<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 period ended JUNE 30, 2000
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. (X) Yes ( ) 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, 38,324,728 shares outstanding as of August 9, 2000
1
<PAGE> 2
AETHER SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I: FINANCIAL INFORMATION
------------------------------
ITEM 1: Financial Statements
Condensed consolidated statements of operations and other comprehensive
loss for the three and six month periods ended June 30, 2000
and 1999 (unaudited) 3
Condensed consolidated balance sheets as of June 30, 2000 (unaudited)
and December 31, 1999 4
Condensed consolidated statements of cash flows for the six months
ended June 30, 2000 and 1999 (unaudited) 5
Notes to the condensed consolidated financial statements 7
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II: OTHER INFORMATION
---------------------------
ITEM 1: Legal Proceedings 21
ITEM 2: Changes in Securities and Use of Proceeds 21
ITEM 3: Defaults Upon Senior Securities 21
ITEM 4: Submission of Matters to a Vote of Security Holders 21
ITEM 5: Other Information 22
ITEM 6: Exhibits and Reports on Form 8-K 22
</TABLE>
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AETHER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Subscriber revenue $ 6,745 $ 331 $ 9,674 $ 599
Engineering services revenue 1,637 116 3,040 188
Software and related services revenue 2,373 -- 3,442 --
---------- ---------- ---------- -----------
Total revenue 10,755 447 16,156 787
Cost of subscriber revenue 3,737 286 5,469 531
Cost of engineering services revenue 1,027 84 1,640 120
Cost of software and related services revenue 863 -- 1,542 --
---------- ---------- ---------- ----------
Total cost of revenue 5,627 370 8,651 651
---------- ---------- ---------- ----------
Gross profit 5,128 77 7,505 136
---------- ---------- ---------- ----------
Operating expenses:
Research and development (exclusive of
Option and warrant expense) 4,077 532 5,761 1,002
General and administrative (exclusive of
Option and warrant expense) 9,906 871 15,269 1,583
Selling and marketing (exclusive of
Option and warrant expense) 16,081 299 21,809 555
In process research and development 60 -- 2,160 --
Depreciation and amortization 67,041 110 84,451 194
Option and warrant expense:
Research and development 1,712 31 2,710 32
General and administrative 1,455 323 2,563 329
Selling and marketing 438 886 777 902
---------- ---------- ---------- ----------
100,770 3,052 135,500 4,597
---------- ---------- ---------- ----------
Operating loss (95,642) (2,975) (127,995) (4,461)
Other income (expense):
Interest income, net 14,787 57 16,976 141
Equity in losses of investments (10,721) -- (13,828) --
Minority interest 1,662 -- 1,662 --
----------- ---------- ----------- ----------
Net loss $ (89,914) $ (2,918) $ (123,185) $ (4,320)
---------- ---------- ---------- ----------
Other comprehensive loss:
Unrealized holding gain (loss) on
investments - available for sale (1,727) (42) 58,876 (132)
Gain on sale of stock by equity
method investee 31,172 -- 31,172 --
---------- ---------- ---------- ----------
Comprehensive loss $ (60,469) $ (2,960) $ (33,137) $ (4,452)
========== ========== ========== ==========
Pro forma statement of operations data
Loss before income taxes, as reported $ (2,918) $ (4,320)
Pro forma income tax provision (benefit) -- --
---------- ----------
Pro forma net loss $ (2,918) $ (4,320)
========== ==========
Net loss per share-basic and diluted $ (2.36) $ (3.65)
========== ==========
Weighted average shares
outstanding-basic and diluted 38,031 33,765
========== ==========
Pro forma net loss per share-basic
and diluted $ (0.15) $ (0.22)
========== ==========
Pro forma weighted average shares
outstanding-basic and diluted 19,878 19,878
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
AETHER SYSTEMS, L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 1,193,450 78,542
Restricted cash 46,698 --
Short-term investments 2,383 2,092
Trade accounts receivable, net of allowance for doubtful
accounts of $293 and $56 at June 30, 2000 (unaudited)
and December 31,1999, respectively 7,515 1,003
Inventory, net of allowance for obsolescence of $115 at
June 30, 2000 (unaudited) and December 31, 1999 2,188 688
Prepaid expenses and other current assets 10,181 4,995
----------- -----------
Total current assets 1,262,415 87,320
Property and equipment, net 13,698 2,796
Investments 140,182 75
Intangibles, net 1,277,012 12,209
Other assets 9,935 134
----------- -----------
$ 2,703,242 $ 102,534
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,561 $ 1,425
Accrued expenses 20,740 1,620
Accrued employee compensation and benefits 2,629 971
Accrued interest on notes payable 5,072 --
Deferred revenue 2,832 176
Notes payable 13,911 --
----------- -----------
Total current liabilities 49,745 4,192
Long term liabilities - convertible subordinated notes
payable and other notes payable 310,500 --
Deferred tax liability 11,221 --
Minority interest in net assets of a subsidiary 65,304 --
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; 0 shares issued and outstanding at
June 30, 2000 (unaudited) and December 31, 1999 -- --
Common stock, $0.01 par value; 75,000,000 shares
authorized; 38,141,522 and 27,154,398
shares issued and outstanding at June 30, 2000
(unaudited) and December 31, 1999, respectively 381 272
Additional paid-in capital 2,352,944 120,892
Accumulated deficit (145,799) (22,614)
Notes receivable from stockholder, -- (138)
Unrealized gain (loss) on investments available for sale 58,946 (70)
----------- -----------
Total stockholders' equity 2,266,472 98,342
----------- -----------
Commitments and contingencies
$ 2,703,242 $ 102,534
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
AETHER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (123,185) $ (4,320)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 84,451 193
Minority interest (1,662) --
Equity in losses of investments 13,828 12
Option and warrant expense 6,050 1,263
In-process research and development charge 2,160 --
Changes in assets and liabilities:
Increase in trade accounts receivable (3,490) (6)
(Increase) decrease in inventory (1,250) 55
Increase in prepaid expenses and
other current assets (3,933) (26)
Increase (decrease) in accounts payable (944) 152
Increase in accrued expenses and compensation
and benefits 21,369 114
Increase in deferred revenue 919 25
----------- -----------
Net cash used in operating activities (5,687) (2,538)
----------- -----------
Cash flows used in investing activities:
Sales of short-term investments 5,337 7,028
Purchases of short-term investments (3,274) (4,938)
Purchases of property and equipment (10,196) (850)
Cost of investments (63,217) --
Costs of acquisitions, net of cash acquired (154,083) --
Increase in restricted cash (13,600) --
----------- -----------
Net cash provided by (used in) investing activities (239,033) 1,240
----------- -----------
Cash flows provided by financing activities:
Net proceeds from issuance of common stock 1,058,220 --
Net proceeds from issuance of convertible debt 300,564 --
Proceeds from exercise of options 844 --
----------- -----------
Net cash provided by financing activities 1,359,628 --
----------- -----------
Net increase in cash and cash equivalents 1,114,908 (1,298)
Cash and cash equivalents, at beginning of period 78,542 1,755
----------- -----------
Cash and cash equivalents, at end of period $ 1,193,450 $ 457
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ -- $ --
=========== ===========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
In January 2000, approximately $600,000 of trade receivables owed to the Company
by OmniSky, Inc. were offset by the Company's additional investment made in
OmniSky, Inc.
