<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 000-27707
AETHER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2186634
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
11460 CRONRIDGE DR.
OWINGS MILLS, MD
(Address of principal executive offices)
21117
(Zip Code)
(410) 654-6400
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value, 26,966,995 shares outstanding at November 30,
1999.
<PAGE> 2
AETHER SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
-------
<S> <C>
PART I: FINANCIAL INFORMATION
- ------------------------------
ITEM 1: FINANCIAL STATEMENTS
Condensed consolidated statements of operations for the three and nine month
periods ended September 30, 1999 and 1998 3
Condensed consolidated balance sheets as of September 30, 1999 and December
31, 1998 4
Condensed consolidated statements of cash flows for the nine months ended
September 30, 1999 and 1998 5
Notes to the condensed consolidated financial statements 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings 20
ITEM 2: Changes in Securities 20
ITEM 3: Defaults Upon Senior Securities 20
ITEM 4: Submission of Matters to a Vote of Security Holders 20
ITEM 5: Other Information 20
ITEM 6: Exhibits and Reports on Form 8-K 20
</TABLE>
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AETHER SYSTEMS, L.L.C.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Subscriber revenue $ 411,002 $ 184,576 $ 1,009,812 $ 309,152
Engineering services revenue 1,079,963 407,700 1,268,237 843,790
-------------- -------------- -------------- --------------
Total revenue 1,490,965 592,276 2,278,049 1,152,942
Cost of subscriber revenue 357,040 211,627 887,863 411,186
Cost of engineering services revenue 425,997 88,299 545,826 259,111
-------------- -------------- -------------- --------------
Total cost of revenue 783,037 299,926 1,433,689 670,297
-------------- -------------- -------------- --------------
Gross profit 707,928 292,350 844,360 482,645
-------------- -------------- -------------- --------------
Operating expenses:
Research and development 414,106 322,461 1,416,213 911,609
General and administrative 1,224,229 699,296 2,806,829 1,972,485
Selling and marketing 382,266 312,829 937,694 626,604
Depreciation and amortization 114,509 67,064 308,032 190,884
Unit option and warrant expense 935,280 8,145 2,198,430 24,435
-------------- -------------- -------------- --------------
3,070,390 1,409,795 7,667,198 3,726,017
-------------- -------------- -------------- --------------
Operating loss (2,362,462) (1,117,445) (6,822,838) (3,243,372)
Other income (expense):
Interest income (expense), net (47,909) (32,263) 92,844 (25,228)
Equity in losses of investment (440,000) - (440,000) -
-------------- -------------- -------------- --------------
Net loss $ (2,850,371) $ (1,149,708) $ (7,169,994) (3,268,600)
-------------- -------------- -------------- --------------
Other comprehensive loss-unrealized
holding gain /(loss) on investments available
for sale 73,612 - (58,604) -
-------------- -------------- -------------- --------------
Comprehensive loss $ (2,776,759) $ (1,149,708) $ (7,228,598) $ (3,268,600)
============== ============== ============== ==============
Pro forma statement of operations data
(unaudited):
Loss before income taxes, as
reported $ (2,850,371) $ (1,149,708) $ (7,169,994) $ (3,268,600)
Pro forma income tax provision
(benefit) - - - -
-------------- -------------- -------------- --------------
Pro forma net loss $ (2,850,371) $ (1,149,708) $ (7,169,994) $ (3,268,600)
============== ============== ============== ==============
Pro forma net loss per share-basic
and diluted $ (0.14) $ (0.07) $ (0.36) $ (0.22)
============== ============== ============== ==============
Pro forma weighted average shares
outstanding-basic and diluted 19,953,675 16,013,364 19,903,406 14,857,883
============== ============== ============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
AETHER SYSTEMS, L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, September 30, December 31,
1999 1999 1998
---- ---- ----
(UNAUDITED) (Pro forma,
unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 3,047,956 89,612,356 $ 1,755,350
Short-term investments 2,132,155 2,132,155 6,191,287
Trade accounts receivable, net of allowance for doubtful
accounts of $157,061 and $78,538 at December 31,
1998 and September 30, 1999 (unaudited),
respectively 830,536 830,536 118,489
Inventory, net of allowance for obsolescence of,
$169,630 and $101,024 at December 31, 1998 and
September 30, 1999 (unaudited), respectively 214,690 214,690 143,617
Prepaid expenses and other current assets 1,099,081 269,081 45,646
-------------- -------------- --------------
Total current assets 7,324,418 93,058,818 8,254,389
Furniture, computers, and equipment, net 1,475,186 1,475,186 510,437
Intangibles and other assets 15,083,651 15,083,651 -
-------------- -------------- --------------
$ 23,883,255 $ 109,617,655 $ 8,764,826
============== ============== ==============
LIABILITIES, MEMBERS' CAPITAL AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 792,004 $ 792,004 $ 195,930
Accrued expenses 2,177,848 2,177,848 539,325
Note payable 14,830,000 - -
-------------- -------------- --------------
Total current liabilities 17,799,852 2,969,852 735,255
Deferred tax liability 2,640,000 2,640,000 -
Members' capital 3,443,403 - 8,029,571
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 1,000,000 shares authorized;
0 shares issued and outstanding September 30, 1999 pro forma - - -
Common stock, $0.01 par value; 75,000,000 shares authorized;
26,066,095 shares issued and outstanding September 30, 1999 pro forma - 260,670 -
Additional paid-in capital - 104,577,133 -
Accumulated deficit - (830,000) -
-------------- -------------- --------------
Commitments and contingencies $ 23,883,255 $ 109,617,655 $ 8,764,826
============== ============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
AETHER SYSTEMS, L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss (7,169,994) $ (3,268,600)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 308,032 190,884
Provision (recovery) for doubtful accounts (78,523) 30,352
Provision (recovery) for inventory obsolescence (68,606) 55,530
Equity in losses of investment 440,000 -
Issuance of warrants - 50,000
Unit option and warrant expense 2,198,430 24,435
Changes in assets and liabilities:
Increase in trade accounts receivable (422,198) (94,914)
Increase in inventory (2,467) (369,937)
Increase in prepaid expenses and
other current assets (187,000) (24,351)
Increase in accounts payable and accrued expenses 675,852 527,633
Decrease in deferred revenue - (162,500)
-------------- --------------
Net cash used in operating activities (4,306,474) (3,041,468)
-------------- --------------
Cash flows used in investing activities:
Sales of short-term investments 12,164,210 -
Purchases of short-term investments (8,163,682) (1,847,910)
Purchases of property and equipment (901,248) (113,025)
Costs to acquire Mobeo, net of cash acquired (11,570,200) -
-------------- --------------
Net cash used in investing activities (8,470,920) (1,960,935)
-------------- --------------
Cash flows provided by financing activities:
Issuance of member units - 6,501,781
Exercise of unit options and warrants 70,000 56
Proceeds from notes payable 14,830,000 500,000
Payment of financing costs (830,000) -
Repayment of note payable - (250,000)
Issuance of notes receivable to member - (265,000)
-------------- --------------
Net cash provided by financing activities 14,070,000 6,486,837
-------------- --------------
Net increase (decrease) in cash and cash
equivalents 1,292,606 1,484,434
Cash and cash equivalents, at beginning of period 1,755,350 132,262
-------------- --------------
Cash and cash equivalents, at end of period 3,047,956 1,616,696
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ - $ -
============== ==============
</TABLE>
5
<PAGE> 6
AETHER SYSTEMS, L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Supplemental disclosure of non-cash investing and financing activities:
In 1998, a member converted a $250,000 promissory note payable into membership
units.
