<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 25, 2000.
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
----------------------
AETHER SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 52-2186634
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
----------------------
11460 CRONRIDGE DRIVE
OWINGS MILLS, MARYLAND 21117
(410) 654-6400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
----------------------
DAVID S. OROS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
11460 CRONRIDGE DRIVE
OWINGS MILLS, MARYLAND 21117
(410) 654-6400
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
----------------------
with copies to:
<TABLE>
<S> <C>
MARK A. DEWIRE, ESQ. EVE N. HOWARD, ESQ.
ROGER J. PATTERSON, ESQ. HOGAN & HARTSON L.L.P.
WILMER, CUTLER & PICKERING 555 13TH STREET, N.W.
2445 M STREET, N.W. WASHINGTON, D.C. 20004
WASHINGTON, D.C. 20037 (202) 637-5600
(202) 663-6000
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share... 4,025,000 $129.69 $522,002,250 $137,809
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 25, 2000
PROSPECTUS
----------
3,500,000 SHARES
[AETHER LOGO]
COMMON STOCK
----------------------
Aether stockholders are selling all the shares offered by this
prospectus. Aether will not receive any of the proceeds from the sale of shares
by the selling stockholders.
The shares are quoted on the Nasdaq National Market under the symbol
"AETH." On August 24, 2000, the last sale price of the shares as reported on the
Nasdaq National Market was $145 5/16 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
The underwriters may also purchase up to an additional 525,000 shares
from the selling stockholders at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
U.S. BANCORP PIPER JAFFRAY
FRIEDMAN BILLINGS RAMSEY
----------------------
The date of this prospectus is , 2000.
<PAGE> 3
DESCRIPTION OF INSIDE FRONT COVER: The inside front cover contains the
Aether Systems logo and the slogan: "Wireless solutions for a portable planet."
Above the logo and slogan is a photograph depicting a finger pointing to a
globe.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 9
Forward-Looking Statements.................................. 19
Use of Proceeds............................................. 19
Price Range of Common Stock................................. 19
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 38
Management.................................................. 59
Transactions Between Aether and its Officers, Directors or
Significant Stockholders.................................. 70
Principal and Selling Stockholders.......................... 75
Description of Capital Stock................................ 79
Shares Eligible for Future Sale............................. 82
Underwriting................................................ 84
Legal Matters............................................... 87
Experts..................................................... 87
Where You Can Find More Information......................... 87
Index to Financial Statements............................... F-1
</TABLE>
------------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
3
<PAGE> 5
PROSPECTUS SUMMARY
This summary does not contain all the information that may be important to
you. You should read the entire prospectus carefully, including the financial
data and related notes beginning on page F-1, before making an investment
decision.
OUR COMPANY
We provide wireless data services, systems and software enabling people to
use handheld devices for mobile data communications and real-time transactions.
We design, develop, sell and support complete wireless systems for corporations
seeking to make data available to mobile workers or consumers. Our full mobile
and wireless solution, including our wireless data engineering and development
expertise, our wireless integration software and mobile data management software
products, our customer service center and our network operations centers,
positions us to take advantage of the growing demand for wireless data services.
We seek to develop and deliver wireless data services across a variety of
industries and market segments in the United States and internationally. Our
strategy initially focused on developing services for the financial services
sector, whose participants we believe are among the earliest adopters of
wireless data services. We currently offer and are developing wireless trading
and financial services for several major financial institutions. We also
currently offer and are developing financial news and information services
through major content providers.
We have moved and continue to move into other industries and market
segments, including software products, logistics, field sales, healthcare,
wireless commerce, mobile government and messaging. Since January 1, 2000 we
have pursued this strategy through acquisitions, joint ventures, and strategic
relationships and have entered into the following transactions or agreements:
Acquisitions. We have acquired four companies: LocusOne Communications,
Inc., a company that develops wireless data systems primarily for companies that
distribute goods and services using their own delivery fleets; Riverbed
Technologies, Inc., a company that develops and licenses mobile data management
software; NetSearch, LLC, a company that provides wireless field sales solutions
for companies selling products and services via the Internet; and IFX Group Plc,
a European company that provides foreign exchange information to financial
professionals. We later contributed IFX to Sila Communications Limited, a joint
venture with Reuters. We recently signed a letter of intent to acquire Cerulean
Technology, Inc., a company that provides wireless software products for the
public safety sector.
Joint ventures. We have entered into or increased our investment in three
joint ventures: we increased our investment in OmniSky Corporation, a company
that we formed with 3Com Corporation that provides wireless e-mail, Internet
access and other electronic transactions primarily for the consumer market;
together with Metrocall, Inc., PSINet, Inc., Hicks, Muse, Tate & Furst
Incorporated and other investors, we formed Inciscent, Inc., a company that
develops wireless e-mail, two-way wireless data applications, Internet access
and other applications to the small business and home office segments; and
together with Reuters, we formed Sila Communications Limited, a company that
develops wireless data systems in Europe. We have also entered into a
non-binding letter of intent with Sylvan Learning Centers, Inc. and Critical
Path Inc. to form MindSurf, Inc. to provide wireless applications to the
kindergarten to twelfth grade education market.
Strategic relationships. We have entered into strategic relationships with
the following companies: in the healthcare industry, Data Critical Corporation
and ParkStone Medical Information Systems, Inc.; in the wireless commerce
industry, VISA, First Data Merchant Services Corporation, CyberBills, Inc. and
MICROS Systems, Inc.; in the financial services industry, Multex.com, Inc.; and
in the messaging industry, Research in Motion, Limited, or RIM, and Critical
Path Inc. We have also entered into strategic relationships with companies that
develop new technology or have products that can be used in
4
<PAGE> 6
combination with our services, including, systems integrators, Proxicom, Inc.
and TIBCO Software, Inc.; wireless carrier, Nextel Communications, Inc.;
biometric technology developer, VeriStar Corporation; and e-commerce
distributor, Skyway Communications, Inc. or ePhones. In connection with our
strategic relationship we may also make equity investments when we believe it
will strengthen our working relationship.
We have all the resources necessary to provide our customers with complete
wireless data systems. We have a large, experienced development team with over
200 engineers. We have developed our package of wireless messaging software and
software development tools known as Aether Intelligent Messaging, or AIM, which
serves as a bridge to integrate diverse corporate in-house data systems with a
wide variety of wireless carrier networks and end-user devices. We also provide
a suite of software products that extend corporate data to mobile handheld
devices. We operate our own high-security network operations centers, which
connect customer and other data to wireless networks, and we maintain our own
customer service center. We established the WAP Enterprise Center, which is
comprised of engineers who develop applications for wireless phones that use the
Wireless Application Protocol, known as WAP smartphones, and the systems to
support data communication to these devices. We have also cultivated close
relationships with major wireless network carriers, including Verizon Wireless,
AT&T Wireless Services and BellSouth Wireless Data and mobile equipment and
software vendors such as 3Com, RIM, Ericsson LM, Novatel Wireless, Inc. and
Phone.com, Inc.
We believe we can provide our corporate customers with more attractive
service offerings by coupling general wireless applications like e-mail and
Internet access with custom corporate applications. We believe our involvement
with OmniSky and Inciscent and our relationship with Critical Path will allow us
to achieve this.
Our strategy. Our strategy is to be the dominant provider in the United
States and internationally of wireless data services and systems to corporations
by using our engineering expertise, our software platforms, our customer service
center, network operations centers and our other resources. We believe our
capabilities and experience have established us as an early market leader in
wireless data services, and a key element of our strategy is to move quickly
into new opportunities to extend our leadership position. Our strategy includes
the following key elements:
- we target a variety of industries and market segments for development of
wireless data communications and services in the United States and
internationally;
- we offer the widest range of software products to address every aspect of
wireless integration and mobile data management for mobile workers and
consumers;
- we expand our customer base and strengthen the Aether brand through
enhanced sales and marketing efforts;
- we maintain and strengthen our strategic relationships with suppliers and
customers;
- we maximize our recurring revenue; and
- we apply the expertise we gain through engineering services and research
and development activities to emerging business opportunities.
Operating results. We had revenue of $1.8 million in 1997, $1.5 million in
1998, $6.3 million in 1999 and $16.2 million in the first six months of 2000. We
had net losses of $2.7 million in 1997, $4.7 million in 1998, $30.7 million in
1999 and $123.2 million in the first six months of 2000. As of December 31,
1999, we had cumulative losses of $38.5 million. As of June 30, 2000, we had
cumulative losses of $161.7 million. On a pro forma basis, giving effect to the
acquisitions of Mobeo, Inc. in September 1999, LocusOne in February 2000,
Riverbed in March 2000 and NetSearch in April 2000, and the acquisition of IFX
in April 2000 and the related formation of Sila in May 2000, we had revenue of
$31.8 million and a net loss of $302.7 million in 1999 and revenue of $21.5
million and a net loss of $174.0 million in the first six months of 2000.
5
<PAGE> 7
Other information. We are a Delaware corporation. In October 1999, we
completed our initial public offering of 6,900,000 shares of our common stock at
an initial offering price of $16.00 per share, which resulted in net proceeds of
approximately $101.1 million. In March 2000, we completed the offering of an
additional 5,411,949 shares of our common stock at a price of $205.00 per share
and issued $310.5 million of 6% convertible subordinated notes due 2005, which
together resulted in net proceeds of approximately $1.4 billion. All references
to "we," "us," "our" or "Aether" in this prospectus mean Aether Systems, Inc.
and its subsidiaries or predecessors.
Our principal executive offices are located at 11460 Cronridge Drive,
Owings Mills, Maryland 21117, and our telephone number is (410) 654-6400. We
maintain a Web site at www.aethersystems.com. Information contained in our Web
site does not constitute a part of this prospectus.
6
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by the selling
stockholders............................... 3,500,000 shares
Total common stock to be outstanding after
the
offering................................... 38,603,852 shares. This excludes:
- 1,272,802 shares of common stock issuable
upon conversion of the 6% convertible notes
due 2005;
- 4,032,615 shares of common stock issuable
upon exercise of options outstanding at July
31, 2000, with a weighted average exercise
price of $59.30 per share;
- 2,580,061 additional shares of common stock
that will be available after the offering for
future issuance under our 1999 equity
incentive plan;
- 1,071,833 shares of common stock issuable
upon exercise of warrants with a weighted
average exercise price of $1.99 per share;
and
- 893,665 shares of common stock contingently
issuable upon exercise of warrants with an
exercise price of $.01 per share, which may
be exercised if certain conditions are met.
Use of proceeds.............................. We will not receive any proceeds from the
sale of common stock by the selling
stockholders.
Risk factors................................. See "Risk Factors" beginning at page 9 for a
discussion of factors you should consider
carefully before deciding to invest in shares
of our common stock.
Nasdaq National Market symbol................ AETH
</TABLE>
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table summarizes our consolidated statements of operations
for each of the years ended December 31, 1997, 1998 and 1999 and for the six
months ended June 30, 1999 and 2000 and our consolidated balance sheets as of
December 31, 1999 and as of June 30, 2000. The pro forma consolidated financial
information gives effect to the acquisitions of Mobeo, LocusOne, Riverbed,
NetSearch and IFX and the related formation of Sila and the investments in
VeriStar, ePhones, ParkStone and MindSurf. The pro forma net loss per share
information for the historical periods presented gives effect to our conversion
from a limited liability company to a corporation immediately prior to our
initial public offering.
