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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 SEPTEMBER 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, 39,118,855 shares outstanding as of November 10,
2000
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AETHER SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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PART I: FINANCIAL INFORMATION
------------------------------
ITEM 1: Financial Statements
Condensed consolidated statements of operations and other comprehensive loss
for the three and nine month periods ended September 30, 2000 and 1999 (unaudited) 3
Condensed consolidated balance sheets as of September 30, 2000 (unaudited) and December 31, 1999 4
Condensed consolidated statements of cash flows for the nine months ended September 30, 2000 and 1999 (unaudited) 5
Notes to the unaudited condensed consolidated financial statements 7
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II: OTHER INFORMATION
---------------------------
ITEM 1: Legal Proceedings 27
ITEM 2: Changes in Securities and use of Proceeds 27
ITEM 3: Defaults Upon Senior Securities 27
ITEM 4: Submission of Matters to a Vote of Security Holders 27
ITEM 5: Other Information 27
ITEM 6: Exhibits and Reports on Form 8-K 27
</TABLE>
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PART I - 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Subscriber revenue $ 8,399 $ 411 $ 18,073 $ 1,010
Engineering services revenue 2,514 1,080 5,554 1,268
Software and related services revenue 5,309 -- 8,751 --
---------- ---------- ---------- -----------
Total revenue 16,222 1,491 32,378 2,278
Cost of subscriber revenue 4,153 357 9,622 888
Cost of engineering services revenue 1,870 426 3,510 546
Cost of software and related services revenue 1,937 -- 3,479 --
---------- ---------- ---------- ----------
Total cost of revenue 7,960 783 16,611 1,434
---------- ---------- ---------- ----------
Gross profit 8,262 708 15,767 844
---------- ---------- ---------- ----------
Operating expenses:
Research and development (exclusive of
option and warrant expense) 6,201 414 11,962 1,416
General and administrative (exclusive of
option and warrant expense) 20,437 1,224 35,706 2,807
Selling and marketing (exclusive of
option and warrant expense) 10,529 383 32,338 938
In process research and development 3,900 -- 6,060 --
Depreciation and amortization 72,305 114 156,756 308
Option and warrant expense:
Research and development 1,712 66 4,422 98
General and administrative 2,004 632 4,567 961
Selling and marketing 304 237 1,081 1,139
---------- ---------- ---------- ----------
117,392 3,070 252,892 7,667
---------- ---------- ---------- ----------
Operating loss (109,130) (2,362) (237,125) (6,823)
Other income (expense):
Interest income (expense), net 14,564 (48) 31,540 93
Equity in losses of investments (17,572) (440) (31,400) (440)
Minority interest 4,303 -- 5,965 --
---------- ---------- ---------- ----------
Net loss before income tax benefit $ (107,835) $ (2,850) $ (231,020) $ (7,170)
Income tax benefit 574 -- 574 --
---------- ---------- ---------- ----------
Net loss $ (107,261) $ (2,850) $ (230,446) $ (7,170)
Other comprehensive loss:
Unrealized holding gain (loss) on
investments -available for sale (53,034) 74 5,842 (59)
Gain on sale of stock by equity-
method investee 42,177 -- 73,349 --
---------- ---------- ---------- ----------
Comprehensive loss $ (118,118) $ (2,776) $ (151,255) $ (7,229)
========== ========== ========== ==========
Pro forma statement of operations data
Loss before income taxes, as reported $ (2,850) $ (7,170)
Pro forma income tax provision (benefit) -- --
---------- ----------
Pro forma net loss $ (2,850) $ (7,170)
========== ==========
Net loss per share-basic and diluted $ (2.80) $ (6.53)
========== ==========
Weighted average shares
outstanding-basic and diluted 38,343 35,308
========== ==========
Pro forma net loss per share-basic
and diluted $ (0.14) $ (0.36)
========== ==========
Pro forma weighted average shares
outstanding-basic and diluted 19,954 19,903
========== ==========
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
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AETHER SYSTEMS, L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999 _
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 1,042,799 78,542
Restricted cash 26,686 --
Short-term investments 3,207 2,092
Trade accounts receivable, net of allowance for doubtful
accounts of $1,111 and $56 at September 30, 2000 (unaudited)
and December 31,1999, respectively 21,983 1,003
Inventory, net of allowance for obsolescence of $206 and $115
at September 30, 2000 (unaudited) and December 31, 1999 5,490 688
Prepaid expenses and other current assets 21,172 4,995
----------- -----------
Total current assets 1,121,337 87,320
Property and equipment, net 36,588 2,796
Investments 162,766 75
Intangibles, net 1,396,962 12,209
Other assets 9,657 134
----------- -----------
$ 2,727,310 $ 102,534
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,645 $ 1,426
Accrued expenses 66,619 1,620
Accrued employee compensation and benefits 15,958 971
Accrued interest on notes payable 214 --
Deferred revenue 9,957 175
Notes payable 13,653 --
---------- -----------
Total current liabilities 116,046 4,192
Long term liabilities - convertible subordinated notes
payable and other notes payable 310,694 --
Deferred tax liability 17,030 --
Minority interest in net assets of a subsidiary 60,540 --
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; 0 shares issued and outstanding at
September 30, 2000 (unaudited) and December 31, 1999 -- --
Common stock, $0.01 par value; 75,000,000 shares
authorized; 38,802,042 and 27,154,398
shares issued and outstanding at September 30, 2000
(unaudited) and December 31, 1999, respectively 388 272
Additional paid-in capital 2,469,900 120,892
Accumulated deficit (253,060) (22,614)
Notes receivable from stockholder, -- (138)
Unrealized gain (loss) on investments available for sale 5,772 (70)
----------- -----------
Total stockholders' equity 2,223,000 98,342
----------- -----------
Commitments and contingencies
$ 2,727,310 $ 102,534
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed
consolidated financial statements.