In 1998, the Company issued 18,442 unit options valued at $374,000 as part of
the costs to acquire Mobeo. These amounts have been reported as a reduction in
members' capital
For the nine months ended September 30, 1999 (unaudited), the Company incurred
an unrealized holding loss associated with its investment available for sale
totaling $58,604. These amounts have been reported as a reduction in members'
capital.
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
AETHER SYSTEMS, L.L.C.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Aether
Systems, L.L.C. and its subsidiary, Mobeo, Inc. Aether Systems, L.L.C. was
merged into Aether Systems, Inc. effective October 25, 1999 and are collectively
referred to as the "Company". The condensed consolidated balance sheet as of
September 30, 1999, the condensed consolidated statements of operations for the
three and nine months ended September 30, 1999 and 1998, and the condensed
consolidated statements of cash flows for the three and nine months ended
September 30, 1999 and 1998 have been prepared by the Company, without audit. In
the opinion of management, all adjustments have been made, which include normal
recurring adjustments necessary to present fairly the condensed consolidated
financial statements. Operating results for the three and nine months ended
September 30, 1999 are not necessarily indicative of the operating results for
the full year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes that the
disclosures provided are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
audited financial statements and related notes included in the Company's Form
S-1 filed with the Securities and Exchange Commission on October 20, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Company derives subscriber revenue from the provision of real-time
access to information from selected financial markets integrated into existing
wireless communication platforms. Subscriber revenue consists of monthly fixed
charges for usage and equipment and is recognized as the service is provided on
a monthly basis and a one-time non-refundable activation fee, which is
recognized upon service activation. Direct activation costs are expensed as
incurred. Also included in subscriber revenue are market exchange fees for
access to financial information from the securities exchanges and markets, which
are recognized as the service is provided. Engineering services revenue is
derived from the provision of wireless integration consulting under
time-and-materials and fixed-fee contracts. Revenue on time-and-materials
contracts is recognized as services are performed. Revenue on fixed-fee
contracts is recognized on the percentage-of-completion method based on costs
incurred in relation to total estimated costs. Anticipated contract losses are
recognized as soon as they become known and estimable.
(b) Cost of Revenues
Cost of subscriber revenue consists primarily of airtime costs, financial
data costs, wireless handheld device costs, and securities and market exchange
fees. Cost of engineering services revenue consists of cash compensation and
related costs for engineering personnel and materials.
(c) Investment in OmniSky
The Company uses the equity method of accounting for advances to and
earnings and losses of its investment in OmniSky.
(d) Unit Options and Warrants
The Company accounts for equity-based compensation arrangements in
accordance with the provisions of Accounting Principle Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, and
complies with the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25, compensation expense is based upon the difference, if any, on the date
of grant, between the fair value of the Company's stock and the exercise price.
All equity-based awards to non-employees are accounted for at their fair value
in accordance with SFAS No. 123.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
(e) Pro Forma Condensed Consolidated Statements of Operations Data and Net
Loss Per Share
Prior to the closing of the Company's initial public offering on October 26,
1999, each member of Aether Systems, L.L.C. contributed its membership units in
Aether Systems, L.L.C. to Aether Systems, Inc. in exchange for two and one-half
shares of common stock of Aether Systems, Inc. Following such contribution,
Aether Systems, L.L.C. was merged with and into Aether Systems, Inc., as a
result of which all assets and liabilities of Aether Systems, L.L.C. were
transferred to Aether Systems, Inc. Aether Systems, Inc. is subject to Federal
and state taxes at prevailing corporate rates. Accordingly, pro forma condensed
consolidated statements of operations data is based on the assumption that
Aether Systems, L.L.C.'S merger with and into Aether Systems, Inc., had occurred
at the beginning of each period. The Company has provided no income taxes on a
pro forma basis due to the losses incurred in all periods.
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings Per Share," and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per
share is computed by the dividing the net income (loss) available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) for the period by the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
Pro forma basic and diluted net loss per share has been calculated assuming that
the capital structure established at the date of the initial public offering was
in effect during the periods presented. As the Company had a net loss in each of
the periods presented, pro forma basic and diluted net loss per share are the
same.
(f) Pro Forma Consolidated Balance Sheet
The pro forma consolidated balance sheet has been prepared to reflect the
sale of 6,900,000 shares of the Company's common stock including 900,000 shares
from the exercise of the underwriters' over-allotment option, at the initial
public offering price less underwriting discounts and offering expenses,
repayment of the short-term note payable, and the merger of Aether Systems,
L.L.C. with and into Aether Systems, Inc. (see Note 3).
(g) Income Taxes
Aether Systems, L.L.C. elected limited liability company status and, as
such, was not directly subject to federal and state income taxes. Instead, the
members were responsible for income taxes on their proportionate share of
taxable income. Members were also entitled to a proportionate share of tax
deductions and credits.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(3) INITIAL PUBLIC OFFERING
On October 26, 1999, the Company completed an initial public offering of
6,900,000 shares, including 900,000 shares from the exercise of the
underwriters' over-allotment option, at a price of $16.00 per share, and
received estimated net proceeds (after expenses of the offering) of
approximately $100.8 million. Immediately prior to the closing of this
offering, members of Aether Systems, L.L.C. contributed their units in the
limited liability company to Aether Systems, Inc., a newly formed Delaware
corporation in exchange for two and one-half shares of common stock. Following
this contribution, Aether Systems, L.L.C. was merged with and into Aether
Systems, Inc.