We have provided the pro forma consolidated financial information for
informational purposes only and you should not assume that our results would
actually have been as shown if we had acquired Mobeo, LocusOne, Riverbed, IFX
and NetSearch or had formed Sila on the assumed dates or had made the
investments, or that the information projects what our results will be as a
result of the acquisitions and investments. The pro forma consolidated statement
of operations information assumes that the transactions occurred on January 1,
1999, and the pro forma consolidated balance sheet information assumes that the
transactions occurred on June 30, 2000. See our, Mobeo's, LocusOne's and
Riverbed's financial statements and notes to those statements included in this
prospectus beginning on page F-1.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------------
HISTORICAL 1999 HISTORICAL 2000
---------------------------- PRO FORMA ------------------- PRO FORMA
1997 1998 1999 CONSOLIDATED 1999 2000 CONSOLIDATED
------- ------- -------- ------------ ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Subscriber revenue..................... $ 161 $ 549 $ 3,732 $ 26,720 $ 599 $ 9,674 $ 14,770
Engineering services revenue........... 1,625 963 2,594 2,594 188 3,040 3,040
Software and related services
revenue.............................. -- -- -- 2,443 -- 3,442 3,696
------- ------- -------- --------- ------- --------- ---------
Total revenue.......................... 1,786 1,512 6,326 31,757 787 16,156 21,506
Gross profit............................. 493 411 2,850 16,552 136 7,505 10,202
Total operating expenses................. 2,801 5,178 30,887 328,112 4,597 135,500 193,305
------- ------- -------- --------- ------- --------- ---------
Operating loss........................... (2,308) (4,767) (28,037) (311,560) (4,461) (127,995) (183,103)
------- ------- -------- --------- ------- --------- ---------
Net loss................................. $(2,747) $(4,693) $(30,691) $(302,742) $(4,320) $(123,185) $(174,040)
======= ======= ======== ========= ======= ========= =========
Net loss per share-basic and diluted..... $ (3.65)
=========
Weighted average shares used in computing
net loss per share-basic and diluted... 33,765
=========
Pro forma net loss per share-basic and
diluted................................ $ (0.22) $ (0.29) $ (1.45) $ (11.76) $ (0.22) $ (4.92)
======= ======= ======== ========= ======= =========
Pro forma weighted average shares used in
computing net loss per share-basic and
diluted................................ 12,656 15,916 21,207 25,745 19,878 35,369
======= ======= ======== ========= ======= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
-------------------------
PRO FORMA
ACTUAL CONSOLIDATED
---------- ------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $1,193,450 $1,134,850
Working capital........................................... 1,212,670 1,154,070
Total assets.............................................. 2,703,242 2,703,242
Total debt................................................ 324,411 324,411
Stockholders' equity...................................... 2,266,472 2,266,472
</TABLE>
8
<PAGE> 10
RISK FACTORS
Investing in our common stock involves risks. You should carefully
consider the following risks together with the other information contained in
this prospectus before deciding to buy our common stock.
WE HAVE HISTORICALLY INCURRED LOSSES AND THESE LOSSES MAY INCREASE IN THE
FUTURE.
We reported net losses of $2.7 million, $4.7 million, $30.7 million and
$123.2 million for the years ended December 31, 1997, 1998 and 1999 and for the
six months ended June 30, 2000, respectively. On a pro forma basis including the
acquisitions of Mobeo, LocusOne, Riverbed, NetSearch and IFX and the related
formation of Sila, we reported a net loss of $302.7 million for the year ended
December 31, 1999 and $174.0 million for the six months ended June 30, 2000. Our
amortization of intangible assets and option and warrant expense has grown
significantly as a result of recent acquisitions. In addition, we expect to
continue to incur significant sales and marketing, systems development and
administrative expenses. Therefore, we will need to generate significant revenue
to become profitable and sustain profitability on a quarterly or annual basis.
We expect to continue to incur significant losses for the foreseeable future. As
a result, we may not be able to achieve profitability on a quarterly or annual
basis.
OUR FUTURE RESULTS ARE UNCERTAIN BECAUSE OUR HISTORICAL REVENUE WAS DERIVED FROM
SERVICES OTHER THAN THOSE WE EXPECT TO BE THE FOCUS OF OUR BUSINESS IN THE
FUTURE.
We only have a limited history selling our current services on which you
can evaluate our business, financial condition and operating results. Although
we commenced operations in January 1996, until March 1997 all of our revenue
came from engineering services and not from monthly service subscriptions or
software licensing which we now provide and which will be our focus in the
future. In 1997, 91.0% of our revenue was from engineering services and 9.0% was
from subscriber revenue. In 1998, 63.7% of our revenue was from engineering
services and 36.3% was from subscriber revenue. In 1999, 41.0% of our revenue
was from engineering services and 59.0% was from subscriber revenue. In 1999, on
a pro forma basis including Mobeo, LocusOne, Riverbed, NetSearch, IFX and Sila,
8.2% of our revenue was from engineering services, 84.1% was from subscriber
revenue, and 7.7% was from software and related services revenue. We have not
had any AIM license sales other than sales to Inciscent and Data Critical
totaling $1.25 million, for which the revenue will be recognized over the terms
of the agreements. In addition, our monthly service subscriptions have come
exclusively from subscriptions to our financial data and online trading
services, and our strategy includes development of services in other industries.
Because of this change in focus and our recent acquisitions, you should not rely
on our past performance to evaluate our future performance.
THERE IS NO ESTABLISHED MARKET FOR OUR SERVICES AND WE MAY NOT BE ABLE TO SELL
ENOUGH OF OUR SERVICES TO BECOME PROFITABLE.
The markets for wireless data and transaction services are still emerging
and continued growth in demand for and acceptance of these services remains
uncertain. Current barriers to market acceptance of these services include cost,
reliability, functionality and ease of use. We cannot be certain that these
barriers will be overcome. We are currently developing services for TD
Waterhouse Investor Services, Inc., Bear, Stearns & Co. Inc., National Discount
Brokers, Merrill Lynch, Nextel, ParkStone, Data Critical, CyberBills, Juniper
Financial Corp., First Data, MICROS and Multex pursuant to preliminary
agreements with these parties and expect to develop services for other entities
as well. We cannot assure you that these parties will enter into contracts for
our services or that products developed for our other customers will result in
revenue. Our competitors may develop alternative wireless data communications
systems that gain broader market acceptance than our systems. If the market for
our services does not grow, or grows more slowly than we currently anticipate,
we may not be able to attract customers for our services and our revenues would
be adversely affected.
9
<PAGE> 11
OUR RECENT ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES MAY NOT DELIVER THE
VALUE WE PAID OR WILL PAY FOR THEM AND MAY RESULT IN EXCESSIVE EXPENSES IF WE DO
NOT SUCCESSFULLY INTEGRATE THEM, OR IF THE COSTS AND MANAGEMENT RESOURCES WE
EXPEND IN CONNECTION WITH THE INTEGRATIONS EXCEED OUR EXPECTATIONS.
We expect that our recent acquisitions, investments and strategic alliances
and any acquisitions, investments or strategic alliances we may pursue in the
future will have a continuing, significant impact on our business, financial
condition and operating results. The value of the companies that we acquire or
invest in may be less than the amount we paid if there is:
- a decline of their position in the respective markets they serve; or
- a decline in general of the markets they serve.
Our financial results may be adversely affected if:
- we fail to assimilate the acquired assets with our pre-existing business;
- we lose key employees of these companies or of Aether as a result of the
acquisitions;
- our management's attention is diverted by other business concerns; or
- we assume unanticipated liabilities related to the acquired assets.
In addition, the companies we have acquired or invested in or may acquire
or invest in are subject to each of the business risks we describe in this
section, and if they incur any of these risks the businesses may not be as
valuable as the amount we paid. Further, we cannot guarantee that we will
realize the benefits or strategic objectives we are seeking to obtain by
acquiring or investing in these companies. In addition, we cannot assure you
that our various pending investments and strategic alliances will be completed
on the terms we describe, or at all.
WE MAY NOT ACHIEVE PROFITABILITY IF WE ARE UNABLE TO MAINTAIN, IMPROVE AND
DEVELOP THE WIRELESS DATA SERVICES WE OFFER.
We believe that our future business prospects depend in part on our ability
to maintain and improve our current services and to develop new ones on a timely
basis. Our services will have to achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in our service offerings,
major new wireless data services and service enhancements require long
development and testing periods. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new services
and service enhancements. Additionally, our new services and service
enhancements may not achieve market acceptance. If we cannot effectively develop
and improve services we may not be able to recover our fixed costs or otherwise
become profitable.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR SERVICES MAY BECOME OBSOLETE AND WE MAY LOSE SALES.
The wireless and data communications industries are characterized by
rapidly changing technologies, industry standards, customer needs and
competition, as well as by frequent new product and service introductions. Our
services are integrated with wireless handheld devices and the computer systems
of our corporate customers. Our services must also be compatible with the data
networks of wireless carriers. We must respond to technological changes
affecting both our customers and suppliers. We may not be successful in
developing and marketing, on a timely and cost-effective basis, new services
that respond to technological changes, evolving industry standards or changing
customer requirements. Our ability to grow and achieve profitability will
depend, in part, on our ability to accomplish all of the following in a timely
and cost-effective manner:
- effectively use and integrate new wireless and data technologies;
- continue to develop our technical expertise;
10
<PAGE> 12
- enhance our wireless data, engineering and system design services;
- develop applications for new wireless networks; and
- influence and respond to emerging industry standards and other changes.
WE DEPEND UPON WIRELESS NETWORKS OWNED AND CONTROLLED BY OTHERS. IF WE DO NOT
HAVE CONTINUED ACCESS TO SUFFICIENT CAPACITY ON RELIABLE NETWORKS, WE MAY BE
UNABLE TO DELIVER SERVICES AND OUR SALES COULD DECREASE.
Our ability to grow and achieve profitability partly depends on our ability
to buy sufficient capacity on the networks of wireless carriers such as Verizon
Wireless and AT&T Wireless Services and on the reliability and security of their
systems. All of our services are delivered using airtime purchased from third
parties. We depend on these companies to provide uninterrupted and "bug free"
service and would not be able to satisfy our customers' needs if they failed to
provide the required capacity or needed level of service. In addition, our
expenses would increase and our profitability could be materially adversely
affected if wireless carriers were to increase the prices of their services. Our
existing agreements with the wireless carriers generally have one-year terms.
Some of these wireless carriers are, or could become, our competitors and if
they compete with us they may refuse to provide us with their services.
OUR FAILURE TO DEVELOP RECOGNITION FOR THE AETHER BRAND COULD PREVENT US FROM
ACHIEVING A PROFITABLE LEVEL OF SALES.
Our sales and marketing activities to date have been limited. Our expenses
related to these activities were $840,000 and $2.1 million for the year ended
December 31, 1998 and 1999, respectively, and $21.8 million for the six months
ended June 30, 2000. We intend to increase the market presence of our brand over
time, which will require us to continue our increased spending on sales and
marketing. We expect to spend an estimated $20.0 million in the remainder of
2000 on sales and marketing, excluding Sila. We have applied for, but have not
received, federal trademark registrations for the names "Aether," "Aether
Systems" and "AIM," among others, and we may not be able to use these names
effectively or at all if we fail to obtain such registrations due to conflicting
marks or otherwise. As a result of our recent acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, we expect to
market our acquired products and services under their existing brands. We may
lose existing customers or fail to attract new customers if these brands are not
well received by our customers, if our marketing efforts are not productive, if
we are otherwise unsuccessful in increasing our brand awareness or if our
competition has greater brand recognition.