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AETHER SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (230,446) $ (7,170)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 156,756 308
Deferred tax benefit (609) --
Minority interest (5,965) --
Equity in losses of investments 31,400 440
Option and warrant expense 10,070 2,198
In-process research and development charges 6,060 --
Changes in assets and liabilities, net of acquisitions:
Increase in trade accounts receivable (8,218) (501)
Increase in inventory (4,099) (70)
Increase in prepaid expenses and
other current assets (13,286) (187)
Increase in accounts payable 2,499 596
Increase in accrued expenses and compensation
and benefits 25,366 80
Increase in deferred revenue 3,167 --
----------- -----------
Net cash used in operating activities (27,305) (4,306)
----------- -----------
Cash flows used in investing activities:
Sales of short-term investments 6,755 12,164
Purchases of short-term investments (4,858) (8,164)
Purchases of property and equipment (30,234) (901)
Purchase of investments (114,000) --
Costs of acquisitions, net of cash acquired (231,979) (11,570)
Increase in restricted cash 5,803 --
----------- -----------
Net cash used in investing activities (368,513) (8,471)
----------- -----------
Cash flows provided by financing activities:
Net proceeds from issuance of common stock 1,057,065 --
Net proceeds from issuance of convertible debt 300,564 14,000
Proceeds from exercise of options 2,446 70
----------- -----------
Net cash provided by financing activities 1,360,075 14,070
----------- -----------
Net increase in cash and cash equivalents 964,257 1,293
Cash and cash equivalents, at beginning of period 78,542 1,755
----------- -----------
Cash and cash equivalents, at end of period $ 1,042,799 $ 3,048
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,315 $ --
=========== ===========
</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 related formation of Sila and
the acquisitions made by Sila, the Company established a deferred tax
liability of $17.6 million. Such amount was offset by an equal increase in
goodwill.
In September 2000, the Company acquired Cerulean for 462,412 shares of the
Company's common stock and converted existing options held by Cerulean
employees into options to acquire 94,275 shares of the Company's common stock
plus $75.0 million in cash. The value of the common stock and vested
replacement options of $69.9 million has been allocated to the fair value of
the
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assets purchased and the liabilities assumed with a corresponding increase in
stockholders' equity.
In connection with the acquisition of Cerulean and Sinope the Company has
accrued $47.3 million as of September 30, 2000 for purchase price and
acquisition costs. Such amount has been allocated to the fair value of the
assets purchased and the liabilities assumed.
For the nine months ended September 30, 2000, the Company recorded additions to
stockholders equity of $73.3 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 nine months ended September 30, 2000 and 1999 (unaudited), the Company
incurred an unrealized net holding gain (loss) associated with its
investments available for sale totaling $5.8 million and $(59,000)
respectively. These amounts have been reported as an increase (decrease) in
stockholders' equity.
See accompanying notes to unaudited condensed consolidated financial statements.
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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 September 30, 2000, the condensed consolidated statements of operations and
other comprehensive loss for the three and nine months ended September 30, 2000
and 1999, and the condensed consolidated statements of cash flows for the nine
months ended September 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
nine months ended September 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.
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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. Given the current guidance on SAB 101,
which was released by the SEC subsequent to the end of the quarter, the Company
will be required to change its policy of recognizing activation fee revenue upon
service activation to recognizing the revenue ratably over the expected term of
the customer relationship. The Company is also considering changing its policy
of expensing hardware up front, to a policy of recognizing the cost of the
hardware over the initial term of the subscription agreement.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. FIN 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 adopted FIN 44 on July 1, 2000.
In September 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 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.
(3) SECONDARY PUBLIC OFFERINGS
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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.
On September 26, 2000, certain stockholders of the Company sold 5,000,000
shares of common stock, in an underwritten offering at $105.00 per share. No new
shares were issued in the offering, and as such the Company received no proceeds
from the sale.
(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
September 30, 2000, warrants to purchase 300,000 member units (750,000 shares)
had not been earned by 3Com. As of September 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 33% on a fully diluted basis. The Company provides
various services to OmniSky under letters of agreement. For the three and nine
months ended September 30, 2000, the Company recognized approximately $2.6
million and $4.6 million in revenue, respectively, under the OmniSky agreements,
and had an account receivable of approximately $2.8 million as of September 30,
2000.
The Company accounts for its investment in OmniSky under the equity method
of accounting. The Company recorded approximately $16.4 million and $30.0
million in expenses for the three and nine month periods ended September 30,
2000, respectively, to reflect its proportionate share of the losses in OmniSky
based upon preliminary unaudited financial information provided by OmniSky.
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 33%
ownership in OmniSky. The Company's per share purchase price was the same as the
other Series B Preferred Stock investors.
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 recognized a
gain through stockholders' equity of approximately $31.1 million related to
issuances of OmniSky equity to third party investors.
In September 2000, OmniSky completed its initial public offering, which
reduced the Company's ownership in OmniSky to approximately 22.4% on a fully
diluted basis. During the quarter ended September 30, 2000, the Company
recognized a gain through stockholders' equity of approximately $42.2 million
related to issuances of OmniSky equity to third party investors.
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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. In July 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.
As of September 30, 2000, the Company has recorded prepaid expenses of
approximately $2.3 million associated with this agreement. As of September 30,
2000, the Company has received 1,930 modems, or approximately $444,000 of
modems. Although there can be no assurance, the Company believes it will be able
to use the remaining modems pursuant to this agreement in the normal course of
its operations.
(6) INVESTMENT IN INCISCENT, METROCALL AND MINDSURF
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 nine months ended September 30, 2000 the Company recognized
approximately $336,000 and $684,000 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 $1.1 million and
$1.4 million in expense for the three and nine months ended September 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. For the three
and nine month periods ending September 30, 2000, the Company has recorded an
unrealized gain (loss) of approximately $(46.4) million and $6.3 million,
respectively, on its investment in Metrocall.
On July 17, 2000, the Company entered into a non-binding Strategic
Alliance Agreement with Sylvan Ventures, LLC (Sylvan) and Critical Path, Inc. to
establish a new company (MindSurf, Inc.) focused on educational services. The
Company committed to acquire a 47% interest in MindSurf for $32.9 million in
cash. Sylvan also intends to contribute $32.9 million for a 47% interest, while
Critical Path will own the remaining 6%. The investment will be made in a series
of payments tied to MindSurf meeting a defined set of performance milestones.
The Company plans to invest an initial amount, $4.7 million, upon the closing of
the transaction with Sylvan and Critical Path. As of September 30, 2000 Aether
has not advanced any funds to MindSurf.
(7) OTHER INVESTMENTS
During 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.
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%. 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. For the three and nine
month periods ending September 30, 2000, the Company has recorded an unrealized
loss of approximately $6.9 million and $6.9 million, respectively on its
investment in Data Critical.
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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.
On July 12, 2000, the Company entered into a stock purchase agreement
with VeriStar Corporation (VeriStar). 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 6 members of the board of directors. The Company accounts for
its investment under the cost method of accounting.