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
(4) 3COM WARRANTS
In connection with the sale of membership units to 3Com, the Company granted
a conditional warrant to 3Com to purchase 357,466 member units at an exercise
price of $0.01 per unit. 3Com vested in 57,466 units in June 1999 upon
completion of a joint sales and marketing plan. As a result, the Company
recorded unit option and warrant expense of approximately $862,000. 3Com vests
in the remaining 300,000 warrants as follows: 150,000 warrants upon the
occurrence of the Company obtaining $6 million in engineering services revenue
from opportunities introduced by 3Com and 150,000 warrants upon the Company
obtaining 6,000 wireless service subscribers, all from opportunities introduced
by 3Com. If and when it becomes probable that 3Com will attain the specified
milestones necessary for the warrants to vest, the Company will begin to record
an expense reflecting the fair value of the warrant, which will be determined in
part based on the market price of the common stock. The Company would begin to
recognize this expense based on the probability that the milestones would be
achieved, continuing through the actual vesting date. The Company would
initially estimate the amount of the expense at the time of the determination
that achievement is probable, based in part on the market price of the common
stock at that time. At the time of the actual vesting, the fair value of the
warrant would be remeasured and, if different from the value used in initially
estimating the expense, the difference would be reflected as an additional
charge or credit at that time. As of September 30, 1999, the Company believes
that it is not yet probable that the member will attain the specified milestones
relating to the remaining 300,000 warrants and, accordingly, no expense relating
to these warrants has been recorded.
(5) EMPLOYMENT AGREEMENT WITH CHIEF EXECUTIVE OFFICER
In June 1999, the Company entered into an employment agreement with its
Chief Executive Officer ("Executive"). As part of this agreement, the Executive
was granted 350,000 unit options at an exercise price of $4.00 per unit and the
right to grant an additional 50,000 unit options at an exercise price of $4.00
per unit to other key executives. These options expire in June 2009. In
September 1999, the Company granted the Executive an additional 70,000 unit
options at an exercise price of $10.00 per unit. These options expire in
September 2009. Both grants of options became fully vested in October 1999, as a
result of the completion of the Company's initial public offering, and each
option was converted into an option to acquire 2.5 shares of common stock of
Aether Systems, Inc. at an exercise price equal to the exercise price per unit
divided by 2.5. In October 1999, the Company will record option and warrant
expense of $16.5 million, which is equal to the difference between the fair
value of the shares of Aether System Inc.'s Common Stock and the exercise price
measured at the date of the initial public offering times the number of options.
(6) OMNISKY VENTURE
On August 9, 1999, the Company entered into a new venture with 3Com, forming
a new Company called OpenSky, which was later renamed OmniSky. OmniSky was
formed to develop wireless Internet access, e-mail and electronic commerce
services that address opportunities in the emerging consumer and business mass
markets. The Company contributed a perpetual, non-exclusive, non-assignable,
worldwide license to certain proprietary software in exchange for a 26% equity
interest in OmniSky in the form of 7,000,000 shares of Series A Preferred Stock
and an option to purchase an additional 3,000,000 shares of Series A Preferred
Stock for an additional $2.5 million. Upon exercising the option, the Company
would increase its ownership in OmniSky to 33% on a fully diluted basis. On
November 9, 1999, the Company exercised its option to acquire these additional
shares. Additionally, the Chief Executive Officer of the Company serves as
a member of OmniSky's board of directors. The Company will also provide
engineering services under a letter of agreement with OmniSky in the amount of
$3.0 million through June 2000. As of September 30, 1999, the Company has
recognized $1.0 million in engineering services revenue under the OmniSky
agreement.
The Company accounts for its investment in OmniSky under the equity method
of accounting. The Company has recorded $440,000 in expenses through September
30, 1999, to reflect its proportionate share of the losses in OmniSky based upon
preliminary unaudited financial information provided by OmniSky.
In October 1999 the Company agreed to pay for the purchase of 25,000
Minstrel V modems from OmniSky for a price per modem of $230. OmniSky has an
exclusive buying arrangement with Novatel for Minstrel V modems, which is
expected to begin in December of 1999 and run through March of 2000. We have
paid for 20,000 of the 25,000 modems in two installments: $1,400,000 on October
15, 1999 and $3,200,000 on November 15, 1999. The modems are scheduled to be
delivered to the Company beginning in November of 1999 through April of 2000.
9
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
(7) ACQUISITION OF MOBEO, INC.
On August 19, 1999, the Company entered into a purchase agreement to
acquire all the outstanding common stock of Mobeo, Inc. ("Mobeo") for an
aggregate purchase price consisting of cash of $11.9 million which includes
estimated acquisition costs of $150,000, and 18,442 unit options with an
exercise price of $12.00 per unit valued at approximately $374,000. The
acquisition was closed on September 28, 1999. Mobeo provides employees and
customers at major banks and financial institutions with continuous pricing
information and news headlines for foreign exchange, government securities, and
commodity markets on wireless handheld devices. Additionally, the Company
entered into two-year advisory service agreements with two former owners of
Mobeo which provide for the grant of an aggregate 125,000 unit options with an
exercise price of $15.00 per unit in the Company. The Company expects to record
approximately $2.2 million as option and warrant expense over the two-year term
of the agreements. The Company also issued 22,000 options at an exercise price
of $6.00 per unit and 30,000 options at an exercise price of $12.00 per unit to
employees of Mobeo. The Company expects to record approximately $1.1 million as
option and warrant expense over the vesting period of the options of two years.
When Aether Systems, L.L.C. was merged into Aether Systems, Inc. each option was
converted into an option to acquire 2.5 shares of common stock of Aether
Systems, Inc. at an exercise price equal to the exercise price divided by 2.5.