In March 2000, the Company acquired Riverbed Technologies, Inc. for 4,537,281
shares of the Company's common stock and converted existing options held by
Riverbed employees into options to acquire 862,480 shares of the Company's
common stock. The value of the common stock and replacement options of
$1.136 billion has been allocated to the fair value of the assets purchased
and liabilities assumed with a corresponding increase in stockholders'
equity.
In connection with the acquisition of IFX and the formation of Sila, the Company
established a deferred tax liability of $11.2 million. Such amount was
offset by an equal increase in goodwill.
5
<PAGE> 6
For the quarter ended June 30, 2000, the Company recorded additions to
stockholders equity of $31.2 million from the issuance of stock by OmniSky,
Inc. to third parties at per share amounts in excess of the book value per
share of the Company's investment in OmniSky, Inc.
For the six months ended June 30, 2000 and 1999 (unaudited), the Company
incurred an unrealized net holding gain (loss) associated with its
investments available for sale totaling $58.9 million and (132,000),
respectively. These amounts have been reported as an increase (decrease) in
stockholders' equity.
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
AETHER SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Aether
Systems, Inc. and its subsidiaries. The condensed consolidated balance sheet as
of June 30, 2000, the condensed consolidated statements of operations and other
comprehensive loss for the three and six months ended June 30, 2000 and 1999,
and the condensed consolidated statements of cash flows for the six months ended
June 30, 2000 and 1999 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 six months ended June
30, 2000 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 condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
included in the Company's Annual Report for the year ended December 31, 1999 on
Form 10-K.
(2) SUMMARY OF SELECTED 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. Certain of the Company's customers are billed in advance with revenue
deferred and recognized on a monthly basis over the term of the agreement. 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. The Company also recognizes fees for managing data
through its network operations center. 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. Software and related services revenues are generated
from licensing software and providing services, including maintenance and
technical support, training and consulting. Software revenue consists of fees
for licenses of the Company's software products. The Company recognizes the
revenue when the license agreement is signed, the license fee is fixed and
determinable, delivery of the software has occurred, and collectibility of the
fees is considered probable. Revenue from software licensing and related
wireless engineering consulting services for which the software requires
significant customization and modification is recognized using the percentage of
completion method in accordance with SOP 97-2, based on the hours incurred in
relation to the total estimated hours. Services revenue consists of maintenance
and technical support, which consists of unspecified when-and-if available
product updates and customer telephone support services and are recognized
ratably over the term of the service period. Other services revenues are
recognized as the related services are provided. See (d) recent accounting
pronouncements for more information.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, CONTINUED
(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. Since the Company's service agreements are generally for a one-year period
and subject to cancellation, non-payment and non-return risk, the Company
expenses the cost of wireless handheld devices upon shipment to the customer.
Cost of engineering services revenue consists of cash compensation and related
costs for engineering personnel and materials. The cost of software license
revenue consists primarily of third party royalties. The cost of maintenance,
consulting and support revenue consists primarily of personnel-related costs.
(c) Use of Estimates
The preparation of condensed 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 dates of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(d) Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A and SAB 101B which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 provides guidance on necessary disclosures relating
to revenue recognition policies in addition to outlining the criteria that must
be met in order to recognize revenue. Dependant upon the final guidance on SAB
101 which is expected to be issued by the SEC in the fourth quarter of this
year, the Company may be required to change its policy of recognizing activation
fee revenue upon service activation to recognizing the revenue ratably over the
initial term of the subscription contract. The Company does not expect this
change to have a material effect on its consolidated results of operations or
financial position.
In March 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) published their consensus on EITF Issue No
00-3, Application of AICPA Statement of Position (SOP) 97-2, Software Revenue
Recognition, to Arrangements that Include the Right to Use Software Stored on
Another Entity's Hardware. The EITF consensus gives guidance on accounting for
hosting arrangements. The Company does not expect the adoption of EITF Issue No.
00-3 to have a material effect on its consolidated results of operations or
financial position.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25. Interpretation No. 44 clarifies the application of Opinion 25 for the
following issues: (1) the definition of employee for purposes of applying
Opinion 25, (2) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (3) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (4) the accounting
for an exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000. The Company does not expect that the
adoption of Interpretation No. 44 will have a material effect on its
consolidated statement of operation or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 137 and
further amended by SFAS No. 138, established accounting and reporting standards
for derivative financial instruments and associated hedging activities as well
as hedging activities in general. The Company does not hold any hedging
instruments, and as such does not expect the adoption of SFAS No. 133, as
amended, to have a material affect on its consolidated results of operation or
its financial position.
8
<PAGE> 9
(3) SECONDARY PUBLIC OFFERING
On March 17, 2000, the Company completed a secondary offering for the sale
of 5,411,949 shares of common stock, including the sale of 825,000 shares from
the exercise of the underwriters' over-allotment option, at $205.00 per share.
The net proceeds after deduction of underwriting discounts and offering expenses
were approximately $1.06 billion. Concurrently with this offering, the Company
completed an offering for the sale of an aggregate $310.5 million of 6%
convertible subordinated notes (the "Notes") due in 2005, including $40.5
million in principal amounts from the exercise of the underwriters'
over-allotment. The net proceeds after deduction of underwriting discounts and
offering expenses were approximately $300.6 million. The underwriting discounts
and expenses of the Notes offering of $9.8 million have been included in other
assets as deferred financing fees. The Notes are convertible, at the option of
the holder, at any time prior to maturity into shares of common stock of Aether
at a conversion price of $243.95 per share, which is equal to a conversion rate
of 4.0992 shares per $1,000 principal amount of notes, subject to adjustment.