On July 31, 2000, the Company entered into a stock purchase agreement
with ePhones Inc. (ePhones). The Company acquired a 11.4% interest in ePhones in
the form of 2,539,683 shares of Series C convertible preferred shares for $8
million, and has the right to appoint one of the 7 members of the board of
directors. The Company accounts for its investment under the cost method of
accounting.
On September 6, 2000, the Company entered into a stock purchase agreement
with FirstWeb Bancorp, Inc (FirstWeb). The Company acquired approximately a
9.9% interest in FirstWeb in the form of 960,000 shares of common stock, for
$2.4 million in cash, or $2.50 per share. The Company accounts for its
investment under the cost method of accounting.
On September 8, 2000, the Company entered into a stock purchase agreement
with ParkStone Medical Information Systems, Inc. (ParkStone). The Company
acquired approximately a 7.2% interest in ParkStone in the form of 2,342,768
shares of Series C Preferred Stock, for $15 million in cash, or $6.40 per share.
The Company accounts for its investment under the cost method of accounting.
On September 19, 2000, the Company entered into a stock purchase
agreement with Cidera Inc. (Cidera). The Company acquired approximately a 0.8%
interest in Cidera in the form of 228,584 shares of Series D Preferred Stock,
for $2 million in cash, or $8.75 per share. The Company accounts for its
investment under the cost method of accounting.
On September 19, 2000, the Company entered into a stock purchase
agreement with AlterEgo Networks, Inc. (AlterEgo). The Company acquired
approximately a 5.8% interest in AlterEgo in the form of 2,714,932 shares Common
Stock, for $6 million in cash, or $2.21 per share. The Company accounts for its
investment under the cost method of accounting.
On September 19, 2000, the Company entered into a stock purchase
agreement with Juniper Financial Corp. (Juniper). The Company acquired
approximately a 5.3% interest in Juniper in the form of 3,460,207 shares Series
B Preferred Stock, for $10 million in cash, or $2.89 per share. The Company
accounts for its investment under the cost method of accounting.
On September 22, 2000, the Company invested $2,000,000 in ViryaNet Ltd.
(ViryaNet), a publicly traded company. The Company acquired 250,000 shares of
Common Stock for 8.00 per share. The Company accounts for its investment in
ViryaNet in accordance with SFAS 115. Under the provisions of SFAS 115, the
Company has classified its investment in ViryaNet 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 September 30, 2000, the Company has recorded an unrealized gain
of approximately $63,000 on its investment in ViryaNet.
(8) RESEARCH IN MOTION LIMITED - MARKETING AGREEMENT
11
<PAGE> 12
On April 11, 2000, the Company entered into a marketing agreement with
Research in Motion Limited (RIM). Under the agreement, the Company committed to
the following terms:
- 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.
- To license the RIM BlackBerry wireless e-mail service for fees aggregating
$4.2 million.
The Company is amortizing the cost of the license over the three year term of
the agreement.
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 also be appointed a reseller and distributor of RIM products
and will receive favorable pricing on RIM handheld devices.
(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 $2.3 million and $5.9 million for the
three and nine months ended September 30, 2000, respectively, related to these
options and expects to record approximately $20.9 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.
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
12
<PAGE> 13
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.
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. 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.
On September 14, 2000, the Company acquired Cerulean Technology Inc.
("Cerulean"). Cerulean is a provider of software to the public safety sector.
The Company paid $75.0 million in cash and issued 462,412 shares of the
Company's common stock valued at $64.6 million. Additionally, the Company
converted existing options held by Cerulean employees into options to acquire
94,275 shares of the Company's common stock. The Company has valued the vested
portion of replacement options to Cerulean employees using the Black-Sholes
option pricing model with the following assumptions: expected dividend yield 0
percent, risk-free interest rate of 6.12 percent, expected life of 1 year, and
volatility of 70 percent. The total value of the vested portion of the
replacement options was approximately $5.3 million. The value of the unvested
portion of the replacement options of $5.2 million was calculated based on the
intrinsic value at the closing date. This amount will be recorded to option and
warrant expense over the remaining vesting period through 2003.
On September 18, 2000, the Company acquired Sunpro, a leading provider of
fire service records management software, for $10.8 million in cash.
On September 25, 2000 the Company acquired Sinope, a provider of
engineering services, for $2.5 million in cash, of which $1.0 million is payable
one year after the closing date.
During 2000, Sila acquired four companies for an aggregate purchase price
of $21.4 million.
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 related formation of Sila, Cerulean, Sunpro and Sinope
and the Sila acquisitions is summarized as follows:
<TABLE>
<S> <C>
(Amounts in thousands)
Restricted Cash $ 32,489
Current assets 26,960
Property and equipment 3,305
Current liabilities (20,335)
Deferred tax liability (17,639)
In-process research and development 6,060
Identifiable intangibles 116,455
Goodwill 1,423,460
Minority interest (66,966)
-----------
Total consideration paid $ 1,503,789
</TABLE>
The Company is in the process of completing a full valuation of the assets and
liabilities acquired. Therefore, the purchase price allocation will be finalized
upon completion of these valuations. The identifiable intangibles are being
amortized between three and five years and the goodwill is being amortized
between three and seven years.
13
<PAGE> 14
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 related formation of Sila), NetSearch, Cerulean, Sunpro and Sinope
acquisitions had been completed as of January 1, 1999:
<TABLE>
<CAPTION>
(Unaudited)
September 30, 2000 September 30, 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except per share data)
Revenue $ 52,596 $ 41,620
Net loss $ (307,667) $ (239,562)
Net loss per share - basic and diluted $ (8.36) $ (9.63)
-------------------------------------------------------------------------------------
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisitions of Mobeo,
LocusOne, Riverbed, IFX (and the related formation of Sila), NetSearch,
Cerulean, Sunpro and Sinope 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) MOTIENT
On September 19, 2000, the Company entered into a binding letter of intent to
acquire Motient Corporation's retail transportation business unit for $45
million in cash plus an additional sum of up to $22.5 million depending on
whether certain revenue and other incentive targets are met in 2001. Concurrent
with the acquisition agreement, the Company also agreed to a long-term reseller
arrangement of Motient satellite and terrestrial network services for $25
million over three years.
(11) SEGMENT INFORMATION
The Company's operating segments include Financial Services, Software,
Logistics, Mobile Government 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 extend 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. The Mobile Government
segment provides wireless data services for the public safety field.