Total consideration, net of cash acquired, paid for the Mobeo acquisition
was approximately $11.6 million in cash and $374,000 in unit options. The
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the assets acquired and liabilities assumed have been recorded at
their estimated fair value as of the acquisition date. The preliminary
allocation of the purchase price is summarized as follows:
<TABLE>
<S> <C>
Current and other assets $ 248,000
Fixed assets, net 371,000
Current liabilities (1,559,000)
Deferred tax liabilities (2,640,000)
Intangibles and goodwill 15,524,000
----------
Total consideration paid $11,944,000
-----------
</TABLE>
The following summary, prepared on a pro forma basis, presents the results of
operations as if the Mobeo acquisition had been completed as of January 1,
1998.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Revenue $ 9,745,883 $ 7,588,532
Net loss $(8,332,808) $(4,880,576)
Net loss per share basic and diluted $(0.42) $(0.33)
</TABLE>
The pro forma results of operations are not necessarily indicative of what
actually would have occurred if Mobeo had been owned for the entire periods
presented or a projection of the Company's results of operations for any future
period.
The final allocation of the purchase price will be determined during the
fourth quarter. The Company expects to amortize the value of the intangibles and
goodwill over an average estimated useful life of 6 years.
(8) NOTES PAYABLE
In September 1999, the Company entered into a $17,000,000 senior secured
credit facility with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated. The credit facility was for a one-year term, with the possibility
of extension for an additional one-year term and accrued interest at a variable
rate. The credit facility was collateralized by substantially all of the assets
of the Company and contained certain financial covenants. In connection with the
credit facility, the Company granted warrants to Merrill Lynch Capital
Corporation to purchase up to 967,876 of the member units in the Company which
became exercisable for no consideration if the Company did not repay the credit
facility in a timely manner. On September 28, 1999, the Company borrowed
approximately $14,830,000 under the credit facility, primarily to pay the
purchase price of Mobeo. On October 26, 1999, the Company repaid the amount
outstanding under the credit facility and the warrants were canceled.
(9) INCENTIVE PLANS
In September 1999, the Company adopted the 1999 Equity Incentive Plan and a
Senior Bonus Plan. Under the 1999 Equity Incentive Plan, the Company has the
ability to grant options to acquire up to 5.4 million shares of common stock to
its employees, directors, and service providers. The Company recorded
approximately $927,000 in unit option and warrant expense for the difference
between the exercise price and the fair market value of the units at the date of
grant during the three months ended September 30, 1999. The Company expects to
record approximately $3.1 million in unit option and warrant expense for the
difference between the exercise price and the fair market value of the units at
the date of grant over the vesting period of two years.
10
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
(10) RESERVED SHARE PROGRAM
Prior to October 20, 1999, the effectiveness of the Company's registration
statement for its initial public offering, the Company sent a letter to
approximately 90 employees, officers and directors of the Company whom it had
designated as potential offerees of up to 390,000 shares of common stock in a
directed share program in connection with its initial public offering. These
materials were not accompanied by a preliminary prospectus and may have
constituted a prospectus that does not meet the requirements of the Securities
Act of 1933. If the mailing of these original materials did constitute a
violation of the Securities Act of 1933, the recipients of the letter who
purchased common stock in the initial public offering could have the right, for
a period of one year from the date of their purchase of common stock, to obtain
recovery of the consideration paid in connection with their purchase of common
stock or, if they have already sold the stock, sue the Company for damages
resulting from their purchase of common stock. These refunds or damages could
total up to approximately $6.2 million, based on the initial public offering
price of $16.00 per share, in the event that investors suffer a total loss of
their investment during this period and seek refunds or damages.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following description of our financial condition and
results of operations in conjunction with the Company's Condensed Financial
Statements and Notes thereto included herewith, and with the Company's
Management's Discussion and Analysis of Financial Condition and Results of
Operations and audited financial statements and notes thereto for the years
ended December 31, 1996, 1997 and 1998, included in the Company's Form S-1 filed
October 20, 1999.
OVERVIEW
Aether Systems L.L.C. was originally formed as Aeros, L.L.C. in January
1996. We changed our name to Aether Technologies International, L.L.C. effective
August 1996 and to Aether Systems L.L.C effective September 1999. Immediately
prior to the completion of our initial public offering, the limited liability
company was converted into a Delaware corporation called Aether Systems, Inc.
From our inception until March 1997, we primarily provided wireless
engineering services, including the development of wireless software
applications for customers. In March 1997, we began offering services that
provide the users of wireless handheld devices access to real-time financial
information. During 1997, we made a strategic decision to focus a significant
portion of our engineering resources on the development of these and other
wireless data services and systems, including our AIM (Aether Intelligent
Messaging) package of wireless messaging software and software development tools
(also known as a software platform) and other wireless data applications. This
resulted in a decrease in engineering services revenue as a percentage of total
revenue and an increase in subscriber revenue as a percentage of total revenue.
We expect this trend to continue in the foreseeable future with an increasing
percentage of our revenue being derived from subscriber revenue. We also expect
to derive revenue from the licensing of our AIM software platform.
Our subscriber base was 1,080 at September 30, 1999, 687 at December 31,
1998 and 150 at December 31, 1997. The growth in subscribers over these periods
was primarily the result of the attraction of new subscribers to the service. We
currently offer two subscriber services; the Reuters MarketClip and the Morgan
Stanley Dean Witter Online TradeRunner. Reuters MarketClip provides real-time
wireless access to financial data and the Morgan Stanley Dean Witter Online
TradeRunner provides real-time wireless financial data and enables subscribers
to trade stocks using wireless handheld devices. Reuters MarketClip yearly
subscriptions started to expire in March 1999 and 77% of all subscribers
eligible to renew during the period from March to September 1999 renewed their
contracts for an additional one-year period. The Morgan Stanley Dean Witter
Online TradeRunner was released to the public in August of 1999 so no renewal
information is available.
For the nine months ended September 30, 1999, our cost to acquire
subscribers was greater than the revenue we expect to derive from those
customers over the initial one-year contract term. The cost to acquire
subscribers during this period was approximately $1,061,000 and the contracts
entered into during that period provide for payments of approximately $545,000
during the one-year term of the contracts. We expect that revenue from new
customers will exceed subscriber acquisition costs as the number of subscribers
increases to cover our fixed costs, but this will depend on the rate at which
subscriber levels increase and we cannot determine when this will occur or
assure you that it will ever occur.
On September 28, 1999, we acquired Mobeo, Inc. ("Mobeo"). Mobeo provides
employees and customers of major banks and financial institutions with real-time
price quotes and news for foreign exchange, government securities and
commodities markets on wireless handheld devices. Mobeo's subscriber base was
3,352 at September 30, 1999, 3,339 at December 31, 1998 and 2,811 at December
31, 1997. The net increase in subscribers from December 31, 1998 to September
30, 1999 was due to 828 new subscriptions and the termination of 817
subscriptions. We believe that a substantial number of the terminations and
additions are the result of changes in personnel at financial institutions whose
traders are Mobeo subscribers. Mobeo subscriber revenue (on a stand-alone basis)
was $7.5 million for the nine months ended September 30, 1999, $8.6 million for
the year ended December 31, 1998 and $7.1 million for the year ended December
31, 1997.