WE DEPEND ON THIRD PARTIES FOR THE MARKETING AND SALES OF SOME OF OUR SERVICES.
IF THE MARKETING EFFORTS OF THESE THIRD PARTIES ARE NOT EFFECTIVE, WE MAY NOT
ACHIEVE A PROFITABLE LEVEL OF SALES.
We rely substantially on the efforts of others to market and sell some of
our wireless data communications services, in particular the online trading
services we have developed for Charles Schwab and Morgan Stanley Dean Witter
Online and are developing for Merrill Lynch, National Discount Brokers, Bear
Stearns and other financial institutions. We also expect to rely on the
marketing efforts of our strategic relationship partners for products under
development in our other market segments such as healthcare and wireless
commerce. We believe that third parties paid over $380,000 in marketing expenses
in 1999 related to our products, which represented 15.0% of sales and marketing
expenses incurred in connection with our services. We cannot control whether or
how these third parties who sell and market our services will perform their
obligations to market our services. If these third parties fail to market our
services or their efforts fail to result in new customers, we may be unable to
attract new customers and our revenue could be adversely effected.
11
<PAGE> 13
WE MAY FAIL TO SUPPORT OUR ANTICIPATED GROWTH IN OPERATIONS, WHICH COULD REDUCE
DEMAND FOR OUR SERVICES AND MATERIALLY ADVERSELY AFFECT OUR REVENUE.
Our business strategy is based on the assumption that the number of
subscribers to our services, the amount of information they want to receive and
the number of services we offer will all increase. We must continue to develop
and expand our systems and operations to accommodate this growth. The expansion
and adaptation of our customer service and network operations centers require
substantial financial, operational and management resources. We may be unable to
expand our operations for one or more of the following reasons:
- we may not be able to locate or hire at reasonable compensation rates
qualified engineers and other employees necessary to expand our capacity;
- we may not be able to obtain the hardware necessary to expand our
capacity;
- we may not be able to expand our billing and other related support
systems; and
- we may not be able to obtain sufficient additional capacity from wireless
carriers.
Due to the limited deployment of our services to date, the ability of our
systems and operations to connect and manage a substantially larger number of
customers while maintaining superior performance is unknown. Any failure on our
part to develop and maintain our wireless data services as we experience rapid
growth could significantly reduce demand for our services and materially
adversely affect our revenue.
WE DEPEND ON RECRUITING AND RETAINING KEY MANAGEMENT AND TECHNICAL PERSONNEL
WITH WIRELESS DATA AND SOFTWARE EXPERIENCE AND WE MAY NOT BE ABLE TO DEVELOP NEW
PRODUCTS OR SUPPORT EXISTING PRODUCTS IF WE CANNOT HIRE OR RETAIN QUALIFIED
EMPLOYEES.
Because of the technical nature of our products and the dynamic market in
which we compete, our performance depends on attracting and retaining key
employees. Competition for qualified personnel in the wireless data and software
industries is intense and finding qualified personnel with experience in both
industries is even more difficult. We believe there are only a limited number of
individuals with the requisite skills in the field of wireless data
communication, and it is becoming increasingly difficult to hire and retain
these persons. Competitors and others have in the past attempted, and may in the
future attempt, to recruit our employees. Each of our engineers has entered into
a non-competition agreement with us for a period of ten months after they leave
Aether. These agreements will not prevent our engineers from leaving or working
for competitors relatively soon after they leave us.
We currently maintain a key person life insurance policy for David S. Oros,
our chairman and chief executive officer. We do not maintain insurance policies
for any of our other executive officers.
WE MAY NOT HAVE ADEQUATELY PROTECTED OUR INTELLECTUAL PROPERTY RIGHTS, WHICH
COULD ALLOW COMPETITORS TO DEVELOP SIMILAR PRODUCTS USING SIMILAR TECHNOLOGY AND
THUS REDUCE OUR SALES AND REVENUE.
We have attempted to protect our technology, including the technology we
have obtained or will obtain in our acquisitions, through patent, trademark and
copyright protection, as well as through trade secret laws and non-competition
and non-disclosure agreements with key employees. Patents may infringe on valid
patents held by third parties, or patents held by third parties may limit the
scope of any patents we receive. In particular, the patent we acquired in our
acquisition of Riverbed covers a technology that is similar to other patented
technologies. In addition, we have no international patent protection in this
technology. If we are not adequately protected, other companies with sufficient
engineering expertise could develop competing products based on our intellectual
property and reduce our sales and thus our revenue.
12
<PAGE> 14
WE MAY BE SUED BY THIRD PARTIES FOR INFRINGEMENT OF THEIR INTELLECTUAL PROPERTY
RIGHTS AND INCUR COSTS OF DEFENSE AND POSSIBLY ROYALTIES OR LOSE THE RIGHT TO
USE TECHNOLOGY IMPORTANT TO PROVIDING OUR SERVICES.
The telecommunications and software industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market increases, the possibility
of an intellectual property claim against us could increase. We have received
two claims that we have infringed patents developed by other parties. Although
we believe these claims are without merit, these and any other intellectual
property claims, with or without merit, could be time-consuming and expensive to
litigate or settle, could require us to enter into costly royalty arrangements,
could divert management attention from administering our business and could
hinder us from conducting our business.
WE MAY BE SUBJECT TO LIABILITY FOR TRANSMITTING INFORMATION, AND OUR INSURANCE
COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY.
We may be subject to claims relating to information transmitted over
systems we develop or operate. These claims could take the form of lawsuits for
defamation, negligence, copyright or trademark infringement or other actions
based on the nature and content of the materials. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or may not be adequate to cover all costs incurred in defense of potential
claims or to indemnify us for all liability that may be imposed.
DISRUPTION OF OUR SERVICES DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES
MAY HARM OUR REPUTATION, POTENTIALLY CAUSING A LOSS OF SALES AND AN INCREASE IN
OUR EXPENSES.
A significant barrier to the growth of wireless data services or
transactions on the Internet or by other electronic means has been the need for
secure transmission of confidential information. Our systems could be disrupted
by unauthorized access, computer viruses and other accidental or intentional
actions. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches. If a third
party were able to misappropriate our users' personal or proprietary information
or credit card information, we could be subject to claims, litigation or other
potential liabilities that could materially adversely impact our revenue and may
result in the loss of customers.
ANY TYPE OF SYSTEMS FAILURE COULD REDUCE SALES, INCREASE COSTS OR RESULT IN
CLAIMS OF LIABILITY.
Our existing wireless data services are dependent on real-time, continuous
feeds from Reuters Selectfeed Plus and others. The ability of our subscribers to
make securities trades, receive sales leads and receive critical business
information requires timely and uninterrupted connections with our wireless
network carriers. Any disruption from our satellite feeds or backup landline
feeds could result in delays in our subscribers' ability to receive information
or execute trades. We cannot assure you that our systems will operate
appropriately if we experience a hardware or software failure or if there is an
earthquake, fire or other natural disaster, a power or telecommunications
failure, intentional disruptions of service by third parties, an act of God or
an act of war. A failure in our systems could cause delays in transmitting data,
and as a result we may lose customers or face litigation that could involve
material costs and distract management from operating our business.
OUR ABILITY TO SELL NEW AND EXISTING SERVICES AT A PROFIT COULD BE IMPAIRED BY
COMPETITORS.
Intense competition could develop in the market for services we offer. We
developed our software using standard industry development tools. Many of our
agreements with wireless carriers, wireless handheld device manufacturers and
data providers are non-exclusive. Our competitors could develop and use the same
products and services in competition with us. With time and capital, it would be
possible for competitors to replicate our services. Our competitors could
include wireless network carriers such as Verizon Wireless and AT&T Wireless
Services, software developers such as Microsoft Corporation, 724 Solutions Inc.
and Phone.com and systems integrators such as International Business Machines
13
<PAGE> 15
Corporation. Many of our competitors have significantly greater resources than
we do. Furthermore, competitors may develop a different approach to marketing
the services we provide in which subscribers may not be required to pay for the
information provided by our services. Competition could reduce our market share
or force us to lower prices to unprofitable levels. Additional information
regarding our competition is described under "Business -- Competition" on page
56.
WE MAY LOSE THE OPPORTUNITY TO PURSUE DESIRABLE PROJECTS TO INCISCENT, OMNISKY,
SILA AND MINDSURF BECAUSE SOME OF OUR DIRECTORS AND EXECUTIVE OFFICERS SERVE ON
THE BOARDS OF DIRECTORS OF THESE COMPANIES.
David S. Oros, our chairman and chief executive officer, and some of our
other directors have been appointed to the boards of directors of companies in
which we hold an equity interest, including OmniSky and Sila. Some of our
executive officers have been appointed to the board of directors of Inciscent.
These other companies may develop products that compete with our own products.
Mr. Oros and the other directors and executive officers may learn of business
opportunities that are appropriate for the boards on which they serve and Mr.
Oros and these other individuals may not be required to make those opportunities
available to us. If OmniSky, Sila, Inciscent, our pending strategic alliance
with MindSurf or any other joint ventures we may enter into pursue opportunities
that we would have an interest in pursuing, our business may fail to grow or our
existing business may suffer. Mr. Oros and these other directors and executive
officers may also have other conflicts of interest with Aether because of their
positions with OmniSky, Sila, Inciscent and MindSurf and OmniSky's, Sila's,
Inciscent's and MindSurf's contractual relationships with Aether. We describe
those contracts in "Transactions between Aether and its Officers, Directors or
Significant Stockholders" on page 72.
AN INTERRUPTION IN THE SUPPLY OF PRODUCTS AND SERVICES THAT WE OBTAIN FROM THIRD
PARTIES COULD CAUSE A DECLINE IN SALES OF OUR SERVICES, AND PRODUCTS WE PURCHASE
TO AVOID SHORTAGES MAY BECOME OBSOLETE BEFORE WE CAN USE THEM.
In designing, developing and supporting our wireless data services, we rely
on wireless carriers, wireless handheld device manufacturers, content providers
and software providers. These suppliers may experience difficulty in supplying
us products or services sufficient to meet our needs or they may terminate or
fail to renew contracts for supplying us these products or services on terms we
find acceptable. Any significant interruption in the supply of any of these
products or services could cause a decline in sales of our services unless and
until we are able to replace the functionality provided by these products and
services. Specifically, Novatel Wireless and Sierra Wireless Inc. are our only
suppliers of wireless modems, which are an integral hardware component of our
services. It can be difficult to obtain these wireless modems and their parts.
Although we have purchased a large supply of these modems, they may become
obsolete before we are able to use them. We also depend on third parties to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis and respond to emerging
industry standards and other technological changes. In addition, we rely on the
ability of our content providers -- Reuters, the New York Stock Exchange, Inc.,
the Chicago Board of Trade, the Nasdaq Stock Market, Inc. and the Options Price
Reporting Authority -- to continue to provide us with uninterrupted access to
the news and financial information we provide to our customers. The failure of
third parties to meet these criteria, or their refusal or failure to deliver the
information for whatever reason, could materially harm our business.