(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 (893,665 shares)
at an exercise price of $0.01 per unit. 3Com vests in the warrants upon
performance of certain services and achievement of specific criteria. As of June
30, 2000, warrants to purchase 300,000 member units (750,000 shares) had not
been earned by 3Com. As of June 30, 2000, the Company believes that it is not
yet probable that 3Com will attain the specified milestones relating to the
remaining 300,000 warrants (750,000 shares) and, accordingly, no expense
relating to these warrants has been recorded.
(5) INVESTMENT IN OMNISKY, INC.
On August 9, 1999, the Company entered into a new venture with 3Com, forming
a new Company called OpenSky, which was later renamed OmniSky, of which the
Company initially owned 31% on a fully diluted basis. The Company provides
various services to OmniSky under letters of agreement through June 2000. For
the three and six months ended June 30, 2000, the Company recognized
approximately $0.9 and $2.0 million in revenue, respectively, under the OmniSky
agreements, and had an account receivable of approximately $1.2 million as of
June 30, 2000.
On January 18, 2000, the Company entered into a Series B Preferred Stock
Purchase Agreement, whereby the Company purchased 1,439,809 shares of Series B
preferred stock of OmniSky for an aggregate purchase price of approximately $6.7
million, consisting of cash of approximately $6.1 million and the forgiveness of
approximately $600,000 of indebtedness owed to the Company by OmniSky for
engineering services. The investment was made to maintain the Company's 31%
ownership in OmniSky. The Company's per share purchase price was the same as the
other Series B Preferred Stock investors.
The Company accounts for its investment in OmniSky under the equity method
of accounting. The Company recorded approximately $10.5 and $13.6 million in
expenses for the three and six month period ended June 30, 2000 respectively, to
reflect its proportionate share of the losses in OmniSky based upon preliminary
unaudited financial information provided by OmniSky.
In May 2000, News Corporation, PSINet Inc., and several other investors,
invested a total of $89.4 million in OmniSky. As a result of this transaction,
the Company's ownership in OmniSky decreased to approximately 27% on a fully
diluted basis. During the quarter ended June 30, 2000, the Company has
recognized a gain through stockholders' equity of approximately $31 million
related to issuances of OmniSky equity to third party investors.
In October 1999, the Company agreed to purchase 25,000 Minstrel V modems
from OmniSky for $230 per modem. OmniSky has an exclusive buying arrangement
with Novatel for Minstrel V modems. In 1999, the Company purchased 20,000 of the
25,000 for cash of $3.5 million and cancellation of $1.1 million of trade
receivables owed to the Company by OmniSky. An additional $1.2 million will be
paid to OmniSky for the remaining 5,000 modems after the delivery of the initial
20,000 modems, which began in November 1999. As of June 30, 2000, the Company
has recorded prepaid expenses of approximately $4.4 million associated with this
agreement. As of June 30, 2000, the Company has received 930 modems, or
approximately $214,000 of modems. Subsequent to June 30, 2000 the Company
received $1.84 million from OmniSky pursuant to an agreement for OmniSky to
repurchase 8,000 modems, reducing the Company's purchase commitment from 25,000
to 17,000.
9
<PAGE> 10
(6) INVESTMENT IN INCISCENT AND METROCALL
On February 8, 2000, the Company entered into a joint venture agreement with
Metrocall, Inc. ("Metrocall"), PSINet, Inc. and Hicks, Muse, Tate and Furst,
Inc. to form a new joint venture called Inciscent. Inciscent was formed to
develop wireless e-mail, Internet access and other applications for the small
and medium-sized businesses and home office customers. The Company acquired a
27.5% percent interest in Inciscent in the form of 4,950,000 shares of Series A
Preferred Stock for $9.9 million, or $2 per share, and has the right to appoint
two of the seven members of the Board of Directors of Inciscent. The Company
granted a perpetual AIM license for $1 million to Inciscent and will be
performing engineering services under a contract totaling approximately $4.0
million. The Company also plans to sign a network operations agreement and a
help desk agreement. The Company will recognize the license revenue over the
term of the network operations agreement, which is expected to be two years. For
the three and six months ended June 30, 2000 the Company recognized
approximately $288,000 and $348,000 in revenue, respectively, under the
engineering services agreement. As part of the Inciscent joint venture, the
Company also acquired 7,766,769 shares of Metrocall common stock at $2.19 per
share, or a 9.9% interest, for $17 million. The Company has obtained the right
to appoint one of the thirteen members of Metrocall, Inc.'s Board of Directors.
The Company accounts for its investment in Inciscent under the equity method
of accounting. The Company has recorded approximately $261,000 and $296,000 in
expense for the three and six months ended June 30, 2000, respectively, to
reflect its proportionate share of the losses in Inciscent based upon
preliminary unaudited financial information provided by Inciscent.
The Company accounts for its investment in Metrocall in accordance with SFAS
115. Under the provisions of SFAS 115, the Company has classified its investment
in Metrocall as available-for-sale and the investment is being carried at fair
value. Fair value is determined based upon quoted market prices. Unrealized
gains (losses) are excluded from earnings and are reported as a separate
component of other comprehensive income until realized. As of June 30, 2000, the
Company has recorded an unrealized gain of approximately $52.9 million on its
investment in Metrocall.
(7) INVESTMENTS
On June 2, 2000, the Company entered into a common stock purchase agreement
with Data Critical Corporation (Data Critical) a publicly traded company. The
Company acquired 1,230,770 shares of Common Stock representing a 9.9% percent
interest in Data Critical for $10 million in cash, or $8.125 per share, and has
the right to appoint one of the six members of the Board of Directors of Data
Critical. The Company also has the right to purchase an additional $10 million
worth of shares provided however that the Company's ownership percentage in Data
Critical does not exceed 19.9%. In separate agreements, the Company granted to
Data Critical a perpetual AIM license for $250,000 and will be providing airtime
under a contract totaling a minimum of $600,000 over 24 months. The Company will
recognize the license revenue and airtime revenue over the term of the minimum
airtime charges cash payment schedule of two years. As of June 30, 2000, the
Company has not recognized any revenue under these agreements.
The Company accounts for its investment in Data Critical in accordance with
SFAS 115. Under the provisions of SFAS 115, the Company has classified its
investment in Data Critical as available-for-sale and the investment is being
carried at fair value. Fair value is determined based upon quoted market prices.
Unrealized gains (losses) are excluded from earnings and are reported as a
separate component of other comprehensive income until realized. As of June 30,
2000, the Company has recorded an unrealized gain of approximately $6 million on
its investment in Data Critical.