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On August 9, 1999, we entered into a joint venture with 3Com called OpenSky,
which was renamed OmniSky in October 1999. We contributed a perpetual,
non-exclusive, non-assignable, royalty-free worldwide license to our AIM
software platform in exchange for 7,000,000 shares of Series A Preferred Stock,
which represents a 26% equity interest in OmniSky on a fully diluted basis. We
also received an option to acquire additional 3,000,000 shares of Series A
Preferred Stock for an aggregate exercise price of $2.5 million. We and 3Com
formed OmniSky to pursue opportunities in the emerging consumer and business
mass markets for wireless internet access, e-mail and Internet and other
electronic transaction applications. We have entered into a letter agreement
with OmniSky that requires OmniSky to pay us $3 million over a 12-month period
ending in June 2000 in exchange for engineering services. We have the right to
offer OmniSky's services to our subscribers in exchange for a monthly fee of $3
per subscriber. On November 9, 1999, we exercised our option in OmniSky which
increased our equity interest in OmniSky to 33% on a fully diluted basis.
On October 26, 1999, we completed an initial public offering of 6,900,000
shares, including 900,000 shares from the exercise of the underwriters'
over-allotment option, at a price of $16.00 per share, and received net proceeds
(after expenses of the offering) of $101.4 million. Immediately prior to the
closing of this offering, members of Aether Systems, L.L.C. contributed their
units in the limited liability company to Aether Systems, Inc., a newly formed
Delaware corporation in exchange for two and one-half shares of our common
stock. Following this contribution, Aether Systems, L.L.C. was merged with and
into Aether Systems, Inc.
Since our inception, we have invested significant capital to build our
customer service and network operations center. Additionally, we have incurred
significant operating costs to develop our AIM software platform and other
software applications and to grow our business. As a result, we have incurred
operating losses since our inception. Part of our strategy is to continue to
invest in business development, research and development and marketing and
advertising. As a result, we expect to continue to incur operating losses for at
least the next several quarters.
RESULTS OF OPERATIONS
We derive our revenue from the sale of wireless data services and by
providing wireless engineering services. Revenue from wireless data services
consists of:
- a one time non-refundable activation fee, which we recognize upon service
activation;
- monthly service fees, which we recognize as services are provided to the
subscriber; and
- monthly exchange fees for access to financial information from the
securities exchanges and markets, which we recognize as services are
provided to the subscriber. We remit these fees to the various exchanges
and markets on a regular basis.
As part of our service offerings, we also provide our subscribers with the
option to purchase wireless handheld devices from us at cost, which we generally
bill over the initial term of the contract.
We also expect to derive revenue from the licensing of our AIM software
platform.
Contracts with our wireless data subscribers are for a one-year period and
include a termination penalty if cancelled by the subscriber before the one-year
term expires. These contracts are generally renewable at the option of the
subscriber for additional one-year periods or otherwise continue on a monthly
basis until cancelled by the subscriber. Mobeo has one-month, one-year and
two-year contracts that include a deposit that is forfeited if cancelled by the
subscriber before the term of the agreement has expired. These contracts
automatically renew for additional periods equal to the original term. Revenue
from wireless engineering services consists of amounts billed to our customers
for engineering time on an hourly basis or on a fixed fee per project basis.
This revenue is recognized as the work is performed.
Cost of subscriber revenue consists primarily of airtime costs, financial
data costs, wireless handheld device costs and securities exchange and market
fees. Our airtime costs are determined by agreements we have with several
wireless carriers. Typically, we have one-year contracts to buy data network
capacity either for an agreed amount of kilobytes at a flat fee or on a
cents-per-kilobyte basis. Cost of engineering services revenue consists of cash
compensation and related costs for engineers and other non-reimbursed,
project-related costs.
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Research and development expenses consist primarily of cash compensation and
related costs for engineers engaged in research and development activities and,
to a lesser extent, costs of materials relating to these activities. We expense
research and development costs as we incur them. General and administrative
expenses consist primarily of cash compensation and related costs for general
corporate and business development personnel, along with rent and other costs.
Selling and marketing expenses consist primarily of advertising and promotions,
sales and marketing personnel, travel and entertainment and other costs.
Depreciation and amortization expenses consist primarily of depreciation
expenses arising from equipment purchased for our network operations center and
other property and equipment purchases. On a pro forma basis, giving effect to
the Mobeo acquisition, depreciation and amortization expenses will consist
primarily of amortization related to goodwill and other intangibles to be
recognized as a result of the Mobeo acquisition.
Unit option and warrant expense consists of expenses recorded to account for
the difference, on the date of grant, between the fair market value and the
exercise price of unit options issued to employees and the fair value of
equity-based awards to non-employees.
Net interest income consists primarily of interest earned on cash and cash
equivalents and short-term investments, net of fees paid to fund managers and
interest expense on monies borrowed.
Equity in losses of investment consists of our proportionate share of the
net losses of OmniSky recorded under the equity method of accounting.
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Subscriber revenue. Subscriber revenue increased to $411,002 for the three
months ended September 30, 1999 from $184,576 for the three months ended
September 30 1998. The increase was primarily due to additional subscribers
associated with the launch of Reuters MarketClip and Morgan Stanley Dean Witter
Online TradeRunner, and we expect a significant portion of future revenue to
come from financial services and online trading products. Mobeo contributed
$55,389 of revenue for the two days that Aether owned Mobeo during the
three-month period ended September 30, 1999.
Engineering services revenue. Engineering services revenue increased to $1.1
million for the three months ended September 30, 1999 from $407,700 for the
three months ended September 30, 1998. This increase was primarily due to
revenue recognized under our OmniSky contract of $1.0 million.
Cost of subscriber revenue. Cost of subscriber revenue increased to $357,040
for the three months ended September 30, 1999 from $211,627 for the three months
ended September 30, 1998. The increase was primarily due to an increase in the
number of subscribers to Reuters MarketClip, which was launched in March 1998
and Morgan Stanley Dean Witter Online TradeRunner, which was launched in August
1999. We expect revenues for financial services and online trading products to
increase, resulting in an increase in the cost of subscriber revenue. The cost
of subscriber revenue as a percent of subscriber revenue decreased for the three
months ended September 30, 1999 as compared to the same period of the prior year
in part because we met minimum airtime usage requirements with various wireless
networks.