Segment detail is summarized as follows:
<TABLE>
<CAPTION>
Financial Software European Mobile Corporate and
Services Products Logistics Operations Government Other Total
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Three months ended
September 30, 1999
Revenue $ 461 $ -- $ 30 $ -- $ -- $ 1,000 $ 1,491
Gross profit $ 309 $ -- $ 12 $ -- $ -- $ 387 $ 708
Total assets $ 23,883 $ -- $ -- $ -- $ -- $ -- $ 23,883
Three months ended
September 30, 2000
Revenue $ 3,060 $ 3,495 $ 1,388 $ 5,281 $ 1,011 $ 1,987 $ 16,222
Gross profit $ 1,002 $ 2,206 $ 827 $ 2,734 $ 545 $ 948 $ 8,262
Total assets $ 12,607 $ 1,022,447 $ 36,958 $ 183,645 $ 164,001 $ 1,307,652 $ 2,727,310
------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Financial Software European Mobile Corporate and
Services Products Logistics Operations Government Other Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nine months ended
September 30, 1999
Revenue $ 1,060 $ -- $ 218 $ -- $ -- $ 1,000 $ 2,278
Gross profit $ 377 $ -- $ 80 $ -- $ -- $ 387 $ 844
Nine months ended
September 30, 200
Revenue $ 9,291 $ 5,620 $ 3,599 $ 8,618 $ 1,011 $ 4,239 $ 32,378
Gross profit $ 3,416 $ 3,367 $ 1,839 $ 4,334 $ 545 $ 2,266 $ 15,767
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of income reported for the operating segments to the amount in
the condensed consolidated financial statements is as follows:
<TABLE>
<CAPTION>
Unallocated
Segment Corporate Expenses Consolidated
Total and Other Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Three months ended September 30, 1999 $ 708 $ (3,558) $ (2,850)
Three months ended September 30, 2000 $ 8,262 $ (115,523) $ (107,261)
Nine months ended September 30, 1999 $ 844 $ (8,014) $ (7,170)
Nine months ended September 30, 2000 $ 15,767 $ (246,213) $ (230,446)
-----------------------------------------------------------------------------------------------
</TABLE>
(12) 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 September 30, Nine months ended September 30, 2000
2000 1999 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
United States $10,726 $1,491 $23,491 $2,278
Aggregate Foreign 5,496 -- 8,887 --
------- ------ ------- ------
$16,222 $1,491 $32,378 $2,278
--------------------------------------------------------------------------------------
</TABLE>
(13) SUBSEQUENT EVENTS
(a) Intent to invest $25 million in Strategy.com
On October 20, 2000, the Company announced its intention to invest $25 million
in Strategy.com, a subsidiary of MicroStrategy, Inc., a worldwide provider of
Intelligent E-Business software.
(b) Funding of Mind Surf
On October 25, 2000, the Company made its initial investment in MindSurf in the
amount of $4.7 million.
15
<PAGE> 16
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 has 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 since that time. We expect this trend to continue in
the foreseeable future. We have also begun to derive revenue from the licensing
of our software platforms.
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 our common stock. In the course of developing our business, we also acquired
Mobeo, LocusOne, NetSearch and IFX since August 1999 for purchase prices and
related expenses aggregating approximately $165.0 million. On September 14,
2000, we acquired all of the capital stock of Cerulean for a purchase price of
$150.0 million, consisting of $75.0 million in cash and 462,412 shares of our
common stock. On September 18, 2000, we acquired Sunpro for a purchase price of
$10.8 million in cash. In addition, on September 19, 2000, we entered into a
binding letter of intent to acquire Motient's retail transportation business
unit for $45 million in cash plus an additional sum of up to $22.5 million
depending on whether certain revenue and other incentive targets are met in
2001. On September 25, 2000 we acquired Sinope, an engineering firm, for $2.5
million plus an additional $500,000 depending on whether certain incentive
targets are met in 2001.
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 September 30, 2000, we owned approximately 25.2% of OmniSky after
completion of OmniSky's initial public offering. 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, ePhones, First Web, ParkStone, Juniper, AlterEgo, Cidera and ViryaNet
in the aggregate amount of approximately $120.2 million. We account for the
results of Inciscent, MindSurf and OmniSky by using the equity method and the
other investments by using the cost method of accounting or fair value as
prescribed by SFAS 115.
Formation of Sila. On May 4, 2000, we formed Sila with Reuters and we
contributed our IFX subsidiary plus $13.5 million in cash to acquire a 60.0%
interest. Reuters contributed cash of approximately $21.6 million and Futures
Pager Limited, a European paging company, for the remaining 40.0% interest. The
results of Sila are consolidated in our financial statements.
Our subscriber and revenue information. We began to report our financial
results by segment as of the first quarter of 2000. Our current segments are
financial services, software products, logistics, European operations and mobile
government, and each of these segments has distinct management teams. We derive
recurring revenue from subscribers in the financial services, logistics and
European segments and we derive revenue from license fees in the software and
mobile government segments. We also derive
16
<PAGE> 17
recurring revenue from products and services that we have not yet allocated to a
specific segment because they are not significant enough to constitute a
separate reportable segment. We refer to these revenues under the heading
"corporate and other."
Our cost to acquire subscribers cannot readily be determined because the
cost depends on the allocation of a variety of costs, including intangible
expenses relating to acquisitions and general sales and marketing efforts. When
our business comprised fewer segments, these costs could be allocated more
clearly. At that time, the overall cost to acquire subscribers exceeded the
revenue expected during the one-year terms of the associated contracts. This
trend may continue 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 only 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.
We also derive revenue from the licensing of software products in our
software segment and in our mobile government segment. Our license revenue
includes revenue from the license of the AIM platform, the ScoutWare software
suite, the e-Mobile software suite, the Packet software suite and the Fire
Software suite. For the nine months ended September 30, 2000, sales to OmniSky
and Spyglass, Inc. individually represented in excess of 10% of the revenue
from the ScoutWare software suite.
We also derive revenue from wireless engineering services in several of
our segments. These services are provided on an hourly basis or on a fixed fee
per project basis. For the nine months ended September 30, 2000, we performed
engineering work under contracts with OmniSky, Inciscent, Merrill Lynch and
Response Services LLC.
Operating losses. Since our inception, we have invested significant capital
to build our customer service and network operations centers. 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, Cerulean, Sunpro, Sinope and IFX and the related formation
of Sila resulted and will continue to result in option and warrant expense and
significant amortization of intangible assets. Due to our acquisition strategy,
we expect to record additional option and warrant expense and significant
amortization of intangible assets in the future. Accordingly, we expect to
continue to incur operating losses for the foreseeable future.