OUR SALES CYCLE IS LONG, AND OUR STOCK PRICE COULD DECLINE IF SALES ARE DELAYED
OR CANCELLED.
Quarterly fluctuations in our operating performance are exacerbated by the
length of time between our first contact with a business customer and the first
revenue from sales of services to that customer or end users. Because our
services represent a significant investment for our business customers, we spend
a substantial amount of time educating them regarding the use and benefits of
our services and they, in turn, spend a substantial amount of time performing
internal reviews and obtaining capital expenditure approvals before purchasing
our services. As much as a year may elapse between the time we approach a
business customer and the time we begin to deliver services to a customer or end
user. Any delay in sales of our
14
<PAGE> 16
services could cause our quarterly operating results to vary significantly from
projected results, which could cause our stock price to decline. In addition, we
may spend a significant amount of time and money on a potential customer that
ultimately does not purchase our services.
OUR SALES OF FINANCIAL DATA AND TRADING SERVICES COULD DECREASE IF THERE IS A
DECLINE IN SECURITIES TRADING.
In the six months ended June 30, 2000, we earned 59.2% (or 66.3% on a pro
forma basis giving effect to the acquisition of IFX and the related formation of
Sila) of our revenue from services that provide financial information and
wireless trading capability. If there is a prolonged decline in the overall
level of securities trading, or online trading in particular, our operating
results may decline. A decline in securities trading may result from:
- loss of confidence in the reliability or security of online trading
systems;
- government regulation of the securities industry or online trading; or
- a downturn or volatility in the stock market.
OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS, AND OUR SALES COULD GO DOWN IF THIS
INJURES OUR REPUTATION OR DELAYS SHIPMENTS OF OUR SOFTWARE.
The AIM package of wireless messaging and software development tools we
develop, the ScoutWare family of software products we develop, Sila's
proprietary software and LocusOne's e-mobile software are complex and must meet
the stringent technical requirements of our customers. We must develop our
services quickly to keep pace with the rapidly changing software and
telecommunications markets. Software as complex as ours is likely to contain
undetected errors or defects, especially when first introduced or when new
versions are released. Our software may not be free from errors or defects after
delivery to customers has begun, which could result in the rejection of our
software or services, damage to our reputation, lost revenue, diverted
development resources and increased service and warranty costs.
THE STOCKHOLDER AGREEMENT AMONG OUR MAJOR STOCKHOLDERS WILL HAVE THE EFFECT OF
ALLOWING THEM TO NOMINATE EIGHT OF OUR TWELVE DIRECTORS, WHICH WILL LIMIT THE
ABILITY OF NEW INVESTORS TO INFLUENCE CONTROL OF AETHER.
NexGen Technologies, L.L.C., Telcom-ATI Investors, L.L.C., Reuters
MarketClip Holdings Sarl, a subsidiary of Reuters Group Plc., and 3Com -- who
together will hold 37.8% of the shares of common stock outstanding following
completion of this offering -- entered into a stockholder agreement that governs
voting for our directors. The agreement provides that each party will vote all
of its shares for two directors nominated by NexGen, two directors nominated by
Telcom-ATI Investors, two directors nominated jointly by NexGen and Telcom-ATI
Investors and one director nominated by each of Reuters and 3Com. As a result,
eight directors of our board are nominated by these major stockholders. As we
currently have authorized only 12 directors, the voting rights of our
stockholders other than these major stockholders effectively will be
meaningfully exercised only in connection with the election of four of our
directors. In addition to its effect on the voting rights of our new investors,
the stockholder agreement could have the effect of delaying or preventing a
change in control.
WE MAY NEED ADDITIONAL CAPITAL AND WE MAY NOT BE ABLE TO OBTAIN IT, WHICH COULD
PREVENT US FROM CARRYING OUT OUR BUSINESS STRATEGY.
We currently anticipate that our available cash resources will be
sufficient to fund our operating needs for at least the next 12 months,
including the expansion of our sales and marketing program and any acquisitions
we may pursue in that period. Thereafter, we expect to require additional
financing in an amount that we cannot determine at this time. We do not have any
bank credit facility or other working capital credit line under which we may
borrow funds for working capital or other general corporate purposes. If our
plans or assumptions change or are inaccurate, we may be required to seek
capital sooner than anticipated. We may need to raise funds through public or
private debt or equity financings.
15
<PAGE> 17
If funds are raised through the issuance of equity securities, the
percentage ownership of our then-current stockholders may be reduced and the
holders of new equity securities may have rights, preferences or privileges
senior to those of the holders of our common stock. If additional funds are
raised through a bank credit facility or the issuance of debt securities, the
holder of this indebtedness would have rights senior to the rights of the
holders of our common stock and the terms of this indebtedness could impose
restrictions on our operations. If we need to raise additional funds, we may not
be able to do so on terms favorable to us, or at all. If we cannot raise
adequate funds on acceptable terms, we may not be able to continue to fund our
operations.
NEW LAWS AND REGULATIONS THAT IMPACT OUR INDUSTRY COULD INCREASE OUR COSTS OR
REDUCE OUR OPPORTUNITIES TO EARN REVENUE.
We are not currently subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses in general. However, in the future, we may
become subject to regulation by the FCC or another regulatory agency. In
addition, the wireless carriers who supply us airtime and certain of our
hardware suppliers are subject to regulation by the FCC and regulations that
affect them could increase our costs or reduce our ability to continue selling
and supporting our services.
OUR STOCK PRICE, LIKE THAT OF MANY TECHNOLOGY COMPANIES, HAS BEEN, AND MAY
CONTINUE TO BE, VOLATILE.
The market price of our common stock has been highly volatile and is likely
to continue to be highly volatile. The trading price of our common stock has
increased significantly from our initial offering price of $16.00 per share on
October 20, 1999. We are involved in a highly visible, rapidly changing industry
and stock prices in our and similar industries have risen and fallen in response
to a variety of factors, including:
- announcements of new wireless data communications technologies and new
providers of wireless data communications;
- acquisitions of or strategic alliances among providers of wireless data
communications;
- changes in recommendations by securities analysts regarding the results
or prospects of providers of wireless data communications; and
- changes in investor perceptions of the acceptance or profitability of
wireless data communications.
WE MAY HAVE TO TAKE ACTIONS THAT ARE DISRUPTIVE TO OUR BUSINESS STRATEGY TO
AVOID REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940.
We invest our temporary cash balances in securities and as part of our
business strategy we own minority and majority equity interests in a number of
ventures. Our ownership of these securities could potentially subject us to
registration under the Investment Company Act of 1940, which, absent an
applicable exclusion or exemption, requires registration for companies that are
engaged primarily in the business of investing, reinvesting, owning, holding or
trading in securities. If we were required to register as an investment company,
we would not be able to continue operating our business in accordance with our
business plan. Accordingly, we intend to take all necessary steps to avoid being
deemed an investment company. These necessary steps might disrupt our business
strategy of forming joint ventures with strategic partners and making equity
investments in companies with whom we have a strategic relationship to develop
new technology or extend the reach of existing products and services. A company
may be deemed to be an investment company if it owns investment securities with
a value exceeding 40% of its total assets excluding cash items and government
securities as defined in the Investment Company Act, subject to certain
exclusions and exemptions. While we believe we are not currently an investment
company, any acquisition or disposition of assets, or fluctuations in the value
of our assets may require us to take steps to avoid registration under the
Investment Company Act, including buying, refraining from buying, selling or
refraining from selling securities, when we would otherwise not choose to in
order to avoid registration under the Investment Company Act. For example, we
may have to retain majority or controlling interests in our joint ventures after
their initial public offerings, which would require us to expend significant
amounts of capital that we might otherwise use to expand our products and
services in other market
16
<PAGE> 18
segments. Moreover, we may incur tax liabilities when we sell assets. We may
also be unable to purchase additional investment securities that may be
important to our business strategy.
WE CONDUCT OPERATIONS IN A NUMBER OF COUNTRIES THROUGH SILA AND ARE SUBJECT TO
RISKS OF INTERNATIONAL OPERATIONS.
We currently operate outside the United States through Sila, which has
operations throughout Europe and in Singapore. We expect that Sila will
independently perform the day-to-day operations of our joint venture and will be
beyond immediate control. Any failure by Sila to successfully implement or
maintain services could result in negative publicity and have an unfavorable
impact on our ability to expand our products and services to Europe and Asia. We
face various risks in expanding outside the United States, including:
- difficulty and cost of monitoring our international operations;
- cultural differences in the conduct of business;
- unexpected changes in regulatory requirements, including U.S. export
restrictions in encryption technologies;
- management and operation of our business spread over various countries;
and
- recessionary environments in foreign economies, particularly in Asian
countries and in the financial services sector.
We cannot assure you that our international operations will contribute
positively to our business, financial condition or result of operations. Our
failure to manage international growth could result in higher operating costs
than anticipated or could delay or preclude altogether our ability to generate
revenues in international markets. In addition, our expanding operations outside
the United States are, in some instances, conducted in currencies other than the
U.S. dollar and fluctuations in the value of foreign currencies relative to the
U.S. dollar could cause currency exchange losses. We cannot predict the effect
of exchange rate fluctuations on our future operating results.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION AND
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
Provisions of our certificate of incorporation and bylaws and provisions of
Delaware law could delay, defer or prevent an acquisition or change of control
of Aether or otherwise adversely affect the price of our common stock. For
example, our bylaws limit the ability of stockholders to call a special meeting.
Moreover, our certificate of incorporation permits our board to issue shares of
preferred stock without stockholder approval, which means that the board could
issue shares with special voting rights or other provisions that could deter a
takeover. In addition to delaying or preventing an acquisition, the issuance of
a substantial number of preferred shares could adversely affect the price of our
common stock. Please refer to "Description of Capital Stock" on page 79 for a
more detailed discussion of these provisions.
UPON COMPLETION OF THIS OFFERING, YOU WILL EXPERIENCE DILUTION.
Our tangible assets are readily identified assets like property, equipment,
cash, securities and accounts receivable. As of June 30, 2000, the value of
these assets on our balance sheet minus the value of our liabilities equals
$25.69 per share. The assumed offering price of $145.31 per share exceeds this
amount by $119.62 per share. Therefore, you will be paying more for a share of
stock than the value reflected in our accounts of tangible assets for that
share. If we were forced to sell all our assets and distribute all the proceeds,
you would not recover the amount you paid for shares unless we can sell the
assets for more than the value we report for our tangible assets. We also have
outstanding a large number of stock options and warrants to purchase common
stock with exercise prices significantly below the price of shares in this
offering. You will experience further dilution to the extent these options or
warrants are exercised.
17
<PAGE> 19
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY DEPRESS OUR
SHARE PRICE.
As of August 21, 2000, assuming the exercise of options by selling
stockholders in connection with this offering, we would have outstanding
38,603,852 shares of common stock. Sales of a substantial number of our shares
of common stock in the public market following this offering -- or the
expectation of such sales -- could cause the market price of our common stock to
drop. All the shares sold in this offering will be, and the shares sold in our
initial public offering and our offering in March 2000 are, freely tradable.
Pursuant to "lock-up" agreements, all directors and officers and all selling
stockholders have agreed with the underwriters not to offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any of the 19,210,393
shares they hold or have the right to acquire until , 2001 (150 days
after the date of this prospectus). After this time, these 14,434,023 shares
will be eligible for sale, subject to a limitation on the number of shares that
can be sold in any three-month period. In addition, 5,907,163 shares will become
eligible for sale at various times after March 6, 2001 subject to a limitation
on the number of shares that can be sold in any three-month period.