Cost of engineering services revenue. Cost of engineering services revenue
increased to $425,997 for the three months ended September 30, 1999 from $88,299
for the three months ended September 30, 1998. This increase was primarily due
to an increase in engineering services as discussed above.
Research and development expenses. Research and development expenses
increased to $414,106 for the three months ended September 30, 1999 from
$322,461 for the three months ended September 30, 1998. This increase was
primarily due to the hiring of additional engineers for increased research and
development activities associated with the development of our AIM software
platform and wireless data services. We expect to continue to make substantial
investments in research and development and anticipate that these expenses will
continue to increase.
General and administrative expenses. General and administrative expenses
increased to $1.2 million for the three months ended September 30, 1999 from
$699,296 for the three months ended September 30, 1998. This increase was
primarily due to the addition of personnel performing general corporate and
business development activities. We expect general and administrative expenses
to increase as we add personnel and incur additional expenses related to the
anticipated growth of our business and our operation as a public company.
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Selling and marketing expenses. Selling and marketing expenses increased to
$382,266 for the three months ended September 30, 1999 from $312,829 for the
three months ended September 30, 1998. The increase was primarily due to an
increase in advertising and promotion costs related to the launch of Reuters
MarketClip in March 1998 and Morgan Stanley Dean Witter Online Trade Runner in
August 1999. We expect selling and marketing expenses to increase significantly
as we incur additional expenses to increase brand awareness and add personnel.
Depreciation and amortization. Depreciation and amortization expenses
increased to $114,509 for the three months ended September 30, 1999 from $67,064
for the three months ended September 30, 1998. This increase was primarily due
to an increase in the purchase of property and equipment related to the
expansion of our corporate offices.
Unit option and warrant expense. Unit option and warrant expense increased
to $935,280 for the three months ended September 30, 1999 from $8,145 for the
three months ended September 30, 1998. The increase was primarily due to an
increase in the number of options that vested during the period with exercise
prices less than the fair value on the date of grant. We expect to record a
one-time option and warrant expense charge of $16.5 million in October 1999
related to options granted to the Chief Executive Officer and other key
executives. These options vested upon the completion of our initial public
offering. We expect to record an additional $6.4 million in option and warrant
expense over the vesting period of two years for options granted to its
employees, employees of Mobeo, and selling shareholders of Mobeo.
Interest income, net. Net interest income decreased to $(47,909) for
the three months ended September 30, 1999 from $(32,263) for the three months
ended September 30, 1998. The decrease was primarily due to realized losses on
sales of short-term investments.
Equity in losses of investment was $(440,000) for the three months ended
September 30, 1999 relating to our proportionate share of losses from OmniSky
accounted for under the equity method of accounting. We expect to continue to
record an increasing amount of equity in losses of investment, as OmniSky ramps
up its operating costs.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
Subscriber revenue. Subscriber revenue increased to $1.0 million for the
nine months ended September 30, 1999 from $309,152 for the nine months ended
September 30, 1998. The increase was primarily due to additional subscribers
associated with the launch of Reuters MarketClip and Morgan Stanley Dean Witter
Online TradeRunner, and we expect a significant portion of future revenue to
come from financial services and online trading products. Mobeo contributed
$55,389 of revenue for the two days that Aether owned Mobeo during nine-month
period ended September 30, 1999.
Engineering services revenue. Engineering services revenue increased to $1.3
million for the nine months ended September 30, 1999 from $843,790 for the nine
months ended September 30, 1998. This increase was primarily due to revenue
recognized under our OmniSky contract of $1.0 million.
Cost of subscriber revenue. Cost of subscriber revenue increased to $887,863
for the nine months ended September 30, 1999 from $411,186 for the nine months
ended September 30, 1998. The increase was primarily due to an increase in the
number of subscribers to Reuters MarketClip, which was launched in March 1998
and Morgan Stanley Dean Witter Online TradeRunner, which was launched in August
1999. We expect revenues for financial services and online trading products to
increase, resulting in an increase in the cost of subscriber revenue. The cost
of subscriber revenue as a percent of subscriber revenue decreased for the nine
months ended September 30, 1999 as compared to the same period of the prior year
in part due to us meeting minimum airtime usage requirements with various
wireless networks.
Cost of engineering services revenue. Cost of engineering services revenue
increased to $545,826 for the nine months ended September 30, 1999 from $259,111
for the nine months ended September 30, 1998. This increase was primarily due to
an increase in engineering services as discussed above.
Research and development expenses. Research and development expenses
increased to $1.4 million for the nine months ended September 30, 1999 from
$911,609 for the nine months ended September 30, 1998. This increase was
primarily due to the hiring of additional engineers for increased research and
development activities associated with the development of our AIM software
platform and wireless data services. We expect to continue to make substantial
investments in research and development and anticipate that these expenses will
continue to increase.
General and administrative expenses. General and administrative expenses
increased to $2.8 million for the nine months ended
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September 30, 1999 from $2.0 million for the nine months ended September 30,
1998. This increase was primarily due to the addition of personnel performing
general corporate and business development activities. We expect general and
administrative expenses to increase as we add personnel and incur additional
expenses related to the anticipated growth of our business and our operation as
a public company.
Selling and marketing expenses. Selling and marketing expenses increased to
$937,694 for the nine months ended September 30, 1999 from $626,604 for the nine
months ended September 30, 1998. The increase was primarily due to an increase
in advertising and promotion costs related to the launch of Reuters MarketClip
in March 1998 and Morgan Stanley Dean Witter Online TradeRunner in August 1999.
We expect selling and marketing expenses to increase significantly as we incur
additional expenses to increase brand awareness and add personnel.
Depreciation and amortization. Depreciation and amortization expenses
increased to $308,032 for the nine months ended September 30, 1999 from $190,884
for the nine months ended September 30, 1998. This increase was primarily due to
an increase in the purchase of property and equipment related to the expansion
of our corporate offices.
Unit option and warrant expense. Unit option and warrant expense increased
to $2.2 million for the nine months ended September 30, 1999 from $24,435 for
the nine months ended September 30, 1998. Of this increase approximately
$862,000 was primarily due to the fact that warrants held by 3Com to acquire
57,466 units became exercisable in the nine months ended September 30, 1999.