RESULTS OF OPERATIONS
We derive subscriber revenue from the sale of wireless data services.
Revenue from wireless data services may consist of:
- a one-time non-refundable activation fee, which we currently 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 centers.
We also generate revenue by providing our subscribers the option to
purchase wireless handheld devices from us at or near 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 period 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.
The products we offer fall into three distinct categories: enterprise
ASP/ISP services; premium information and commerce services; and network hosting
services. The nature of revenue and costs for these product categories is
similar, regardless of the market segment in which we offer them. Accordingly,
we believe it is valuable to analyze our revenue and costs on the basis of these
product categories.
17
<PAGE> 18
Enterprise ASP/ISP services wirelessly connect critical business functions
of an enterprise to end users within the business enterprise or to third parties
such as customers. Through our enterprise ASP/ISP services, we provide a full
wireless solution to the end user including product development, fulfillment,
network hosting, customer service and carrier connections between the enterprise
and wireless carriers. For this type of product, we typically receive upfront
revenue such as hardware and activation fees and a monthly recurring fee for the
full range of services between $40 and $70 per month per subscriber.
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 connections between the enterprise and wireless carriers.
For this type of product, 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 per subscriber. The cost of hardware is typically
recovered in the monthly fee over the initial contract period.
Network hosting services connect businesses and wireless carriers. Hosting
services may be charged per subscriber or on a usage basis. Average revenue per
subscriber typically ranges between $5 and $25 per month.
Revenue from wireless engineering services consists of amounts billed to
our customers for engineering time on an hourly basis or fixed fees on a 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 of 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, Cerulean, Sunpro, Sinope and IFX acquisitions and the related
formation of Sila. Depreciation and amortization expenses also include
depreciation expenses arising from equipment purchased for our network
operations centers and other property and equipment purchases. With future
acquisitions and increased capital expenditures for our network operation
centers, we anticipate substantial additional depreciation and amortization
expenses.
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 stock options issued to employees and the fair value of equity-based
awards to non-employees. With the acquisitions of Mobeo, LocusOne, Riverbed,
NetSearch, Cerulean, Sunpro and IFX, 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.
18
<PAGE> 19
PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Subscriber revenue. The following table sets forth the number of
subscribers for each of our product types as of September 30, 1999 and
2000.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
Enterprise ASP/ISP services................... -- 1,957
Premium information and commerce services..... 1,080 19,925
Network hosting services...................... -- 1,037
---- ------
Total subscribers................... 1,080 22,919
</TABLE>
The growth in subscribers over this period was primarily the result of
subscribers added through our acquisitions of Mobeo, LocusOne, NetSearch and IFX
and the related formation of Sila. The remaining increase was due to subscriber
additions subsequent to the integration of these companies, the attraction of
new subscribers to our services and the introduction of new services. Growth in
enterprise ASP/ISP services between September 30, 1999 and September 30, 2000 is
attributable to recent releases of several online trading products. Growth in
premium information and commerce services between September 30, 1999 and
September 30, 2000 is attributable to recent acquisitions and subscriber
additions subsequent to the integrations of these companies, together with
growth in internally developed products. Growth in network hosting services
since the introduction of these services is attributable to growth through
recent acquisitions and the corresponding subsequent subscriber additions.
Subscriber revenue in total increased to $8.4 million for the quarter ended
September 30, 2000 from $411,000 for the quarter ended September 30, 1999 and
increased to $18.1 million for the nine months ended September 30, 2000 from
$1.0 million for the nine months ended September 30, 1999. The increase was
primarily due to an increase in subscribers to our premium information and
commerce services. The increase in subscribers for this product type was
primarily from our acquisitions. Total subscriber revenue generated from
acquisitions was $7.1 million and $14.6 million for the three and nine months
ended September 30, 2000, respectively. Most of the remaining increase in
subscriber revenue was due to an increase in the number of subscribers to our
enterprise ASP/ISP services resulting from our introduction of several new
online trading products.
An analysis of subscriber revenue by reportable segments and corporate and
other is as follows:
- Subscriber revenue from our financial services segment was $3.0 million
for the quarter ended September 30, 2000 and $461,000 for the quarter
ended September 30, 1999. Subscriber revenue from our financial
services segment was $8.9 million for the nine months ended September
30, 2000 and $1.1 million for the nine months ended September 30, 1999.
This increase was primarily due to the acquisition of Mobeo and the
introduction of online trading products.
- There was no subscriber revenue from our software products segment for
the three and nine months ended September 30, 2000 and 1999.
- Subscriber revenue from our logistics segment was $43,000 for the
quarter ended September 30, 2000 and there was no subscriber revenue
for the quarter ended September 30, 1999. Subscriber revenue from our
logistics segment was $113,000 for the nine months ended September 30,
2000 and there was no subscriber revenue from logistics for the nine
months ended September 30, 1999. This increase was due to the
acquisition of LocusOne in February 2000 and subsequent additions to
its subscriber base.
- Subscriber revenue from our European operations segment was $4.4
million for the quarter ended September 30, 2000 and there was no
subscriber revenue for the quarter ended September 30, 1999. Subscriber
revenue from our European operations segment was $7.6 million for the
nine months ended September 30, 2000 and there was no subscriber
revenue from European operations for the three and nine months ended
September 30, 1999. This increase was due to the acquisition of IFX in
April 2000 and the related formation of Sila.
- There was no subscriber revenue from our mobile government segment for
the three and nine months ended September 30, 2000 and 1999.
- Subscriber revenue from our corporate and other segment was $1.0
million for the quarter ended September 30, 2000 and there was no
subscriber revenue from corporate and other for the quarter ended
September 30, 1999. Subscriber revenue from our corporate and other
segment was $1.5 million for the nine months ended September 30, 2000.
There was no subscriber revenue
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from corporate and other for the nine months ended September 30, 1999.
This increase was primarily due to the acquisition of NetSearch in
April 2000 and subsequent additions to its subscriber base.
Cost of subscriber revenue. Cost of subscriber revenue increased to $4.2
million for the quarter ended September 30, 2000 from $357,000 for the quarter
ended September 30, 1999 and increased to $9.6 million for the nine months ended
September 30, 2000 from $888,000 for the nine months ended September 30, 1999.