On June 30, 2000 the Company entered into a purchase agreement with Novatel
Wireless, Inc. (Novatel). The Company acquired approximately a 7% interest in
Novatel in the form of 1,159,420 shares of Series D Preferred Stock and 231,884
Investor Warrants to purchase common stock, for $20 million in cash, or $17.25
per share, and has the right to appoint one of the nine members of the board of
directors of Novatel. The Company accounts for its investment under the cost
method of accounting.
10
<PAGE> 11
(8) RESEARCH IN MOTION LIMITED - PRELIMINARY MARKETING AGREEMENT
On April 11, 2000, the Company entered into a preliminary marketing
agreement with Research in Motion Limited (RIM). Under the agreement, the
Company committed to the following terms to be further defined in future
agreements:
- Purchase up to 140,000 RIM handheld devices over the next three years.
The total commitment is dependent on certain conditions being met over
the period of the agreement.
- License the RIM BlackBerry wireless e-mail service for $3.0 million.
- Provide the technology for the Company to build the BlackBerry service
infrastructure in its network operations center for payments by the
Company totaling $900,000 million over 15 months plus two annual
maintenance payments of $375,000 each.
The agreement also provided for joint marketing expenditures up to $1.0 million
each and joint research and development expenditures up to $1.5 million each.
The Company will be appointed a reseller and distributor of RIM products and
will receive favorable pricing on RIM handheld devices. As of June 30, 2000 the
terms and conditions of the anticipated definitive agreements were being
negotiated however, no subsequent definitive agreements had been signed.
(9) ACQUISITIONS
On February 3, 2000, the Company acquired all of the capital stock of
LocusOne Communications, Inc. ("LocusOne") for a purchase price of $40 million.
LocusOne provides wireless data systems to companies that distribute goods and
services using their own delivery fleets. At the closing of the acquisition, the
Company paid approximately $21 million in cash and issued notes payable of $19
million to the former LocusOne shareholders. The Company also granted options to
acquire 308,500 shares of the Company's common stock to existing LocusOne
employees on the closing date at exercise prices below the fair market value of
the Company's stock. The Company has recorded option and warrant expense of
approximately $2.2 million and $3.6 million for the three and six months ended
June 30, 2000 related to these options and expects to record approximately $23.2
million in option and warrant expense related to these options over the
remaining service and vesting period through March 2003. At the closing of the
Secondary Offering (see Note 3), the Company paid the former LocusOne holders
$5.4 million in settlement of a note payable and placed $13.6 million in escrow
to pay all remaining obligations, which will be paid on December 31, 2000. In
connection with this acquisition, the two principal stockholders of LocusOne
have entered into non-compete agreements with the Company expiring on the later
of February 2, 2002 or ten months after their termination with LocusOne.
On March 6, 2000, the Company acquired Riverbed Technologies, Inc.
("Riverbed") for 4,537,281 shares of the Company's common stock and converted
existing options held by Riverbed employees into options to acquire 862,480
shares of the Company's common stock. Riverbed develops products to extend the
accessibility of applications and information from corporate networks and
databases to handheld devices. As part of closing this transaction, the Company
is holding 270,000 of the shares payable to Riverbed shareholders for 12 months
to secure their post-closing indemnification obligations to the Company and the
Company has agreed to indemnify up to $40.5 million of damages the sellers may
incur.
The Company has valued the 4,537,281 shares of its common stock issued to
Riverbed based on the market price of the Company's common stock over the period
two days before and two days after the acquisition was agreed to and announced,
in accordance with Financial Accounting Standards Board ("FASB") Emerging Issues
Task Force ("EITF") Issue 95-19. The Company has valued the 862,480 shares of
common stock issued as replacement options to Riverbed employees using the
Black-Scholes option pricing model with the following assumptions: expected
dividend yield 0 percent, risk-free interest rate of 6.7 percent, expected life
of five years and volatility of 70 percent. The total value of common stock and
replacement options issued as consideration for the acquisition was
approximately $1.1 billion.
On April 6, 2000, the Company acquired IFX Group Plc ("IFX"), a European
provider of mobile financial data, for a purchase price of $85 million in cash,
excluding related expenses of approximately $1.4 million. IFX develops
leading-edge technologies to optimize the delivery of data over the next
generation of digital networks currently being deployed across Western Europe.
On February 8, 2000, the Company entered into a non-binding letter of intent
with Reuters PLC to establish a new company focused on financial markets in
Europe. The Company committed to acquire a 60% interest in this new Company for
$100 million. On May 5, 2000, Sila Communications ("Sila") was formed as the new
company and the Company contributed its subsidiary, IFX to the joint venture
plus cash of $12 million in satisfaction of the Company's commitment. Reuters
contributed cash of approximately $22 million and a paging company for the
remaining 40% interest. Sila is consolidated for financial statement
presentation.
11
<PAGE> 12
On April 20, 2000, the Company acquired NetSearch, LLC ("NetSearch"), a
Scottsdale, AZ company, for a purchase price of approximately $25 million in
cash at the closing of the acquisition, plus up to an additional $65 million
earn-out payable over the next 13 months for reaching specified revenue targets.
As of June 30, 2000, no amount of earn-out had been accrued. NetSearch develops
and markets a high-end, wireless notification and response system designed to
increase sales productivity for companies engaged in electronic commerce on the
Internet by bridging the gap between website consumers and retailers.
These acquisitions have 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 total purchase price for the LocusOne, Riverbed,
NetSearch, IFX and the formation of Sila is summarized as follows:
<TABLE>
<S> <C>
(Amounts in thousands)
Restricted Cash $ 32,489
Current assets 11,332
Property and equipment 1,872
Current liabilities (10,607)
Deferred tax liability (11,221)
In-process research and development 2,160
Identifiable intangibles 74,614
Goodwill 1,267,965
Minority interest (66,966)
-----------
Total consideration paid $ 1,301,638
</TABLE>
The Company is in the process of completing a full valuation of the assets and
liabilities acquired for cash. Therefore, the purchase price allocation will be
finalized upon completion of these valuations. The identifiable intangibles are
being amortized between four and five years and the goodwill is being amortized
between five and seven years.