We filed a registration statement to register all shares of common stock
that were issued to our employees under our equity incentive plan and intend to
file future registration statements. Shares issued upon exercise of stock
options will be eligible for resale in the public market without restriction. As
of July 31, 2000, options and warrants to purchase 5,104,448 shares of our
common stock were issued and outstanding and covered by the registration
statement. In addition, warrants to purchase 893,665 additional shares were
issued and outstanding on that date.
DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW.
As a result of the $310.5 million of 6% convertible subordinated notes due
2005 currently outstanding, we have substantial amounts of indebtedness,
primarily consisting of the notes. As a result of this indebtedness, we are
obligated to make principal and interest payments. There is a possibility that
we may be unable to generate cash sufficient to pay the principal of, interest
on and other amounts due in respect of our indebtedness when due. We may also
obtain additional long-term debt and working capital lines of credit to meet
future financing needs. We cannot assure you that additional financing
arrangements will be available on commercially reasonable terms or at all.
18
<PAGE> 20
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. These include projections about the industry contained on pages 38 to 39.
We have based these forward-looking statements on our current expectations and
projections about future events. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "pending,"
"potential," "continue," "expects," "anticipates," "intends," "plans,"
"believes," "predicts," "estimates" and similar expressions, although not all
forward-looking statements are identified by these words. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions about
Aether, including those we describe in the "Risk Factors" section of this
prospectus. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus might not occur. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
We use market data and industry forecasts and projections throughout this
prospectus, which we have obtained from internal surveys, market research,
publicly available information and industry publications. Industry publications
generally state that the information they provide has been obtained from sources
believed to be reliable, but that the accuracy and completeness of such
information is not guaranteed. The forecasts and projections are based on
industry surveys and the preparers' experience in the industry and there is no
assurance that any of the projected amounts will be achieved. Similarly, we
believe that the surveys and market research we or others have performed are
reliable, but we have not independently verified this information. Neither we
nor any of the underwriters represents that any such information is accurate.
USE OF PROCEEDS
This prospectus relates to shares of our common stock being offered and
sold for the accounts of the selling stockholders named in this prospectus. We
will not receive any proceeds from the 3,500,000 shares sold in the offering.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "AETH" since our initial public offering on October 20, 1999. Prior to
that time, there was no public market for the common stock. The following table
sets forth, for the periods indicated, the high and low prices per share of the
common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1999
Fourth Quarter (since October 20, 1999)................... $ 89 3/8 $ 41 1/8
2000
First Quarter............................................. $345 $ 73
Second Quarter............................................ $216 $ 62
Third Quarter (through August 24, 2000)................... $203 3/4 $124 1/8
</TABLE>
On August 24, 2000 the reported last sale price of the common stock on the
Nasdaq National Market was $145.31. As of August 20, 2000 there were
approximately 66 holders of record of our common stock.
19
<PAGE> 21
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock nor,
when we were organized as a limited liability company, did we make any
distributions to our members. We currently intend to retain earnings, if any, to
support the development of our business and do not anticipate paying cash
dividends in the foreseeable future. Payment of future dividends, if any, will
be at the discretion of our board of directors after taking into account factors
such as our financial condition, operating results and current and anticipated
cash needs.
20
<PAGE> 22
CAPITALIZATION
The table below sets forth the actual capitalization as of June 30, 2000:
Actual common stock data are as of June 30, 2000 and exclude:
- 1,272,802 shares of common stock issuable upon conversion of the 6%
convertible notes due 2005;
- 3,736,290 shares issuable upon exercise of options to purchase
shares of common stock issued under our equity incentive plan at a
weighted average exercise price of $46.56 per share;
- 1,099,833 shares issuable upon exercise of warrants exercisable at a
weighted average exercise price of $1.98 per share; and
- 893,665 shares of common stock issuable upon exercise of warrants
with an exercise price of $.01 per share.
This table should be read in conjunction with our consolidated financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 25.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 2000
-------------
ACTUAL
-------------
(IN
THOUSANDS)
<S> <C>
Notes payable, current...................................... $ 13,911
Notes payable, long term.................................... --
Convertible subordinated notes.............................. 310,500
----------
Total debt......................................... 324,411
----------
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; 0 shares issued and outstanding............. --
Common stock, $0.01 par value; 1,000,000,000 shares
authorized; 38,141,522 shares issued and outstanding.... 381
Additional paid-in-capital................................ 2,352,944
Accumulated deficit....................................... (145,799)
Unrealized gain on investments available for sale......... 58,946
----------
Total stockholders' equity......................... 2,266,472
----------
Total capitalization............................... $2,590,883
==========
</TABLE>
21
<PAGE> 23
DILUTION
If you invest in our shares of common stock, your interest will be diluted
by the amount of the difference between the assumed offering price per share of
$145.31 of common stock and the net tangible book value per share of common
stock after this offering. Our net tangible book value as of June 30, 2000 was
$979.8 million, or $25.69 per share of common stock. Net tangible book value per
share is equal to our total tangible assets less total liabilities, divided by
the number of outstanding shares of common stock. This figure represents an
immediate dilution of $119.62 per share of common stock to new investors. The
following table illustrates this per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed offering price per share............................ $145.31
Net tangible book value per share as of June 30, 2000....... $ 25.69
-------
Dilution per share to new investors in this offering........ $119.62
=======
</TABLE>
As of June 30, 2000, we had outstanding options to purchase 3,736,290
shares under our equity incentive plan at a weighted average exercise price of
$46.56 and warrants to purchase 1,099,833 shares at a weighted average exercise
price of $1.98 per share.
22
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
The table that follows presents portions of our consolidated financial
statements and is not complete. You should read the following selected
consolidated financial data together with our consolidated financial statements
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus. The
consolidated statement of operations data for the years ended December 31, 1997,
1998 and 1999, and the consolidated balance sheet data as of December 31, 1998
and 1999, are derived from our consolidated financial statements, which have
been audited by KPMG LLP, independent auditors, and which are included in this
prospectus beginning on page F-1. The consolidated statement of operations data
for the year ended December 31, 1996 and the consolidated balance sheet data as
of December 31, 1996 and 1997 are derived from audited financial statements that
do not appear in this prospectus. The financial information as of June 30, 2000
and for the six-months ended June 30, 1999 and 2000 was derived from our
unaudited consolidated financial statements, which are also included in this
prospectus and include, in the opinion of our management, all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
the fair presentation of our financial position and results of operations for
those periods. The historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 25.
The pro forma consolidated financial information gives effect to the
acquisitions of Mobeo, LocusOne, Riverbed, NetSearch and IFX and the related
formation of Sila and the investments in VeriStar, ePhones, ParkStone and
MindSurf. The pro forma net loss per share information for the historical
periods presented gives effect to our conversion from a limited liability
company to a corporation immediately prior to our initial public offering.
We have provided the pro forma consolidated financial information for
informational purposes only and you should not assume that our results would
actually have been as shown if we had acquired Mobeo, LocusOne, Riverbed,
NetSearch and IFX and the related formation of Sila on the assumed dates or made
the investments, or that the information projects what our results will be as a
result of the acquisitions or the formation of Sila or the investments. The pro
forma consolidated statement of operations information assumes that the
transactions occurred on January 1, 1999, and the pro forma consolidated balance
sheet information assumes that the transactions occurred on June 30, 2000. See
our, Mobeo's, LocusOne's and Riverbed's financial statements and notes to those
statements included in this prospectus beginning on page F-1.
23
<PAGE> 25
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------- ----------------------------------
HISTORICAL 1999 PRO HISTORICAL 2000 PRO
------------------------------------- FORMA ------------------- FORMA
1996 1997 1998 1999 CONSOLIDATED 1999 2000 CONSOLIDATED
------ ------- ------- -------- ------------ ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Subscriber revenue.................. $ -- $ 161 $ 549 $ 3,732 $ 26,720 $ 599 $ 9,674 $ 14,770
Engineering services revenue........ 1,355 1,625 963 2,594 2,594 188 3,040 3,040
Software and related services
revenue........................... -- -- -- -- 2,443 -- 3,442 3,696
------ ------- ------- -------- --------- ------- --------- ---------
Total revenue................... 1,355 1,786 1,512 6,326 31,757 787 16,156 21,506
Cost of subscriber revenue.......... -- 447 797 2,110 12,299 531 5,469 7,846
Cost of engineering services
revenue........................... 1,007.. 846 304 1,366 1,366 120 1,640 1,640
Cost of software and related
services revenue.................. -- -- -- -- 1,540 -- 1,542 1,818
------ ------- ------- -------- --------- ------- --------- ---------
Total cost of revenue........... 1,007 1,293 1,101 3,476 15,205 651 8,651 11,304
------ ------- ------- -------- --------- ------- --------- ---------
Gross profit.................... 348 493 411 2,850 16,552 136 7,505 10,202
Operating expenses:
Research and development............ 161 734 1,267 2,614 6,325 1,002 7,921 8,802
General and administrative.......... 395 1,505 2,773 5,891 11,710 1,583 15,269 17,640
Selling and marketing............... -- 333 840 2,095 10,137 555 21,809 24,029
Depreciation and amortization....... 45 189 265 1,089 268,339 194 84,451 135,627
Option and warrant expense.......... -- 40 33 19,198 31,601 1,263 6,050 7,207
------ ------- ------- -------- --------- ------- --------- ---------
Total operating expenses.......... 601 2,801 5,178 30,887 328,112 4,597 135,500 193,305
------ ------- ------- -------- --------- ------- --------- ---------
Operating loss........................ (253) (2,308) (4,767) (28,037) (311,560) (4,461) (127,995) (183,103)
Interest income, net.................. 8 7 70 (60) 126 141 16,976 17,026
Equity in losses of investments....... (172) (144) -- (2,425) (2,425) -- (13,828) (13,828)
Realized gain (loss) on sale of
investments......................... -- (302) 4 (169) (169) -- -- --
Minority interest..................... -- -- -- -- 10,378 -- 1,662 5,290
Income tax benefit.................... -- -- -- -- 908 -- -- 575
------ ------- ------- -------- --------- ------- --------- ---------
Net loss.............................. $ (417) $(2,747) $(4,693) $(30,691) $(302,742) $(4,320) $(123,185) $(174,040)
====== ======= ======= ======== ========= ======= ========= =========
Net loss per share-basic and
diluted............................. $ (3.65)
=========
Weighted average shares used in
computing net loss per share-basic
and diluted......................... 33,765
=========
Pro forma net loss per share-basic and
diluted............................. $(0.04) $ (0.22) $ (0.29) $ (1.45) $ (11.76) $ (0.22) $ (4.92)
====== ======= ======= ======== ========= ======= =========
Pro forma weighted average shares used
in computing net loss per
share-basic and diluted............. 10,555 12,656 15,916 21,207 25,745 19,878 35,369
====== ======= ======= ======== ========= ======= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
AS OF DECEMBER 31, -------------------------
---------------------------------- PRO FORMA
1996 1997 1998 1999 ACTUAL CONSOLIDATED
------ ----- ------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 51 $ 132 $1,755 $ 78,542 $1,193,450 $1,134,850
Working capital (deficit)................................. 181 (323) 7,519 83,128 1,212,670 1,154,070
Total assets.............................................. 1,269 822 8,765 102,534 2,703,242 2,703,242
Total debt................................................ -- 150 -- -- 324,411 324,411
Members' capital.......................................... 1,101 74 8,030 -- -- --
Stockholders' equity...................................... -- -- -- 98,342 2,266,472 2,266,472
</TABLE>
24
<PAGE> 26
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 financial statements and the notes
thereto and the unaudited pro forma condensed consolidated financial information
included in this prospectus beginning on page F-1.