The increase was primarily due to an increase in subscribers to our premium
information and commerce services. The increase in subscribers for this product
type was primarily from our acquisitions of Mobeo, NetSearch and IFX and the
related formation of Sila. Cost of subscriber revenue related to acquisitions
totaled $3.2 million for the three months ended September 30, 2000 and $7.7
million for the nine months ended September 30, 2000. Most of the remaining
increase in cost of subscriber revenue was due to an increase in the number of
subscribers to our enterprise ASP/ISP services given our introduction of several
new online trading products. We expect the cost of subscriber revenue to
increase proportionately with any increase in subscriber revenue. The cost of
subscriber revenue as a percentage of subscriber revenue decreased for the three
and nine months ended September 30, 2000 as compared to the same period of the
prior year in part because we met minimum airtime usage requirements and
negotiated lower rates with various wireless networks. These gross margin
improvements were partially offset because we entered into a new airtime supply
agreement with a paging company in the first quarter of 2000 related to our F/X
ALERT products whereby we provided a new pager to each of our subscribers at no
cost as the previous pagers were not compatible with the new supplier's network.
As a result, we recorded approximately $462,000 of expense in the first nine
months of 2000 relating to supplying these pagers.
An analysis of cost of subscriber revenue by reportable segments and
corporate and other is as follows:
- Cost of subscriber revenue from our financial services segment was $1.9
million for the quarter ended September 30, 2000 and $152,000 for the
quarter ended September 30, 1999. Cost of subscriber revenue from our
financial services segment was $5.4 million for the nine months ended
September 30, 2000 and $683,000 for the nine months ended September 30,
1999. This increase was primarily due to our acquisition of Mobeo and
the rollout of several new online trading products.
- There was no cost of subscriber revenue from our software products
segment for the three and nine months ended September 30, 2000 and
1999.
- Cost of subscriber revenue from our logistics segment was $27,000 for
the quarter ended September 30, 2000 and there was no cost of
subscriber revenue from our logistics segment for the quarter ended
September 30, 1999. Cost of subscriber revenue from our logistics
segment was $67,000 for the nine months ended September 30, 2000 and
there was no cost of subscriber revenue from logistics for the nine
months ended September 30, 1999. This increase was due to the
acquisition of LocusOne and the subsequent addition of new subscribers.
- Cost of subscriber revenue from our European operations segment was
$1.9 million for the quarter ended September 30, 2000 and there was no
cost of subscriber revenue from our European operations segment for the
quarter ended September 30, 1999. Cost of subscriber revenue from our
European operations segment was $3.6 million for the nine months ended
September 30, 2000 and there was no cost of subscriber revenue from
European operations for the nine months ended September 30, 1999. This
increase was due to the acquisition of IFX and the related formation of
Sila.
- There was no cost of subscriber revenue from our mobile government
segment for the three and nine months ended September 30, 2000 and
1999.
- Cost of subscriber revenue from our corporate and other segment was
$304,000 for the quarter ended September 30, 2000 and there was no cost
of subscriber revenue from our corporate and other segment for the
quarter ended September 30, 1999. Cost of subscriber revenue from our
corporate and other segment was $574,000 for the nine months ended
September 30, 2000 and there was no cost of subscriber revenue from
corporate and other for the nine months ended September 30, 1999. This
increase was primarily due to the acquisition of NetSearch and the
subsequent addition of new subscribers.
Engineering services revenue. Engineering services revenue increased to
$2.5 million for the quarter ended September 30, 2000 from $1.1 million for the
quarter ended September 30, 1999 and increased to $5.6 million for the nine
months ended September 30, 2000 from $1.3 million for the nine months ended
September 30, 1999. This increase was primarily due to our engineering contracts
with OmniSky and Inciscent. We recognized $2.8 million under these contracts for
the nine months ended September 30, 2000.
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An analysis of engineering services revenue by reportable segments and
corporate and other is as follows:
- Engineering services revenue from our financial services segment was
$87,000 for the quarter ended September 30, 2000 and there was no
engineering services revenue from the financial services segment for
the quarter ended September 30, 1999. Engineering services revenue from
our financial services segment was $395,000 for the nine months ended
September 30, 2000 and there was no engineering services revenue from
the financial services segment for the nine months ended September 30,
1999. This increase was due to engineering work performed for the
development of online trading applications.
- Engineering services revenue from our software products segment was
$83,000 for the quarter ended September 30, 2000. Engineering services
revenue from our software products segment was $250,000 for the nine
months ended September 30, 2000, and there was no engineering services
revenue from the software products segment for the three and nine
months ended September 30, 1999. This increase was primarily due to
revenue earned from sales of the ScoutWare software suite.
- Engineering services revenue from our logistics segment was $460,000
for the quarter ended September 30, 2000 and $30,000 for the quarter
ended September 30, 1999. Engineering services revenue from our
logistics segment was $1.2 million for the nine months ended September
30, 2000 and was $218,000 for the nine months ended September 30, 1999.
The increase was primarily due to the acquisition of LocusOne and
additional work under our Response Services contract.
- There was $920,000 engineering services revenue from our European
operations segment for the three and nine months ended September 30,
2000. There was no engineering services revenue from our European
operations segment for the three and nine months ended September 30,
1999. This increase was due to two of the acquisitions made by Sila in
the third quarter of 2000.
- There was no engineering services revenue from our mobile government
segment for the three and nine months ended September 30, 2000. There
was no engineering services revenue from our mobile government segment
for the three and nine months ended September 30, 1999.
- Engineering services revenue from our corporate and other segment was
$964,000 for the quarter ended September 30, 2000 and $1.0 million for
the quarter ended September 30, 1999. This decrease was due to the
timing of the work we performed pursuant to our engineering services
contracts with OmniSky and Inciscent. Engineering services revenue from
our corporate and other segment was $2.8 million for the nine months
ended September 30, 2000 and $1.0 million for the nine months ended
September 30, 1999. This increase was due to our engineering services
contracts with OmniSky and Inciscent.
Cost of engineering services revenue. Cost of engineering services revenue
increased to $1.9 million for the quarter ended September 30, 2000 from $426,000
for the quarter ended September 30, 1999 and increased to $3.5 million for the
nine months ended September 30, 2000 from $546,000 for the nine months ended
September 30, 1999. This increase was primarily due to our engineering services
contracts with OmniSky, Merrill Lynch, Response Services and Inciscent.