The following summary, prepared on a pro forma basis, presents the results of
operations of the Company as if the Mobeo, LocusOne, Riverbed, IFX (including
the formation of Sila) and NetSearch acquisitions had been completed as of
January 1, 1999:
<TABLE>
<CAPTION>
(Unaudited)
June 30, 2000 June 30, 1999
---------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except per share data)
Revenue $ 21,506 $ 13,880
Net loss $ (174,288) $ (140,960)
Net loss per share - basic and diluted $ (4.93) $ (5.77)
---------------------------------------------------------------------------
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative
of what actually would have occurred if the acquisition of Mobeo, LocusOne,
Riverbed, NetSearch, IFX and the formation of Sila had taken place as of January
1, 1999 nor is it a projection of the Company's results of operations for any
future period.
(10) SEGMENT INFORMATION
The Company's operating segments include Financial Services, Software, Logistics
and our Sila operations. The Financial Services segment provides wireless data
services and engineering services to develop applications for the financial
services industry. The Software segment develops, licenses and supports software
products to extends the accessibility of applications and information from
corporate networks and databases to handheld devices. The Logistics segment
develops and sells wireless data systems to companies that distribute goods and
services using their own delivery fleets. Sila is our European joint venture
with Reuters and has the majority of it's customers in the European financial
services industry.
12
<PAGE> 13
Segment detail is summarized as follows:
<TABLE>
<CAPTION>
Financial Software European Corporate and
Services Products Logistics Operations Other Total
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months ended
June 30, 1999
Revenue $ 331 $ -- $ 116 $ -- $ -- $ 447
Gross profit $ 45 $ -- $ 32 $ -- $ -- $ 77
Total assets $ 5,867 $ -- $ -- $ -- $ -- $ 5,867
Three months ended
June 30, 2000
Revenue $ 3,174 $ 1,443 $ 1,545 $ 3,338 $ 1,255 $ 10,755
Gross profit $ 1,131 $ 952 $ 750 $ 1,601 $ 694 $ 5,128
Total assets $ 12,651 $1,069,131 $ 36,780 $ 180,647 $1,404,033 $2,703,242
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial Software European Corporate and
Services Products Logistics Operations Other Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Six months ended
June 30, 1999
Revenue $ 599 $ -- $ 188 $ -- $ -- $ 787
Gross profit $ 68 $ -- $ 68 $ -- $ -- $ 136
Six months ended
June 30, 2000
Revenue $ 6,230 $ 2,125 $ 2,211 $ 3,338 $ 2,252 $16,156
Gross profit $ 2,415 $ 1,161 $ 1,011 $ 1,601 $ 1,317 $ 7,505
----------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of net income reported for the operating segments to the amount
in the condensed consolidated financial statements as follows:
<TABLE>
<CAPTION>
Unallocated
Segment Corporate Expenses Consolidated
Total and Other Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Three months ended June 30, 1999 $ 77 $ (2,995) $ (2,918)
Three months ended June 30, 2000 $ 5,128 $ (95,042) $ (89,914)
Six months ended June 30, 1999 $ 136 $ (4,456) $ (4,320)
Six months ended June 30, 2000 $ 7,505 $(130,690) $(123,185)
---------------------------------------------------------------------------------------
</TABLE>
(11) GEOGRAPHIC REGIONS
The Company derives revenue primarily from the United States and Europe.
Information regarding the Company's revenues in different Geographic regions is
as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
United States $ 7,376 $ 447 $12,777 $ 787
Aggregate Foreign 3,379 -- 3,379 --
------- ------- ------- -------
$10,755 $ 447 $16,156 $ 787
----------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
(12) SUBSEQUENT EVENTS
(a) Investment in VeriStar Corporation.
On July 12, 2000 the Company entered into a purchase agreement with VeriStar
Corporation (VeriStar) a provider of biometric recognition devices. The Company
acquired a 19.9% interest in VeriStar in the form of 3,250,649 shares of Series
B Preferred Stock for approximately $5.6 million in cash or $1.73 per share, and
has the right to appoint one of the six members of the board of directors. The
investment will be accounted for under the cost method of accounting.
(b) Launch of MindSurf.
On July 17, 2000, the Company entered into a non-binding Alliance Agreement
with Sylvan Learning Systems, Inc (Sylvan) to establish a new company focused on
educational services. The Company committed to acquire a 42% interest in this
new company for $30.0 million in cash. The Company intends to form the new
company, MindSurf, Inc. (Mindsurf) on or before August 31, 2000. Sylvan also
intends to contribute $30.0 million for a 42.0% interest while Critical Path and
other minority investors will own the remaining 16%.
(c) Investment in ePhones Inc.
On July 31, 2000, the Company invested $8 million in ePhones Inc. (ePhones),
a leading provider of retail wireless products and services. The Company
acquired a 11.4% interest in ePhones in the form of 2,539,683 shares of Series C
convertible preferred shares, and has the right to appoint one of the 7 members
of the board of directors.
(d) Formation of Aether Capital.
On June 13, 2000, the Company formed Aether Capital as a vehicle for Aether to
invest in a diversified group of early-stage, high-growth private companies,
principally engaged in wireless data communications.
(e) Intent to purchase Cerulean Technology, Inc.
On August 14, 2000, the Company signed a letter of intent to purchase
Cerulean Technology, Inc. (Cerulean), a leader in wireless mobile software for
the public safety field. The Company intends to purchase Cerulean for
approximately $150 million.
14
<PAGE> 15
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, 1997, 1998 and 1999, included in the Company's Annual Report
on Form 10-K filed on March 24, 2000.
OVERVIEW
Aether Systems, Inc. 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 of common stock on
October 26, 1999, the limited liability company was converted into a Delaware
corporation called Aether Systems, Inc.
Development of our business. 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. 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. We have also begun to derive revenue from the licensing our software
platform.
Acquisitions. On March 6, 2000, we acquired Riverbed Technologies, which
develops software that extends the accessibility of applications and information
from corporate networks and databases to handheld devices, for 4,537,281 shares
of the Company's common stock. In the course of developing our business we also
acquired Mobeo, Locus One, NetSearch and IFX for purchase prices and related
expenses aggregating approximately $165 million. One of the acquisitions,
NetSearch, has an additional $65 million earn-out payable over the 13 months
subsequent to the purchase date for reaching specified revenue targets.
Investments. In August 1999, we formed a new company with 3Com called
OpenSky, which was renamed OmniSky in October 1999. We formed OmniSky with 3Com
to pursue opportunities in the emerging consumer and business mass markets for
wireless e-mail, Internet access and other electronic transactions applications.
As of June 30, 2000, we owned approximately 27% of OmniSky. In the course of
developing our business we also made investments, or have agreed to make
investments in, Inciscent, Data Critical, Novatel Wireless, Veristar (formerly
SmartTouch), MindSurf and ePhones in the aggregate amount of approximately $84
million.