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. One of the
acquisitions, NetSearch, has an additional $65.0 million earn-out payable over
the 13 months subsequent to the purchase date for reaching specified revenue
targets. In addition, on August 11, 2000, we signed a letter of intent to
acquire all of the capital stock of Cerulean Technology, Inc. for a purchase
price of $150.0 million; $75.0 million in cash and $75.0 million in shares of
our common stock.
Investments. In August 1999, we formed a new company with 3Com called
OpenSky, which was renamed OmniSky in October 1999. We formed OmniSky with 3Com
to pursue opportunities in the emerging consumer and business mass markets for
wireless e-mail, Internet access and other electronic transactions applications.
As of June 30, 2000, we owned approximately 30.4% of OmniSky. In the course of
developing our business we also made investments, or have agreed to make
investments, in Inciscent, Data Critical, Novatel Wireless, VeriStar (formerly
SmartTouch), MindSurf, ParkStone and ePhones in the aggregate amount of
approximately $99.0 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.
Formation of Sila. On May 4, 2000, we formed Sila Communications 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 $22.0
million and a European paging company for the remaining 40.0% interest. The
results of Sila are consolidated for the purpose of 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 and European operations, and
each of these segments typically has distinct management teams. We derive
recurring revenue from subscribers in three of these segments and from corporate
and other (revenues in the software products segment are from license fees).
25
<PAGE> 27
Our cost to acquire subscribers depends upon a variety of factors including
the allocation of intangible expenses relating to acquisitions and general sales
and marketing efforts to the acquisition of subscribers as opposed to other
areas of our business. When our business involved fewer elements and these costs
could be allocated more clearly, the overall cost to acquire subscribers
exceeded the revenue expected during the one-year terms of the associated
contracts, and that may continue to be true depending on how costs are allocated
to subscriber contracts. In any event, we expect that revenue from new customers
will begin to exceed subscriber acquisition costs when the number of subscribers
increases to cover our fixed costs. This will depend on the rate at which
subscriber levels increase, and we cannot determine when this will occur or
assure that it will ever occur.
We also derive revenue from wireless engineering services provided on an
hourly basis or on a fixed fee per project basis. For the six months ended June
30, 2000, we performed work under contracts with OmniSky, Inciscent, Merrill
Lynch and Response Services LLC.
We also derive revenue from the licensing of software products, including
the AIM platform, the ScoutWare software suite and the e-Mobile software suite.
For the six months ended June 30, 2000, approximately 70.0% of the revenue from
the ScoutWare software suite was derived from sales to Spyglass, Security
Source, Extensity, Oracle, NowSpeed and Medtronic.
Operating losses. Since our inception, we have invested significant
capital to build our customer service and network operations 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 and IFX and the 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 in our financial services, logistics, European
operations segments and other revenue from the sale of wireless data services.
We derive revenue in our software products segment from the sale of software
licenses and related services. We also derive revenue from the provision of
wireless engineering services across various segments. Revenue from wireless
data services may consist of:
- a one time non-refundable activation fee, which we recognize upon service
activation;
- monthly per-subscriber service fees, which we recognize as services are
provided;
- monthly per-subscriber exchange fees for access to financial information
from the securities exchanges and markets, which we recognize as services
are provided; and
- monthly fees for providing access to our network operations centers.
We also derive revenue from providing our subscribers with 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 revenues and costs of the subscriber products that we offer are common
for distinct product types, even though these product types are offered across
our different market segments. Accordingly, we believe it is valuable to analyze
our subscriber base on the basis of distinct product types that have similar
revenue and cost characteristics. These distinct product types include
enterprise ASP/ISP services, premium information and commerce services and
network hosting services.
26
<PAGE> 28
Enterprise ASP/ISP services wirelessly connect critical business functions
of an enterprise within the enterprise or to third parties such as customers.
Through our enterprise ASP/ISP 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 revenues 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 the enterprise and wireless carriers.
Hosting services may be charged per subscriber or as a flat fee per month. Per
subscriber rates typically range between $5 and $25 per month.
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 and IFX acquisitions and the 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, IFX and the pending acquisition of Cerulean, 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.
27
<PAGE> 29
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.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Subscriber revenue. The following table sets forth the number of
subscribers for each of our product types as of June 30, 1999 and 2000.
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------
1999 2000
-------- ------
<S> <C> <C>
Enterprise ASP/ISP services................................. -- 1,336
Premium information and commerce services................... 982 17,002
Network hosting services.................................... -- 1,135
--- ------
Total subscribers................................. 982 19,473
</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, and subscriber additions subsequent to the
integration of these companies. The remaining increase was due to the attraction
of new subscribers to our services and the introduction of new services. Growth
in enterprise ASP/ISP services between June 30, 1999 and June 30, 2000 is
attributable to recent releases of several online trading products. Growth in
premium information and commerce services between June 30, 1999 and June 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 $9.7 million for the six months
ended June 30, 2000 from $599,000 for the six months ended June 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 $8.3 million for the six months ended June 30, 2000. Most
of the remaining increase in 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.
An analysis of subscriber revenue by reportable segments and corporate and
other is as follows:
- Subscriber revenue from our financial services segment was $6.0
million for the six months ended June 30, 2000 and $599,000 for the
six months ended June 30, 1999. This increase was primarily due to
the acquisition of Mobeo and the rollout of online trading products.
- There was no subscriber revenue from our software products segment
for the six months ended June 30, 2000 and 1999.
- Subscriber revenue from our logistics segment was $70,000 for the
six months ended June 30, 2000 and there was no subscriber revenue
from logistics for the six months ended June 30, 1999. This increase
was primarily due to the acquisition of LocusOne and subsequent
additions to its subscriber base.
- Subscriber revenue from our European operations segment was $3.3
million for the six months ended June 30, 2000 and there was no
subscriber revenue from European operations for the six months ended
June 30, 1999. This increase was due to the acquisition of IFX and
the related formation of Sila.
- Subscriber revenue from corporate and other was $312,000 for the six
months ended June 30, 2000. There was no subscriber revenue from
corporate and other for the six months ended
28
<PAGE> 30
June 30, 1999. This increase was primarily due to the acquisition of NetSearch
and subsequent additions to its subscriber base.
On a pro forma basis, giving effect to the acquisitions of LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, subscriber
revenue for the six months ended June 30, 2000 was $14.8 million. Acquisitions
accounted for $8.7 million or 59% of this pro forma revenue, with Sila alone
accounting for $7.9 million or 54% of this pro forma revenue.
Cost of subscriber revenue. Cost of subscriber revenue increased to $5.5
million for the six months ended June 30, 2000 from $531,000 for the six months
ended June 30, 1999. The increase was 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
NetSearch and IFX and the related formation of Sila. Cost of subscriber revenue
related to acquisitions totaled $4.5 million for the six months ended June 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 percent of subscriber revenue
decreased for the six months ended June 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 $454,000 of expense in the first six
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
$3.6 million for the six months ended June 30, 2000 and $531,000 for
the six months ended June 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 six months ended June 30, 2000 and 1999.
- Cost of subscriber revenue from our logistics segment was $40,000
for the six months ended June 30, 2000 and there was no cost of
subscriber revenue from logistics for the six months ended June 30,
1999. This increase was primarily due to the acquisition of LocusOne
and the subsequent addition of new subscribers.
- Cost of subscriber revenue from our European operations segment was
$1.7 million for the six months ended June 30, 2000 and there was no
cost of subscriber revenue from European operations for the six
months ended June 30, 1999. This increase was primarily due to the
acquisition of IFX and the related formation of Sila.
- Cost of subscriber revenue from corporate and other was $127,000 for
the six months ended June 30, 2000 and there was no cost of
subscriber revenue from corporate and other for the six months ended
June 30, 1999. This increase was primarily due to the acquisition of
NetSearch and the subsequent addition of subscribers.
On a pro forma basis, giving effect to the acquisitions of LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, cost of
subscriber revenue for the six months ended June 30, 2000 was $7.8 million.
Acquisitions accounted for $4.3 million or 55% of this pro forma revenue, with
Sila alone accounting for $4 million or 51% of this pro forma revenue.
Engineering services revenue. Engineering services revenue increased to
$3.0 million for the six months ended June 30, 2000 from $188,000 for the six
months ended June 30, 1999. This increase was
29
<PAGE> 31
primarily due to our engineering contract with OmniSky and Inciscent. We
recognized $1.6 million under this contract for the six months ended June 30,
2000.
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
$308,000 for the six months ended June 30, 2000 and there was no
engineering services revenue from the financial services segment for
the six months ended June 30, 1999. This increase was primarily due
to engineering work performed for the development of online trading
applications.
- Engineering services revenue from our software products segment was
$167,000 for the six months ended June 30, 2000 and there was no
engineering services revenue from the software products segment for
the six months ended June 30, 1999. This increase was primarily due
to the acquisition of Riverbed.
- Engineering services revenue from our logistics segment for the six
months ended June 30, 2000 was $744,000 and there was no engineering
services revenue from the logistics segment for the six months ended
June 30, 1999. The increase was due to our Response Services
contract.
- There was no engineering services revenue from our European
operations segment for the six months ended June 30, 2000 and 1999.
- Engineering services revenue from corporate and other was $1.8
million for the six months ended June 30, 2000. There was no
engineering services revenue from corporate and other for the six
months ended June 30, 1999. This increase was primarily due to our
engineering services contracts with OmniSky and Inciscent.
The acquisitions of LocusOne, Riverbed, NetSearch and IFX and the related
formation of Sila did not have a material effect on engineering services revenue
on a pro forma basis for the six months ended June 30, 2000.
Cost of engineering services revenue. Cost of engineering services revenue
increased to $1.6 million for the six months ended June 30, 2000 from $120,000
for the six months ended June 30, 1999. This increase was primarily due to our
engineering services contracts with OmniSky 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 $393,000 for the six months ended June 30, 2000 and
there was no cost of engineering services revenue from the financial
services segment for the six months ended June 30, 1999. This
increase was primarily 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 $34,000 for the six months ended June 30, 2000 and there
was no cost of engineering services revenue from the software
products segment for the six months ended June 30, 1999. This
increase was primarily due to the acquisition of Riverbed.
- Cost of engineering services revenue from our logistics segment for
the six months ended June 30, 2000 was $548,000 and there was no
cost of engineering services revenue from the logistics segment for
the six months ended June 30, 1999. The increase was due to our
Response Services contract.
30
<PAGE> 32
- There was no cost of engineering services revenue from our European
operations segment for the six months ended June 30, 2000 and 1999.
- Cost of engineering services revenue from corporate and other was
$665,000 for the six months ended June 30, 2000 and there was no
cost of engineering services revenue from corporate and other for
the six months ended June 30, 1999. This increase was primarily due
to our engineering services contracts with OmniSky and Inciscent.