An analysis of cost of engineering services revenue by reportable segments
and corporate and other is as follows:
- Cost of engineering services revenue from our financial services
segment was $126,000 for the quarter ended September 30, 2000 and there
was no cost of engineering services revenue from our financial services
segment for the quarter ended September 30, 1999. Cost of engineering
services revenue from our financial services segment was $519,000 for
the nine months ended September 30, 2000 and there was no cost of
engineering services revenue from our financial services segment for
the nine months ended September 30, 1999. This increase was due to
engineering work performed for the development of online trading
applications. Much of the cost of engineering services revenue in this
period relates to the development of an online trading product for
Merrill Lynch. While Merrill Lynch contributed significantly to the
cost of this development, our total costs to date associated with this
development project have exceeded the revenue that we have recognized.
- Cost of engineering services revenue from our software products segment
was $22,000 for the quarter ended September 30, 2000 and there was no
cost of engineering services revenue from our software products segment
for the quarter ended September 30, 1999. Cost of engineering services
revenue from our software products segment was $56,000 for the nine
months ended September 30, 2000 and there was no cost of engineering
services revenue from the software products segment for the nine months
ended September 30, 1999. This increase was primarily due to the cost
of revenue from the ScoutWare software suite.
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- Cost of engineering services revenue from our logistics segment was
$330,000 for the quarter ended September 30, 2000 and $18,000 for the
quarter ended September 30, 1999. Cost of engineering services revenue
from our logistics segment was $878,000 for the nine months ended
September 30, 2000 and was $138,000 for the nine months ended September
30, 1999. The increase was primarily due to the acquisition of LocusOne
and additional work under our Response Services contract.
- There was $658,000 cost of engineering services revenue from our
European operations segment for the three and nine months ended
September 30, 2000. There was no cost of engineering services revenue
from the European operations segment for the three and nine months
ended September 30, 1999. This increase was due to two acquisitions
made by Sila in the third quarter of 2000.
- Cost of engineering services revenue from our corporate and other
segment was $735,000 for the quarter ended September 30, 2000 and
$613,000 for the quarter ended September 30, 1999. Cost of engineering
services revenue from our corporate and other segment was $1.4 million
for the nine months ended September 30, 2000 and $613,000 for the nine
months ended September 30, 1999. This increase was due to our
engineering services contracts with OmniSky and Inciscent.
Software and related services revenue. Software and related services
revenue was $5.3 million for the quarter ended September 30, 2000 and there was
no software and related services revenue for the quarter ended September 30,
1999. Software and related services revenue was $8.8 million for the nine months
ended September 30, 2000 and we did not have any software and related services
revenue for the nine months ended September 30, 1999. Software and related
services revenue was generated from the sale of licenses and services of the
ScoutWare software platform, e-Mobile Delivery platform, Packet Cluster software
suite, and Fire records control software suite following our acquisitions of
Riverbed and LocusOne, Cerulean, Sunpro and sales of AIM licenses.
An analysis of software and related services by reportable segments and
corporate and other is as follows:
- There was no software and related services revenue from our financial
services segment for the three and nine months ended September 30, 2000
or the three and nine months ended September 30, 1999.
- Software and related services revenue from our software products
segment was $3.4 million for the quarter ended September 30, 2000.
There was no software and related services revenue from our software
products segment for the quarter ended September 30, 1999. Software and
related services revenue from our software products segment was $5.4
million for the nine months ended September 30, 2000. There was no
software and related services revenue from the software products
segment for the nine months ended September 30, 1999. The increase was
primarily due to sales of our ScoutWare software suite.
- Software and related services revenue from our logistics segment was
$885,000 for the quarter ended September 30, 2000. There was no
software and related services revenue from our logistics segment for
the quarter ended September 30, 1999. Software and related services
revenue from our logistics segment was $2.3 million for the nine months
ended September 30, 2000. There was no software and related services
revenue from the logistics segment for the nine months ended September
30, 1999. The increase was due to our acquisition of LocusOne and
additional licenses sold since the acquisition.
- There was no software and related services revenue from our European
operations segment for the three months ended September 30, 2000. There
was no software and related services revenue from the European
operations segment for the three months ended September 30, 1999.
Software and related services revenue from our European operations
segment was $88,000 for the nine months ended September 30, 2000. There
was no software and related services revenue from the European
operations segment for the nine months ended September 30, 1999. The
increase was due to our acquisition of IFX and the related formation of
Sila.
- There was $1.0 million of software and related services revenue from
our mobile government segment for the three and nine months ended
September 30, 2000. There was no software and related services revenue
from the mobile government segment for the three and nine months ended
September 30, 1999. This increase was due to the acquisition of
Cerulean and Sunpro.
- There was no software and related services revenue from our corporate
and other segment for the three and nine months ended September 30,
2000 or the three and nine months ended September 30, 1999.
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Cost of software and related services revenue. Cost of software and related
services revenue was $1.9 million for the quarter ended September 30, 2000
relating to royalty fees and personnel costs and there was no cost of software
and related services revenue for the quarter ended September 30, 1999. Cost of
software and related services revenue was $3.5 million for the nine months ended
September 30, 2000 relating to royalty fees and personnel costs. We did not have
any costs of software and related services revenue for the nine months ended
September 30, 1999. Substantially all of the increase in costs resulted from the
acquisitions of LocusOne Riverbed, Cerulean and Sunpro.
An analysis of cost of software and related services revenue by reportable
segments and corporate and other is as follows:
- There was no cost of software and related services revenue from our
financial services segment for the three and nine months ended
September 30, 2000 or the three and nine months ended September 30,
1999.
- Cost of software and related services revenue from our software
products segment was $1.3 million for the three months ended September
30, 2000. There was no cost of software and related services revenue
from our software products segment for the three months ended September
30, 1999. Cost of software and related services revenue from our
software products segment was $2.2 million for the nine months ended
September 30, 2000. There was no cost of software and related services
revenue from the software products segment for the nine months ended
September 30, 1999. The increase was primarily due to costs associated
with sales of our ScoutWare software suite.
- Cost of software and related services revenue from our logistics
segment was $203,000 for the three months ended September 30, 2000.
There was no cost of software and related services revenue from our
logistics segment for the three months ended September 30, 1999. Cost
of software and related services revenue from our logistics segment was
$815,000 for the nine months ended September 30, 2000. There was no
cost of software and related services revenue from the logistics
segment for the nine months ended September 30, 1999. The increase was
due to our acquisition of LocusOne and additional licenses sold since
the acquisition.
- There was no cost of software and related services revenue from our
European operations segment for the three and nine months ended
September 30, 2000 or the three and nine months ended September 30,
1999.