Formation of Sila. On May 4, 2000, Sila Communications was formed and we
contributed our IFX subsidiary plus $12 million in cash to acquire a 60%
interest. Reuters contributed cash of approximately $22 million and a European
paging company for the remaining 40% interest.
Our subscriber and revenue information. Our revenues are derived from our
five current segments which are: Financial Services; Software Products;
Logistics; European Operations; and Corporate and Other. These reportable
segments are arranged primarily based on the subject matters covered by their
markets (so called vertical market lines) and typically have distinct management
teams. We derive recurring revenue from subscribers in four of these segments
(revenues in the Software Products segment come from license fees). Important
financial characteristics of our subscriber base are common across various
market segments, but differ based on other factors within market segments.
Accordingly, we believe it is valuable to analyze our subscriber base on the
basis of distinct product types that have similar revenue and cost
characteristics. These distinct product types include enterprise ASP/ISP
services, premium information and commerce services, and network hosting
services.
<TABLE>
<CAPTION>
AS OF JUNE 30,
2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Enterprise ASP/ISP services 1,336 --
Premium information and commerce services 17,002 982
Network hosting services 1,135 --
------ ------
Total subscribers 19,473 982
-------------------------------------------------------------------------
</TABLE>
The growth in subscribers over these periods was primarily the result of
subscribers added through our acquisition of Mobeo, LocusOne, NetSearch, IFX
and the formation of Sila, and subscriber additions subsequent to the
integration of these companies, the attraction of new subscribers to our
services and the introduction of new services. Enterprise ASP/ISP services
wirelessly connect critical business functions of an enterprise within the
enterprise or to third parties such as customers. Through our enterprise ASP/ISP
15
<PAGE> 16
services we provide a full wireless solution to the end user including product
development, fulfillment, network hosting, customer service and carrier
connectivity. For these type products we typically receive upfront revenues such
as hardware and activation fees and a monthly recurring fee for the full range
of services between $40 and $70 per month. Growth in this product category
between June 30, 1999 and June 30, 2000 is attributable to recent releases of
several online trading products.
Premium information and commerce services provide the end user with
information critical to their business, such as market information or sales
inquiries. Premium information products are packaged with fulfillment, customer
service and carrier connectivity. For these type products we typically receive
upfront revenues such as activation fees and a monthly recurring fee for the
full range of services between $70 and $200 per month. The monthly fee
typically covers the cost of hardware. Growth in this product category between
June 30, 1999 and June 30, 2000 is attributable to growth in internally
developed products, recent acquisitions and their subsequent subscriber
additions.
Network hosting services provide connectivity between the enterprise and
wireless carriers. Hosting services may be charged per subscriber or as a flat
fee per month. Per subscriber rates typically range between $5 and $25 per
month. Growth in this product category between June 30, 1999 and June 30, 2000
is attributable to growth through recent acquisitions and their subsequent
subscriber additions.
Our cost to acquire subscribers depends upon a variety of factors including
the allocation of intangible expenses and general sales and marketing efforts to
the acquisition of subscribers as opposed to other areas of our business. When
our business involved fewer elements and these costs could be allocated more
clearly, the overall cost to acquire subscribers exceeded the revenue expected
during the one-year terms of the associated contracts, and that may continue to
be true depending on how costs are allocated to subscriber contracts. In any
event, we expect that revenue from new customers will begin to exceed subscriber
acquisition costs when the number of subscribers increases to cover our fixed
costs. This will depend on the rate at which subscriber levels increase, and we
cannot determine when this will occur or assure that it will ever occur.
During the six months ended June 30, 2000 we also derived revenue from the
licensing of software products including the AIM platform, the ScoutWare
software suite, and the e-Mobile software suite. For the six months ended June
30, 2000, approximately 70% of the revenue from the ScoutWare software suite was
derived from sales to Spyglass, Security Source, Extensity, Oracle, NowSpeed and
Medtronic.
Operating losses. 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. In addition, our acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch, IFX and the formation of Sila as well as future
acquisitions will result in option and warrant expense and significant
amortization of intangible assets. As a result, we expect to continue to incur
operating losses for the foreseeable future.
RESULTS OF OPERATIONS
We currently derive our revenue from the sale of wireless data services, the
provision of wireless engineering services and the sale of software licenses and
related services. Revenue from wireless data services consists of:
- a one time non-refundable activation fee, which we recognize upon
service activation;
- monthly per-subscriber service fees, which we recognize as services are
provided;
- monthly per-subscriber exchange fees for access to financial information
from the securities exchanges and markets, which we recognize as
services are provided; and
- monthly fees for providing access to our network operations center.
We also derive revenue from providing our subscribers with the option to
purchase wireless handheld devices from us at cost, which we bill either up
front or over the initial term of the contract. Contracts with our wireless data
subscribers are generally 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. Revenue from wireless engineering services consists of amounts
billed to our customers for engineering time on an
16
<PAGE> 17
hourly basis or on a fixed fee per project basis. This revenue is recognized as
the work is performed. Revenue from software and related services consists of
amounts billed to our customers for software licensing, including licensing
fees, work performed for customization, training fees, maintenance fees and
support fees.
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 project-related costs.
Cost of software and related services revenue consists of costs relative to
software licensing, including royalty payments and personnel costs.
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 the amortization
of intangible assets acquired in the Mobeo, LocusOne, Riverbed, NetSearch and
IFX acquisitions and the formation of Sila, as well as from depreciation
expenses arising from equipment purchased for our network operations center and
other property and equipment purchases.
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. With the acquisitions of Mobeo, LocusOne, Riverbed and
NetSearch, we expect to have substantial additional option and warrant expense.
Other income (expense) consists primarily of interest income, interest
expense and realized losses on our investments.
Equity in losses of investments consists of our proportionate share of the
net losses of OmniSky and Inciscent recorded under the equity method of
accounting.
Minority interest consists wholly of Reuters ownership interest in Sila.
PERIODS ENDED JUNE 30, 2000 AND 1999
Subscriber revenue. Subscriber revenue increased to $6.7 million for the
quarter ended June 30, 2000 from $331,000 for the quarter ended June 30, 1999
and increased to $9.7 million for the six months ended June 30, 2000 from
$600,000 for the six months ended June 30, 1999. The increase was primarily due
to an increase in MarketClip subscribers, TradeRunner subscribers, the recent
introduction of PocketBroker, and the acquisition of Mobeo, Locus One,
NetSearch, IFX and the formation of Sila. Subscriber revenue generated from
acquisitions was $5.9 million and $8.3 million for the three and six months
ended June 30, 2000, respectively.
