Innova Corporation (amended
by Exhibit 10.18)(1)
10.13 OEM Purchase and Limited Licensing Agreement, dated May 30,
1997, between NERA ASA and Innova Corporation(1)
10.14 Memorandum of Understanding, dated November 17, 1995 between
SAT Telecommunications Division and Innova Corporation
(terminated by Exhibit 10.19)(1)
10.15 Heads of Agreement, Slovtel OEM Purchase Agreement, dated
November 29, 1996, between Northern Telecom Limited and
Innova Corporation (as amended on February 27, 1997, and
further amended on April 24, 1997 and by Exhibit 10.20)(1)
10.16 First Amendment to Cooperation Agreement, dated June 20,
1997, between SAT (Societe Anonyme de Telecommunications)
and Innova Corporation(1)
</TABLE>
56
<PAGE> 58
<TABLE>
<C> <S>
10.17 Second Amendment to Cooperation Agreement, dated June 20,
1997, between SAT (Societe Anonyme de Telecommunications)
and Innova Corporation(1)
10.18 First Amendment to Master Purchase Agreement, dated June 20,
1997, between SAT (Societe Anonyme de Telecommunications)
and Innova Corporation(1)
10.19 Agreement, dated June 20, 1997, between SAT (Societe Anonyme
de Telecommunications) and Innova Corporation(1)
10.20 Extension, dated June 30, 1997, of Heads of Agreement,
between Northern Telecom Limited and Innova Corporation(1)
10.21 Loan and Security Agreement, dated October 15, 1996, between
Greyrock Business Credit, a division of NationsCredit
Commercial Corporation and Innova Corporation, as amended by
Amendment to Loan Documents, dated April 29, 1997)(1)
</TABLE>
EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<C> <S>
21.1 Subsidiaries of Registrant(1)
</TABLE>
EXHIBIT NO. 23: CONSENTS OF EXPERTS AND COUNSEL
<TABLE>
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP(2)
</TABLE>
EXHIBIT NO. 24: POWER OF ATTORNEY
<TABLE>
<C> <S>
24.1 Powers of Attorney(2)
</TABLE>
EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE
<TABLE>
<C> <S>
27.1 Financial Data Schedule(2)
27.2 Restated Financial Data Schedules(2)
</TABLE>
- ---------------
(1) Incorporated by reference to same exhibit number as in the Company's
Registration Statement on Form S-1, Registration No. 333-29547.
(2) Incorporated by reference to same exhibit number as in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
57
<PAGE> 59
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
INNOVA CORPORATION
AND SUBSIDIARY
YEAR ENDED DECEMBER 31, 1997, NINE MONTH FISCAL PERIOD ENDED
DECEMBER 31, 1996 AND YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER DEDUCTION END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS $ PERIOD
----------- ------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Valuation accounts deducted from
assets
Lower of cost or market reserve
on inventories.................. $466,179 $ 80,610 -- -- $546,789
======== ======== == ========= ========
Allowance for doubtful
receivables..................... $ 14,892 $189,766 -- -- $204,658
======== ======== == ========= ========
Nine month fiscal period ended
December 31, 1996:
Valuation accounts deducted from
assets
Lower of cost or market reserve
on inventories.................. $596,256 -- -- $(130,077) $466,179
======== ======== == ========= ========
Allowance for doubtful
receivables..................... -- $ 14,892 -- -- $ 14,892
======== ======== == ========= ========
Year ended March 31, 1996:
Valuation accounts deducted from
assets
Lower of cost or market reserve
on inventories.................. $426,631 169,625 -- -- $596,256
======== ======== == ========= ========
Allowance for doubtful
receivables..................... -- -- -- -- --
======== ======== == ========= ========
</TABLE>
58