Approximately $1.3 million relates to an increase in the number of options that
vested during the period with exercise prices less than the fair value on the
date of grant. We expect to record a one-time option and warrant expense charge
of $16.5 million in October 1999 related to options granted to the Chief
Executive Officer and other key executives. These options vested upon the
completion of our initial public offering. We expect to record an additional
$6.4 million in option and warrant expense over the vesting period of two years
for options granted to its employees, employees of Mobeo, and selling
shareholders of Mobeo.
Interest income, net. Net interest income increased to $92,844 for the nine
months ended September 30, 1999 from $(25,228) for the nine months ended
September 30, 1998. The increase was primarily due to increased cash balances as
a result of our private placement financings completed in August 1998 and
October 1998.
Equity in losses of investment was $(440,000) for the nine months ended
September 30, 1999 relating to our proportionate share of losses from OmniSky
accounted for under the equity method of accounting. We expect to continue to
record an increasing amount of equity in losses of investment, as OmniSky ramps
up its operating costs.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private placements of our equity securities, which have resulted in net proceeds
of $15.7 million through September 30, 1999. As of September 30, 1999, we had
$5.2 million in cash and short-term investments and a $(10.5) million working
capital deficit. On October 26, 1999, we completed our initial public offering
and raised net proceeds (after expenses of the offering) of approximately $101.4
million. As of September 30, 1999, on a pro forma basis including the initial
public offering, we would have cash and short-term investments of $91.8 million
and working capital of $90.1 million.
On September 28, 1999, we borrowed $14.8 million under a senior secured
interim credit facility with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, one of the underwriters of our initial public offering,
and Merrill Lynch Capital Corporation. The loan was due and payable one year
from the closing date, with the possibility of a single extension up to one
year. We had the ability to prepay the loan at any time without any penalty.
Interest on borrowings under the credit facility were to accrue at a rate of, at
our option, either LIBOR plus a specified margin which increases over time or
the lender's base rate plus a specified margin which also increases over time.
The initial interest rate per annum was 11.1%. The facility was secured by
substantially all of our assets and the assets of our subsidiaries. The
subsidiaries also guaranteed repayment under the credit facility. The credit
facility contained terms and conditions typical for credit facilities of this
type and size and also included financial covenants.
In connection with this credit facility, Merrill Lynch Capital Corporation
received warrants to purchase up to 2,419,690 shares of our common stock for no
consideration. These warrants only became exercisable if the credit facility was
not repaid in a timely manner. On October 26, 1999, the Company repaid the
amount borrowed under the credit facility with proceeds from our initial public
offering. The warrants granted to Merrill Lynch Capital Corporation were
canceled.
Net cash used in operating activities was $4.3 million and $3.0 million for
the nine months ended September 30, 1999 and 1998, respectively. The principal
use of cash in each of these periods was to fund our losses from operations.
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Net cash used in investing activities was $8.5 million and $2.0 million for
the nine months ended September 30, 1999 and 1998, respectively. For the nine
months ended September 30, 1999 we invested cash in the purchase of property and
equipment and costs to acquire Mobeo offset in part by from the net sale of
short-term investments. Cash used in investing activities for the nine months
ended September 30, 1998 was primarily for the purchase of property and
equipment and short-term investments.
Net cash provided by financing activities was $14.1 million and $6.5
million for the nine months ended September 30, 1999 and 1998, respectively. For
the nine months ended September 30, 1999, cash provided by financing activities
was primarily attributable to borrowings under our credit facility with Merrll
Lynch & Co. Cash provided by financing activities for the nine months ended
September 30, 1998 was primarily attributable to proceeds from additional
private sales of our equity securities.
For the remainder of 1999, we expect to have the following expenditures and
requirements:
- $4.6 million for the purchase of Minstrel V modems from OmniSky
(see note 6 in the notes to the Condensed Consolidated notes to the
financial statements),
- $2.5 million for exercising warrants in OmniSky, increasing our ownership
from 26% to 33%,
- $2.0 million for expansion of our network operations center,
- enhancement of Mobeo's service offerings,
- increases in sales and marketing expenditures,
- research and development, and
- other working capital needs to grow our business.
We may also need funds to complete any acquisitions we may decide to pursue.
We believe our existing cash and cash equivalents will be sufficient to meet our
anticipated cash requirements for working capital and capital expenditures for
at least the next twelve months. Although, we currently believe that we have
sufficient capital resources to meet our anticipated working capital and capital
expenditure requirements beyond the next twelve months, unanticipated events and
opportunities may make it necessary for us to return to the public markets or
establish new credit facilities or raise capital in private transactions in
order to meet our capital requirements.
YEAR 2000 READINESS
Many currently installed computer systems and software products are coded to
accept or recognize only two digits rather four digits to define the year in the
date code field. These systems and software products will need to accept four
digit year entries to distinguish 21st century dates from 20th century dates.
Systems and products that are not corrected to do this could cause a disruption
of operations including a temporary inability to process transactions, send
invoices or engage in other normal business activities. We maintain a
significant number of computer software systems and operating systems across our
entire organization, which are potentially subject to year 2000 problems.
The discussion below includes the products and infrastructure of Aether and
its recent acquisition, Mobeo, except where noted.
We have taken several steps to prepare for the year 2000 transition. We
developed all our in-house software, including our AIM software platform, using
four digit date codes. We run all these applications on hardware and operating
systems that we have determined are year 2000 compliant. The Reuters MarketClip
and Morgan Stanley Dean Witter Online TradeRunner applications have been
successfully tested using year 2000 data supplied by Reuters and Morgan Stanley
Dean Witter respectively. All our computer hardware has been inventoried and
checked against the manufacturers' year 2000 compliance declarations. All
non-compliant hardware has been upgraded if possible, or replaced. All
third-party software, including operating systems and applications, have been
inventoried and checked against the manufacturers' compliance statements. We
will further assure the integrity of our business critical third party software
by conducting transaction testing in a year 2000 environment by early December.
We have upgraded and fixed software as recommended by the manufacturers.
We have received assurances from external entities that could affect our
business. We have on file the Y2K compliance statements of our data providers,
landline and wireless network carriers, device manufacturers and current
corporate customers whose systems might impact our own systems.