Engineering services revenue. Engineering services revenue increased to $1.6
million for the three months ended June 30, 2000 from $116,000 for the three
months ended June 30, 1999 and increased to $3.0 million for the six months
ended June 30, 2000 from $188,000 for the six months ended June 30, 1999. This
increase was primarily due to the contract with OmniSky. We recognized $720,000
and $1.8 million under this contract for the quarter and six months ended June
30, 2000, respectively.
Software and related services revenue. Software and related services revenue
was $2.4 million for the quarter ended June 30, 2000 and $3.4 million for the
six months ended June 30, 2000. We did not have any software and related
services revenue for the three and six months ended June 30, 1999. Software and
related services revenue was generated from the sale of licenses and services of
the ScoutWare software platform and e-Mobile Delivery platform following our
acquisition of Riverbed (now Aether Software) on March 6, 2000 and LocusOne (now
Aether Logistics) on February 3, 2000.
17
<PAGE> 18
Cost of subscriber revenue. Cost of subscriber revenue increased to $3.7
million for the quarter ended June 30, 2000 from $286,000 for the three months
ended June 30, 1999 and increased to $5.5 million for the six months ended June
30, 2000 from $531,000 for the six months ended June 30, 1999. The increase was
a result of an increase in MarketClip subscribers, TradeRunner subscribers, the
recent introduction of PocketBroker and the acquisition of Mobeo, Locus One,
NetSearch, IFX and the formation of Sila. Cost of subscriber revenue related to
acquisitions totaled $3.1 million and $4.5 million for the three and six months
ended June 30, 2000. We expect the number of subscribers for financial services
and online services 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 June 30, 2000 as compared to the
same period of the prior year in part because we met minimum airtime usage
requirements with various wireless networks. Mobeo entered into a new airtime
supply agreement with a paging company, and in the first quarter of 2000, Mobeo
provided a new pager to each of its subscribers at no cost as the previous
pagers were not compatible with the new supplier's network. As a result, the
Company recorded approximately $110,000 and $454,000 of expense in the three
and six months ended June 30, 2000 respectively, relating to supplying these
pagers.
Cost of engineering services revenue. Cost of engineering services revenue
increased to $1.0 million for the quarter ended June 30, 2000 from $84,000 for
the quarter ended June 30, 1999 and increased to $1.6 million for the six months
ended June 30, 2000 from $120,000 for the six months ended June 30, 1999. This
increase was primarily due to the contracts with OmniSky.
Cost of software and related services revenue. Cost of software and related
services revenue was $863,000 for the quarter ended June 30, 2000 and $1.5
million for the six months ended June 30, 2000 relating to royalty fees and
personnel costs. Substantially all of these costs were derived from the
operations of LocusOne, which we acquired on February 3, 2000 and Riverbed,
which we acquired on March 6, 2000. We did not have any costs of software and
related services revenue for the three and six months ended June 30, 1999.
Research and development expenses. Research and development expenses
increased to $4.1 million for the quarter ended June 30, 2000 from $532,000 for
the three months ended June 30, 1999. This increase was primarily due to the
hiring of additional engineers for increased research and development
activities. Research and development expenses increased to $5.8 million for the
six months ended June 30, 2000 from $1.0 million for the six months ended June
30, 1999. 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. In addition
to these costs, we incurred a one-time $2.1 million in-process research and
development charge recorded in connection with our acquisition of Riverbed in
the first quarter of 2000.
General and administrative expenses. General and administrative expenses
increased to $9.9 million for the quarter ended June 30, 2000 from $871,000 for
the three months ended June 30, 1999. This increase was primarily due to the
addition of personnel as we continue to build our infastructure, and due to the
addition of personnel performing general corporate and business development
activities. General and administrative expenses increased to $15.3 million for
the six months ended June 30, 2000 from $1.6 million for the six months ended
June 30, 1999. This increase was primarily due to the addition of personnel
performing general corporate and business development activities and the
acquisition of Mobeo, LocusOne, Riverbed, NetSearch, IFX and the formation of
Sila since the same period prior year.
Selling and marketing expenses. Selling and marketing expenses increased to
$16 million for the quarter ended June 30, 2000 from $299,000 for the quarter
ended June 30, 1999 and increased to $21.8 million for the six months ended June
30, 2000 from $555,000 for the six months ended June 30, 1999.. The increase was
primarily due to an increase in advertising and promotion costs including a
nationwide broadcast and print branding campaign as well as increases in the
number of sales and marketing personnel. We expect selling and marketing
expenses to continue to increase as we incur additional expenses to increase
brand awareness and add personnel.
Depreciation and amortization. Depreciation and amortization expenses
increased to $67.0 million for the three months ended June 30, 2000 from
$110,000 for the three months ended June 30, 1999 and increased to $84.5 million
for the six months ended June 30, 2000 from $194,000 for the six months ended
June 30, 1999. This increase was primarily due to amortization of intangibles
relating to the purchases of Mobeo, LocusOne, Riverbed, IFX and NetSearch as
well as additional capital expenditures.
Option and warrant expense. Option and warrant expense increased to $3.6
million for the quarter ended June 30, 2000 from $1.2 million for the quarter
ended June 30, 1999 and increased to $6.1 million for the six months ended June
30, 2000 from $1.3 million for the six months ended June 30, 1999. The increase
was primarily due to expenses associated with options granted to employees of
18
<PAGE> 19
LocusOne and to the selling stockholders of Mobeo for consulting and employee
services. The increase was also 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.
Interest income, net. Net interest income increased to $14.8 million for the
quarter ended June 30, 2000 from $57,000 for the quarter ended June 30, 1999 and
increased to $17.0 million for the six months ended June 30, 2000 from $141,000
for the six months ended June 30, 1999. The increase was primarily due to an
increase in interest earned on cash and cash equivalents following the
completion of our secondary offering on March 17, 2000.
Equity in losses of investments. Equity in losses of investments was $10.7
and $13.8 million for the three and six months ended June 30, 2000,
respectively, relating to our proportionate share of losses from OmniSky and
Inciscent, which are both accounted for under the equity method of accounting.
We expect to continue to record an increasing amount of equity in losses of
investments, as OmniSky and Inciscent ramp up their operations.