The acquisitions of LocusOne, Riverbed, NetSearch and IFX and the related
formation of Sila did not have a material effect on the cost of engineering
services revenue on a pro forma basis for the six months ended June 30, 2000.
Software and related services revenue. Software and related services
revenue was $3.4 million for the six months ended June 30, 2000. We did not have
any software and related services revenue for the six months ended June 30,
1999. Software and related services revenue was generated from the sale of
licenses and services of the ScoutWare software platform and e-Mobile Delivery
platform following our acquisitions of Riverbed and LocusOne 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 the
financial services segment.
- Software and related services revenue from the software products
segment was $2.0 million for the six months ended June 30, 2000.
There was no software and related services revenue from the software
products segment for the six months ended June 30, 1999. The
increase was primarily due to our acquisition of Riverbed and
additional licenses sold since the acquisition.
- Software and related services revenue from the logistics segment was
$1.4 million for the six months ended June 30, 2000. There was no
software and related services revenue from the logistics segment for
the six months ended June 30, 1999. The increase was due primarily
to our acquisition of LocusOne and additional licenses sold since
the acquisition.
- Software and related services revenue from our European operations
segment was $88,000 for the six months ended June 30, 2000. There
was no software and related services revenue from the European
operations segment for the six months ended June 30, 1999. The
increase was due primarily to our acquisition of IFX and the related
formation of Sila.
- There was no software and related services revenue from corporate
and other.
On a pro forma basis, giving effect to the acquisitions of LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, software revenue
and related services for the six months ended June 30, 2000 was $3.7 million.
Acquisitions accounted for $3.6 million or 97% of this pro forma revenue.
Cost of software and related services revenue. Cost of software and
related services revenue was $1.5 million for the six months ended June 30, 2000
relating to royalty fees and personnel costs. Substantially all of these costs
were derived from the acquisitions of LocusOne and Riverbed. We did not have any
costs of software and related services revenue for the six months ended June 30,
1999.
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 the
financial services segment.
- Cost of software and related services revenue from the software
products segment was $930,000 for the six months ended June 30,
2000. There was no cost of software and related services revenue
from the software products segment for the six months ended June 30,
1999. The increase was due primarily to our acquisition of Riverbed
and additional licenses sold since the acquisition.
31
<PAGE> 33
- Cost of software and related services revenue from the logistics
segment was $612,000 for the six months ended June 30, 2000. There
was no cost of software and related services revenue from the
logistics segment for the six months ended June 30, 1999. The
increase was due primarily 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.
- There was no cost of software and related services revenue from
corporate and other.
On a pro forma basis, giving effect to the acquisitions of LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, cost of software
revenue and related services for the six months ended June 30, 2000 was $1.8
million. Acquisitions accounted for 100% of this pro forma revenue.
Research and development expenses. Research and development expenses
increased to $7.9 million for the six months ended June 30, 2000 from $1.0
million for the six months ended June 30, 1999. This increase was primarily due
to the hiring of additional engineers for increased research and development
activities associated with the development of our AIM software platform, our XML
framework and wireless data services. This increase included one-time charges of
$2.2 million for in-process research and development in connection with our
acquisitions of Riverbed and IFX in 2000.
On a pro forma basis, giving effect to the acquisitions of LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, research and
development expenses for the six months ended June 30, 2000 were $8.8 million.
Acquisitions accounted for $3.4 million or 38% of this pro forma revenue, with
Riverbed alone accounting for $3.0 million or 34% of this pro forma revenue.
General and administrative expenses. General and administrative expenses
increased to $15.3 million for the six months ended June 30, 2000 from $1.6
million for the six months ended June 30, 1999. This increase was primarily due
to the addition of personnel performing general corporate and business
development activities and the acquisitions of Mobeo, LocusOne, Riverbed,
NetSearch and IFX and the related formation of Sila since the same period in the
prior year.
On a pro forma basis, giving effect to the acquisitions of LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, general and
administrative expenses for the six months ended June 30, 2000 were $17.6
million. Acquisitions accounted for $6.2 million or 35% of this pro forma
revenue.
Selling and marketing expenses. Selling and marketing expenses increased
to $21.8 million for the six months ended June 30, 2000 from $555,000 for the
six months ended June 30, 1999. The 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 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.
On a pro forma basis, giving effect to the acquisitions of LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, selling and
marketing expenses for the six months ended June 30, 2000 were $24.0 million.
Acquisitions accounted for $8.2 million or 34% of these expenses with Sila
accounting for $2.1 million or 9% and Riverbed accounting for $5.6 million or
23% of these expenses, respectively.
Depreciation and amortization. Depreciation and amortization increased to
$84.5 million for the six months ended June 30, 2000 from $194,000 for the six
months ended June 30, 1999. These increases were primarily due to amortization
of intangibles relating to the acquisitions of Mobeo, LocusOne, Riverbed,
NetSearch and IFX and the related formation of Sila as well as additional
capital expenditures.
On a pro forma basis, giving effect to the acquisitions of LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, depreciation and
amortization expenses for the six months ended June 30, 2000 was $135.6 million.
Acquisitions accounted for $133 million or 98% of these expenses with Riverbed
alone accounting for $112.5 million or 83% of these expenses.
32
<PAGE> 34
Option and warrant expense. Option and warrant expense increased to $6.1
million for the six months ended June 30, 2000 from $1.3 million for the six
months ended June 30, 1999. The increases were 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 increases were
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.
On a pro forma basis, giving effect to the acquisitions of LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, option and
warrant expenses for the six months ended June 30, 2000 were $7.2 million.
Acquisitions accounted for $1.2 million or 16% of these expenses with LocusOne
alone accounting for $861,000 or 12% of these expenses.
Interest income, net. Net interest income increased to $17.0 million for
the six months ended June 30, 2000 from $141,000 for the six months ended June
30, 1999. The increases were primarily due to an increase in interest earned on
cash and cash equivalents following the completion of our follow-on offering on
March 17, 2000.
Equity in losses of investments. Equity in losses of investments was $13.8
million for the six months ended June 30, 2000. We had no equity losses in
investments for the six months ended June 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 ramp up their operations.
Minority interest. Minority interest was $1.7 million for the six months
ended June 30, 2000 relating to Reuters' proportional share of losses in Sila,
which is consolidated into our financial statements. We expect that Sila will
continue to incur losses as it ramps up its operations in Europe.
On a pro forma basis, giving effect to the acquisition IFX and the related
formation of Sila, minority interest for the six months ended June 30, 2000 was
$5.3 million, all of which is accounted for by Sila.
FISCAL YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Subscriber revenue. Subscriber revenue of $161,000 for the year ended
December 31, 1997 is attributable to our AirBroker service, which provides
real-time financial information via cellular phones. Subscriber revenue
increased to $549,000 for the year ended December 31, 1998 primarily due to the
launch of Reuters MarketClip in March 1998. Subscriber revenue increased to $3.7
million for the year ended December 31, 1999 as a result of an increase in
MarketClip subscribers, the introduction of TradeRunner and the acquisition of
Mobeo in September 1999. Services acquired from Mobeo contributed revenue of
$2.4 million for the year ended December 31, 1999.
On a pro forma basis, giving effect to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, subscriber
revenue for the year ended December 31, 1999 was $26.7 million. Acquisitions
accounted for $25.4 million or 95% of this pro forma revenue, with Sila alone
accounting for $15.2 million or 57% of this pro forma revenue.
Engineering services revenue. Engineering services revenue decreased from
$1.6 million for the year ended December 31, 1997 to $1.0 million for the year
ended December 31, 1998 and increased to $2.6 million for the year ended
December 31, 1999. The decrease in engineering services revenue from 1997 to
1998 was primarily due to our decision to focus our efforts on developing our
AIM software platform and wireless data services. One of our investors accounted
for approximately 37% of engineering services revenue for 1997. The increase
from 1998 to 1999 was primarily due to the contract with OmniSky. We recognized
$2.2 million under this contract for the year ended December 31, 1999.
The acquisitions of Mobeo, LocusOne, Riverbed, NetSearch and IFX and the
related formation of Sila did not have a material effect on engineering services
revenue on a pro forma basis for the year ended December 31, 1999.
33
<PAGE> 35
Software and related services revenue. We did not earn any software and
related services revenue in 1997, 1998 and 1999. On a pro forma basis, giving
effect to the acquisitions of Mobeo, LocusOne, Riverbed, NetSearch and IFX and
the related formation of Sila, software revenue and related services for the
year ended December 31, 1999 was $2.4 million. Acquisitions accounted for all of
this pro forma revenue with LocusOne alone accounting for $1.6 million or 67%.
Cost of subscriber revenue. Cost of subscriber revenue increased from
$447,000 for the year ended December 31, 1997 to $797,000 for the year ended
December 31, 1998 and to $2.1 million for the year ended December 31, 1999. We
began to incur costs of subscriber revenue in 1997 with the March 1997 launch of
our AirBroker service. The increase in the cost of subscriber revenue from 1997
to 1998 was primarily due to the launch of the Reuters MarketClip service in
March 1998. The increase from 1998 to 1999 was a result of an increase in
MarketClip subscribers, the introduction of TradeRunner and the acquisition of
Mobeo in September 1999. Cost of subscriber revenue from services acquired from
Mobeo totaled $859,000 in 1999. We expect the number of subscribers for
financial services and online trading services to increase resulting in an
increase in the cost of subscriber revenue. Mobeo has entered into a new airtime
supply agreement with a paging company.
On a pro forma basis, giving effect to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, cost of
subscriber revenue for the year ended December 31, 1999 was $12.3 million.
Acquisitions accounted for $11.0 million or 89% of this pro forma revenue, with
Sila alone accounting for $7.5 million or 61% of this pro forma revenue.
Cost of engineering services revenue. Cost of engineering services revenue
decreased from $846,000 for the year ended December 31, 1997 to $304,000 for the
year ended December 31, 1998 and increased to $1.4 million for the year ended
December 31, 1999. The decrease from 1997 to 1998 was primarily due to our
decision to focus our efforts on developing our AIM software platform and
wireless data services. The increase from 1998 to 1999 was primarily due to the
contract with OmniSky.
The acquisitions of Mobeo, LocusOne, Riverbed, NetSearch and IFX and the
related formation of Sila did not have a material effect on the cost of
engineering services revenue on a pro forma basis for the year ended December
31, 1999.
Cost of software and related services revenue. We had no costs associated
with software and related services revenue in 1997, 1998 and 1999. However, we
did incur research and development expenses as discussed below.
On a pro forma basis, giving effect to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, cost of software
revenue and related services for the year ended December 31, 1999 was $1.5
million. Acquisitions accounted for all of this pro forma cost of revenue.
Research and development expenses. Research and development expenses
increased from $734,000 for the year ended December 31, 1997 to $1.3 million for
the year ended December 31, 1998 and to $2.6 million for the year ended December
31, 1999. These increases in research and development expenses were primarily
due to the hiring of additional engineers for increased research and development
activities associated with the development of our AIM software platform and
wireless data services.
On a pro forma basis, giving effect to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, research and
development expenses for the year ended December 31, 1999 were $6.3 million.
Acquisitions accounted for $4.2 million or 67% of these expenses.
General and administrative expenses. General and administrative expenses
increased from $1.5 million for the year ended December 31, 1997 to $2.8 million
for the year ended December 31, 1998 and to $5.9 million for the year ended
December 31, 1999. These increases were primarily due to the addition of
personnel performing general corporate and business development functions.