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We have developed a contingency plan to deal with failures that may occur during
the year 2000 transition. With the assistance of KPMG, we conducted a business
impact analysis and mapped the most critical of these into a contingency plan
that identified proactive measures to be taken to prepare for system failures as
well as those people responsible. In the event of a material system or product
failure in spite of Aether's efforts to date, a crisis management plan has been
developed and is in place if needed.
The most likely worst case scenario would be the failure of the landline or
wireless networks that carry data to us or from us to our customers. If this
happened, we would not be able to deliver our services to our customers and we
may lose revenue.
Although we have taken the steps described above to make our systems year
2000 compliant, we may experience material problems and expenses associated with
year 2000 compliance that could adversely affect our business, results of
operations and financial condition. If the assurances we have received from
third parties regarding their compliance is inaccurate we may experience
disruption resulting in additional expense and loss of revenue. We are also
subject to outside forces that might generally affect industry and commerce,
such as year 2000 compliance failures by utility or transportation companies. If
our customers experience disruptions related to our services and software
systems, they may begin litigation against us even if the disruptions were
caused by their own systems or software provided by others.
We have purchased most of our equipment within the last four years, which
has kept the costs of year 2000 compliance efforts to a minimum. All
non-compliant software and equipment has been upgraded or replaced at a cost
that is not material to us and our total costs relating to year 2000 compliance
have been less than $100,000. Based on our review of compliance to date, we do
not expect any future costs related to year 2000 compliance to be material.
QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. At September 30, 1999, we had short-term investments of
approximately $2.1 million. These short-term investments consisted of highly
liquid investments in debt obligations of the U.S. Government and other highly
rated entities with maturities of up to 30 years. These investments are
classified as available-for-sale and are considered short-term, because we
expect to sell them within 12 months. These investments are subject to interest
rate risk and will fall in value if market interest rates increase. At September
30, 1999, the value of our short-term investments was approximately $117,000
less than our cost. If market interest rates continue to rise, the value of our
short-term investments will continue to decrease. We expect to sell these
investments prior to maturity, and therefore we may not realize the full value
of these investments. We currently hold no derivative instruments and do not
earn foreign-source income. We expect to invest only in short-term, investment
grade, interest-bearing instruments and thus do not expect future interest rate
risk to be significant.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This report includes forward-looking statements relating to, among other
things, future results of operations, our plans and expectations regarding our
future services and operations and our investment in OmniSky, and general
industry and business conditions applicable to us. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to a number of
risks, uncertainties and assumptions about us that could cause actual results
to differ materially from those in such forward-looking statements. Such risks,
uncertainties and assumptions include, but not limited to our limited operating
history with subscriber based services, our historical losses and potential
larger future losses, the infancy of the wireless data industry where there is
no established market for our products and services, our ability to adapt to
rapid technological change, our dependence on wireless networks owned and
controlled by others, our reliance on a small number of customers and the other
factors that we describe in the section entitled "Risk Factors" in the
prospectus that we filed with the SEC on October 21, 1999, pursuant to Rule
424(b).
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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See disclosure in the section entitled "Qualitative and Quantitative Disclosure
About Market Risk" in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 18.
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PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 1999, Aether Technologies, L.L.C. (predecessor to Aether Systems,
L.L.C.) issued 30,000 units pursuant to an option exercise for proceeds of
$30,000. The securities issued in the foregoing transactions were (i) offered
and sold in reliance upon exemptions from Securities Act registration set forth
in Section 4(2) of the Securities Act. No underwriters were involved in the
foregoing sales of securities.
On October 20, 1999, our Registration Statement on Form S-1 (SEC File No.
333-85697), for our initial public offering of 6,000,000 shares on common stock,
par value $0.01 became effective. All 6,000,000 were sold upon completion of the
initial public offering at an aggregate offering price of $96,000,000,
reflecting an offering price of $16 per share. Merrill Lynch and Co., Robertson
Stevens, Donaldson, Lufkin and Jenrette and U.S. Bancorp Piper Jaffray acted as
managing underwriters for the initial public offering. Underwriting discounts
and commissions for the shares sold in the initial public offering totaled
$6,720,000.
In connection with the initial public offering, we registered and offered the
underwriters of the offering an option to purchase an additional 900,000 shares
of common stock at the $16 per share offering price. The underwriters exercised
this option on October 22, 1999. After deducting underwriting discounts and
commissions, we received approximately $13,414,000 in proceeds from the exercise
of this option.
In connection with its initial public offering, we incurred estimated expenses
of approximately $1,900,000. None of our expenses in connection with the
offering were paid directly or indirectly to our directors or officers or our
associates, or to persons owning 10% or more of our common stock or other
affiliates. After deducting underwriting discounts and commissions and other
expenses, we received net proceeds of approximately $100,794,000 from the
initial public offering.
The primary purposes of the initial public offering were to obtain additional
working capital, create a public market for the Company's common stock and
facilitate future access to public markets. We used approximately $14,830,000 of
the net proceeds to repay in full all indebtedness incurred under the senior
secured interim credit facility with Merrill Lynch & Co., one of the
underwriters of this offering, of which $11,570,000 was used to purchase Mobeo,
approximately $830,000 was used to pay fees and expenses related to the credit
facility, and the remaining $2,430,000 was allocated for general corporate
purposes. We used approximately $2,500,000 of the net proceeds to exercise
warrents in Omnisky and $4,600,000 to purchase Minstrel V Modems. The
remaining net proceeds have been invested in short-term, investment grade,
interest-bearing instruments.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibit 27 - Financial Data Schedule
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: December 3, 1999
Aether Systems, Inc.
By: /s/ David C. Reymann
--------------------
David C. Reymann
Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30,
1999, AND THE NINE MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001093434
<NAME> AETHER SYSTEMS, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,047,956
<SECURITIES> 2,132,155
<RECEIVABLES> 830,536
<ALLOWANCES> 0
<INVENTORY> 214,690
<CURRENT-ASSETS> 7,324,418
<PP&E> 2,271,321
<DEPRECIATION> (796,135)
<TOTAL-ASSETS> 23,883,255
<CURRENT-LIABILITIES> 17,799,852
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,443,403
<TOTAL-LIABILITY-AND-EQUITY> 23,883,255
<SALES> 1,490,965
<TOTAL-REVENUES> 1,490,965
<CGS> 783,037
<TOTAL-COSTS> 783,037
<OTHER-EXPENSES> 3,510,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,909
<INCOME-PRETAX> (2,850,371)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,850,371)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,850,371)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