- There was $466,000 cost of software and related services revenue from
our mobile government segment for the three and nine months ended
September 30, 2000. There was no cost of software and related services
revenue from the mobile government segment for the three and nine
months ended September 30, 1999. The increase was due to the
acquisition of Cerulean and Sunpro.
- There was no cost of software and related services revenue from our
corporate and other segment for the three and nine months ended
September 30, 2000 or the three and nine months ended September 30,
1999.
Research and development expenses. Research and development expenses,
including in-process research & development, increased to $10.1 million for the
quarter ended September 30, 2000 from $414,000 for the quarter ended September
30, 1999. Research and development expenses increased to $18.0 million for the
nine months ended September 30, 2000 from $1.4 million for the nine months
ended September 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, our XML framework
and wireless data services. This increase included one-time charges of $6.0
million for in-process research and development in connection with our
acquisitions of Riverbed, Cerulean and IFX in 2000.
General and administrative expenses. General and administrative expenses
increased to $20.4 million for the quarter ended September 30, 2000 from $1.2
million for the quarter ended September 30, 1999. General and administrative
expenses increased to $35.7 million for the nine months ended September 30, 2000
from $2.8 million for the nine months ended September 30, 1999. This increase
was primarily due to the addition of personnel performing general corporate and
business development activities and the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch, Cerulean, Sunpro, Sinope and IFX and the related formation
of Sila since the same period in the prior year.
Selling and marketing expenses. Selling and marketing expenses increased to
$10.5 million for the quarter ended September 30, 2000 from $382,000 for the
quarter ended September 30, 1999. Selling and marketing expenses increased to
$32.3 million for the nine months ended September 30, 2000 from $938,000 for the
nine months ended September 30, 1999. The increases were primarily due to an
increase in advertising and promotion costs, including a nationwide broadcast
and print branding campaign as well as increases in
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the number of sales and marketing personnel. We expect selling and marketing
expenses to continue at an increased level as we incur additional expenses to
increase brand awareness and add personnel.
Depreciation and amortization. Depreciation and amortization increased to
$72.3 million for the quarter ended September 30, 2000 from $115,000 for the
quarter ended September 30, 1999. Depreciation and amortization increased to
$156.8 million for the nine months ended September 30, 2000 from $308,000 for
the nine months ended September 30, 1999. These increases were primarily due to
amortization of intangibles relating to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch, Cerulean, Sunpro, Sinope and IFX and the related formation
of Sila as well as additional capital expenditures.
Option and warrant expense. Option and warrant expense increased to $4.0
million for the three months ended September 30, 2000 from $935,000 for the
three months ended September 30, 1999. Option and warrant expense increased to
$10.1 million for the nine months ended September 30, 2000 from $2.2 million for
the nine months ended September 30, 1999. The increase was primarily due to
expenses associated with options granted to employees of 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 $14.6 million for
the three months ended September 30, 2000 from an expense of $48,000 for the
three months ended September 30, 1999. Net interest income increased to $31.5
million for the nine months ended September 30, 2000 from $93,000 for the nine
months ended September 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 $17.6
million for the quarter ended September 30, 2000 and $440,000 for the quarter
ended September 30, 1999. Equity in losses of investments was $31.4 million for
the nine months ended September 30, 2000 and $440,000 for the nine months ended
September 30, 1999. The increase related 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
losses in investments as OmniSky and Inciscent develop their operations.
Income tax benefit. Income tax benefit for the quarter and nine months
ended September 30, 2000 was $574,000 and there was no income tax benefit for
the quarter and nine months ended September 30, 1999.
Minority interest. There was no minority interest for the three and nine
months ended September 30, 1999. Minority interest was $4.3 million for the
quarter ended September 30, 2000, and $6.0 million for the nine months ended
September 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 develops its operations.
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 $1.37 billion through September 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 September 30, 2000, we had
approximately $1.0 billion in cash and short-term investment resulting in
working capital of $1.0 billion.
Net cash used in operating activities was $27.5 million and $4.3 million
for the nine months ended September 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 $368.6 million for the nine
months ended September 30, 2000. Net cash used in investing activities was $8.5
million for the nine months ended September 30, 1999. For the nine months ended
September 30, 2000, we used cash for the purchase of property and equipment, to
invest in several strategic partners and to acquire LocusOne Communications,
NetSearch, Cerulean, Sunpro, Sinope, IFX and the related formation of Sila, and
Sila's subsequent acquisitions. Cash use by investing activities for the nine
months ended September 30, 1999 was primarily for the purchase of property and
equipment partially offset by the sale of short-term investments.
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Net cash provided by financing activities was $1.4 billion for the nine
months ended September 30, 2000 and $14 million by financing activities for the
nine months ended September 30, 1999. For the nine months ended September 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 nine months ended September 30, 1999, cash provided
by financing activities was primarily attributable to proceeds received from
issuance of notes payable.
For the remainder of 2000, we have had or expect to have the following
expenditures and requirements:
- We plan to invest $32.9 million in the launch of MindSurf, $4.7
million of which has already been funded.
- We plan to acquire Motient Corporation's retail transportation
business for approximately $45 million
- We invested approximately $25 million in Strategy.com
- We estimate we will spend between $10 and $15 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 $15 million to enhance our sales
and marketing activities, including a nationwide broadcast and print branding
and advertising campaign.
- We are committed to purchase 4,370 RIM handheld devices. Depending on
the mix of products ordered, we estimate the cost will be between $1.4 and $2.0
million.
- 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 September 30, 2000, we had cash and cash equivalents of $1.1
billion and short-term investments of approximately $11.9 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 September
30, 2000, the value of our short-term investments was approximately $341,000
more than our cost. If market interest rates rise, the value of our short-term
investments will 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 Sinope, 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
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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 September 27, 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 16.
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PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibit 2* - Agreement and Plan of Merger by and among Aether Systems, Inc.
and Cerulean Technology, Inc.
Exhibit 11 - Earnings Per Share Calculation
Exhibit 27 - Financial Data Schedule
* Incorporated by reference to the Registration Statement (File No. 333-45656)
on Form S-1 filed with the Commission on September 27, 2000.
b. Reports on Form 8-K
Current Report on Form 8-K dated September 14, 2000 was filed on September 28,
2000 pursuant to Item 2 (Acquisition or Disposition of Assets) and Item 7
(Financial Statements, Pro Forma Financial Information and Exhibits.)
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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: November 14, 2000
Aether Systems, Inc.
By: /s/ David C. Reymann
--------------------
David C. Reymann
Chief Financial Officer
(Principal Financial and Accounting Officer)
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