Minority interest. Minority interest was $1.7 million for the three and six
months ended June 30, 2000 relating to Reuters proportional share of losses in
Sila which is consolidated into our financial statements. We expect that Sila
will continue to incur losses as it ramps up its operations in Europe.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private placements of our equity securities, our initial public offering, and
our secondary offering, which in the aggregate have resulted in net proceeds of
approximately $1.5 billion through June 30, 2000. On March 17, 2000, we
completed our secondary offering and raised net proceeds (after expenses of the
offering) of approximately $1.370 billion. As of June 30, 2000, we had
approximately $1.2 billion in cash and short-term investments and working
capital of $1.213 billion.
Net cash used in operating activities was $5.7 million and $2.5 million for
the six months ended June 30, 2000 and 1999, respectively. The principal use of
cash in each of these periods was to fund our losses from operations.
Net cash used in investing activities was $239.0 million for the six months
ended June 30, 2000. Net cash provided by investing activities was $1.2 million
for the six months ended June 30, 1999. For the six months ended June 30, 2000,
we used cash for the purchase of property and equipment, investments in
Metrocall, OmniSky, Inciscent, Data Critical and Novatel and to acquire LocusOne
Communications, NetSearch, IFX and the formation of Sila. Cash provided by
investing activities for the six months ended June 30, 1999 was primarily from
the sale of short-term investments, partially offset by the purchase of property
and equipment.
Net cash provided by financing activities was $1.4 billion for the six
months ended June 30, 2000. There was no cash provided by financing activities
for the six months ended June 30, 1999. For the six months ended June 30, 2000,
cash provided by financing activities was primarily attributable to proceeds
received from our secondary offering of common stock and convertible
subordinated notes.
For the remainder of 2000, we have had or expect to have the following
expenditures and requirements:
- We invested $5.6 million in VeriStar Corporation in July, 2000
- We invested $8 million in ePhones Inc. in July, 2000
- We plan to invest $30 million in the launch of Mindsurf
- We may invest approximately $150 million in Cerulean
- We estimate we will spend between $20 and $25 million for further
expansion of our current network operations center, and the completion
of a new network operations center in Arizona.
- We estimate we will pay in excess of $20.0 million to enhance our sales
and marketing activities, including a nationwide broadcast and print
branding and advertising campaign.
19
<PAGE> 20
- We are committed to purchase 11,200 RIM handheld devices. Depending on the
mix of products ordered, we estimate the cost will be between $3.7
and $5.1 million.
- We will pay an earn-out of up to $65 million on NetSearch if certain
revenue targets are met over the twelve months subsequent to the
Purchase date.
- As part of our LocusOne acquisition, we issued a note in the amount of
$13.6 million that is due and payable at December 31, 2000.
- Other potential acquisitions, investments and agreements we may identify
or are in the process of negotiating.
We currently estimate that our available cash resources will be sufficient
to fund our operating needs for at least the next twelve months. We expect that
our available cash resources will also support our current acquisition strategy
during this period.
QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. At June 30, 2000, we had cash and cash equivalents of $1.2
billion and short-term investments of approximately $2.4 million. Cash and cash
equivalents consisted of demand deposits, money market accounts and
investment-grade commercial paper. 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 June 30,
2000, the value of our short-term investments was approximately $2,400 more 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.
Since the acquisition of IFX, the formation of Sila and the commencement of
US sales to foreign countries, we have been exposed to foreign currency exchange
risk. All US sales to foreign countries have been denominated in USD. Sila has
been able to fund its ongoing operations from internally generated cash and as
such has not required funding from the Company, moreover the offices of Sila
located in various European countries require minimal funding from Sila.
Therefore, due to the insignificant amount of currency being exchanged, the
Company has not hedged, or otherwise attempted to mitigate its foreign currency
exchange risk.
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 investments in OmniSky and Inciscent, 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 March 17, 2000, pursuant to Rule
424(b).
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.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
20
<PAGE> 21
The Company is party to legal proceedings in the normal course of business.
Based on evaluation of these matters and discussions with counsel, management
believes that liabilities arising from these matters will not have a material
adverse effect on the consolidated results of operations or financial position
of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of Shareholders was held on April 28,2000, in Baltimore
Maryland, at which several matters were submitted to a vote of the share
holders.
a. Votes cast for or withheld regarding the election of directors.
<TABLE>
<CAPTION>
Total Vote For Total Vote Withheld
Each Director From Each Director
<S> <C> <C>
J. Carter Beese, Jr. 32,098,565 2,712
Frank A. Bonsal, Jr. 32,098,565 2,722
Mark D. Eln 32,098,565 2,712
E. Wayne Jackson III 32,098,465 2,812
David S. Oros 32,098,565 2,712
Rahul C. Prakash 32,098,565 2,712
Janice M. Roberts 32,098,555 2,722
Dr. Rajendra Singh 32,098,565 2,712
George P. Stamas 32,098,565 2,712
Robin T. Vasan 32,098,555 2,722
Devin N. Wenig 32,098,555 2,722
Thomas E. Wheeler 32,098,565 2,712
</TABLE>
21
<PAGE> 22
b. Votes cast for, against or withheld regarding the Company's Amended and
Restated Certificate of Incorporation.
<TABLE>
For Against Abstain
<S> <C> <C>
30,425,533 1,674,017 1,727
</TABLE>
C. Votes cast for, against or withheld regarding the Company's appointment of
KPMG LLP as independent auditors.
<TABLE>
For Against Abstain
<S> <C> <C>
32,073,277 1,518 26,482
</TABLE>
d. Votes cast for, against or withheld to approve the Company's Stock Purchase
Plan*
<TABLE>
For Against Abstain
<S> <C> <C>
31,886,102 207,732 27,443
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibit 2.1 - LLC Interest Purchase Agreement made effective as of April 18,
2000 by and among Aether Systems, Inc., Net Search LLC and the members of
Net Search, LLC and Augustine N. Esposito
Exhibit 2.2 - Share Purchase Agreement relating to IFX Group Limited
Exhibit 3.1 - As Amended Certificate of Incorporation of Aether Systems,
Inc.
Exhibit 10.1 - Shareholders Agreement dated May 5, 2000 relating to Sila
Communications Limited
Exhibit 11.1 - Earnings Per Share Calculation
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
Current Report on Form 8-K dated April 6, 2000 was filed on April 14, 2000
(as amended April 21, 2000) pursuant to Item 2 (Acquisition or Disposition
of Assets) and Item 7 (Financial Statements, Pro Forma Financial Information
and Exhibits.)
22
<PAGE> 23
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: August 14, 2000
Aether Systems, Inc.
By: /s/ David C. Reymann
David C. Reymann
Chief Financial Officer
(Principal Financial and Accounting
Officer)
23