On a pro forma basis, giving effect to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, general and
administrative expenses for the year ended December 31, 1999 were $11.7 million.
Acquisitions accounted for $6.2 million or 53% of these expenses.
34
<PAGE> 36
Selling and marketing expenses. Selling and marketing expenses increased
from $333,000 for the year ended December 31, 1997 to $840,000 for the year
ended December 31, 1998 and to $2.1 million for the year ended December 31,
1999. Of the increase from 1997 to 1998, $324,000 was due to an increase in
advertising and promotion costs related to the launch of Reuters MarketClip in
March 1998, and the remaining amount relates to an increase in personnel and
costs associated with sales and marketing. From 1998 to 1999, the increase
relates primarily to increases in the number of sales and marketing personnel.
This expense is expected to increase significantly in 2000 as a result of
increased spending in advertising.
On a pro forma basis, giving effect to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, selling and
marketing expenses for the year ended December 31, 1999 were $10.1 million.
Acquisitions accounted for $8.5 million or 84% of these expenses.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased from $189,000 for the year ended December 31, 1997 to
$265,000 for the year ended December 31, 1998 and to $1.1 million for the year
ended December 31, 1999. The increase from 1998 to 1999 was primarily due to
amortization of goodwill and other intangibles related to the Mobeo acquisition
and additional capital expenditures.
On a pro forma basis, giving effect to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, depreciation and
amortization expenses for the year ended December 31, 1999 were $268.3 million.
Acquisitions accounted for $267.9 million or over 99% of these expenses with
Riverbed alone accounting for $225.6 million or 84%.
Option and warrant expense. Option and warrant expense decreased from
$40,000 for the year ended December 31, 1997 to $33,000 for the year ended
December 31, 1998 and increased to $19.2 million for the year ended December 31,
1999. The changes in option and warrant expense for 1998 and 1999 reflect
changes in the extent to which options with exercise prices less than the fair
value on the date of grant were granted during the period. Approximately $16.5
million of the expense in 1999 relates to warrants granted to the chief
executive officer and other key executives which became fully vested as a result
of our initial public offering.
On a pro forma basis, giving effect to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, option and
warrant expenses for the year ended December 31, 1999 were $31.6 million.
Acquisitions accounted for $12.4 million or 39% of these expenses with LocusOne
alone accounting for $9.2 million or 29% of these expenses.
On a pro forma basis, giving effect to the acquisitions of Mobeo, LocusOne,
Riverbed, NetSearch and IFX and the related formation of Sila, minority interest
for the year ended December 31, 1999 was $10.4 million, all of which is
accounted for by Sila.
Interest income, net. Net interest income increased from $8,000 for the
year ended December 31, 1997 to $70,000 for the year ended December 31, 1998 and
decreased to net interest expense of $60,000 for the year ended December 31,
1999. The increase from 1997 to 1998 was primarily due to increased cash
balances as a result of our private placement financings completed in August
1998 and October 1998. The decrease to a net expense from 1998 to 1999 relates
to interest and related expense of a loan that funded the purchase price of
Mobeo, partially offset by interest earned on the proceeds from our initial
public offering. The loan was repaid at the time of our initial public offering.
Equity in losses of investments. Our equity in the loss of Real World
Solutions, a joint venture, and Navox, Inc., was $145,000 for the year ended
December 31, 1997. This amount related to losses of Real World Solutions and
Navox recorded by us under the equity method of accounting. The $2.4 million of
equity in losses of investments in 1999 relates to our proportionate share of
losses in OmniSky under the equity method of accounting.
Realized loss on sale of investment. In the year ended December 31, 1997,
we sold our interest in Real World Solutions and recorded a loss of $302,000. In
the year ended December 31, 1999, we recorded a loss of approximately $169,000
resulting from the sale of short-term investments.
35
<PAGE> 37
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private placements of our equity securities, our initial public offering, our
follow-on offering of common stock and our convertible subordinated notes, which
in the aggregate have resulted in net proceeds of approximately $1.5 billion
through June 30, 2000. On March 17, 2000, we completed our follow-on offering of
common stock and our offering of subordinated notes, and raised net proceeds
(after expenses of the offering) of approximately $1.4 billion. As of June 30,
2000, we had approximately $1.2 billion in cash and short-term investments and
our working capital was approximately $1.2 billion.
Net cash used in operating activities was $5.7 million and $2.5 million for
the six months ended June 30, 2000 and 1999, respectively. The principal use of
cash in each of these periods was to fund our losses from operations.
Net cash used in investing activities was $239.0 million for the six months
ended June 30, 2000. Net cash provided by investing activities was $1.2 million
for the six months ended June 30, 1999. For the six months ended June 30, 2000,
we used cash for the purchase of property and equipment, investments in
Metrocall, OmniSky, Inciscent, Data Critical and Novatel and to acquire LocusOne
Communications, NetSearch and IFX and the formation of Sila. Cash provided by
investing activities for the six months ended June 30, 1999 was primarily from
the sale of short-term investments, partially offset by the purchase of property
and equipment.
Net cash provided by financing activities was $1.4 billion for the six
months ended June 30, 2000. There was no cash provided by financing activities
for the six months ended June 30, 1999. For the six months ended June 30, 2000,
cash provided by financing activities was primarily attributable to proceeds
received from our follow-on offering of common stock and convertible
subordinated notes.
Since June 30, 2000, and over the next 12 months, we have had or expect to
have the following cash expenditures and requirements:
- we invested $5.6 million in VeriStar Corporation in July 2000;
- we invested $8.0 million in ePhones in July 2000;
- we plan to invest $29.4 million in the launch of MindSurf;
- we plan to pay approximately $75.0 million as part of the purchase
price for our acquisition of Cerulean;
- we plan to invest approximately $15.0 million in ParkStone;
- we estimate we will spend between $20.0 and $25.0 million for
further expansion of our current network operations center, and the
completion of a new network operations center in Arizona;
- we estimate we will pay in excess of $20.0 million to enhance our
sales and marketing activities, including a nationwide broadcast and
print branding and advertising campaign;
- we are committed to purchase 30,400 RIM handheld devices over the
next 12 months. Depending on the mix of products ordered, we
estimate the cost will be between $10.0 and $14.0 million;
- we will pay an earn-out of up to $65.0 million to the sellers of
NetSearch if certain revenue targets are met through June, 2001;
- 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; and
- other potential acquisitions, investments and agreements we may
identify, or are in the process of negotiating.
36
<PAGE> 38
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. This
statement, as amended, is effective for all fiscal quarters beginning after June
15, 2000. We do not expect SFAS No. 133 to have a material effect on our
financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A and SAB 101B which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 provides guidance on necessary disclosures relating
to revenue recognition policies in addition to outlining the criteria that must
be met in order to recognize revenue. Dependant upon the final guidance on SAB
101, which is expected to be issued by the SEC in the fourth quarter of this
year, we may be required to change our policy of recognizing activation fee
revenue upon service activation to recognizing the revenue ratably over the
initial term of the subscription contract. We do not expect this change to have
a material effect on our consolidated results of operations or financial
position.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. Interpretation No. 44 clarifies the application of Opinion 25
for the following issues: (1) the definition of employee for purposes of
applying Opinion 25, (2) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (3) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (4)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000.
QUALITATIVE AND QUANTITATIVE DISCLOSURE REGARDING MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. At June 30, 2000, we had cash and cash equivalents of $1.2
billion and short-term investments of approximately $2.4 million. Cash and cash
equivalents consisted of demand deposits, money market accounts and
investment-grade commercial paper. Short-term investments consisted of highly
liquid investments in debt obligations of the U.S. Government and other highly
rated entities with maturities of up to 30 years. These investments are
classified as available-for-sale and are considered short-term, because we
expect to sell them within 12 months. These investments are subject to interest
rate risk and will fall in value if market interest rates increase. At June 30,
2000, the value of our short-term investments was approximately $2,400 more than
our cost. If market interest rates 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 IFX and the related formation of Sila and the
commencement of U.S. sales to foreign countries, we have been exposed to foreign
currency exchange risk. All sales from the United States to foreign countries
have been denominated in U.S. dollars. Sila has been able to fund its ongoing
operations from internally generated cash and, therefore, has not required
funding from us. Moreover, Sila's offices located in various European countries
require minimal funding from Sila. Therefore, due to the insignificant amount of
currency being exchanged, we have not hedged or otherwise attempted to mitigate
our foreign currency exchange risk.
37
<PAGE> 39
BUSINESS
OVERVIEW
We provide wireless data services, systems and software enabling people to
use handheld devices for mobile data communications and real-time transactions.
We design, develop, sell and support complete wireless systems for corporations
seeking to make data available to mobile workers or consumers. Our full mobile
and wireless solution, including wireless data engineering and development
expertise, our wireless integration and mobile data management software
products, our customer service center and our network operations centers,
positions us to take advantage of the growing demand for wireless data services.
MARKET OPPORTUNITY
Growth of the Internet, Intranets and Extranets
The Internet and businesses' internal data networks, or intranets, have
emerged as global communications channels that allow users to share information
and conduct real-time business electronically. Technology and communications
research firm International Data Corporation, or IDC, estimates that there were
approximately 245 million worldwide users of the Internet at the end of 1999 and
that the number of users will increase to 643 million by the end of 2003. IDC
also estimates that by 2001 there will be 133 million global intranet users.
Businesses are also increasingly employing extranets, which allow them to
communicate and conduct transactions electronically with their customers and
suppliers. Forrester Research forecasts that business-to-business Internet
commerce in the United States will increase from an estimated $406 billion in
2000 to $2.7 trillion in 2004. All of the projections and estimates in this
"Market Opportunity" section are based on the qualifications described on page
19 of this prospectus.
Growth of Mobile Communications
Individuals are increasingly using mobile devices for convenience and
enhanced productivity when away from their home or office. IDC estimates that in
1999 there were 427 million worldwide cellular and personal communications
systems, or PCS, subscribers, and that number is expected to increase to 1.1
billion in 2003. Use of wireless telecommunications has grown rapidly as
cellular, paging and PCS have become more widely available and affordable for
both the business and mass consumer markets. Advances in technology, regulatory
changes, the introduction of new service providers and simplified pricing plans
have contributed to this growth.
Growth of Wireless Data Applications and Communications
We believe an increasing number of people will carry wireless devices for
data communications rather than for voice communications alone. The latest
wireless communications devices in the United States, including handheld
personal organizers, notebook computers, pagers and mobile phones, are smaller,
less expensive, have longer battery life and more features than earlier devices.
According to publicly available estimates, the U.S. wireless data market will
grow from 3 million subscribers in 1999 to 36 million subscribers in 2003.
Forrester Research forecasts that 7.1 million European business professionals
and young adults will own Web-enabled smartphones using the Wireless Application
Protocol, or WAP, by the end of 2000 and that there will be 40 million Europeans
using WAP smartphones by the end of 2001.
The market for wireless data applications is driven by the increased
reliance on the Internet, intranets and extranets and the emergence of a mobile
workforce. IDC forecasts that the remote and mobile workforce in the United
States will be 47.1 million at the end of 2003. Having grown accustomed to and
dependent on the information and applications available on their personal
computers, we believe workers and consumers want access to similar information
when away from their office or home.
38
<PAGE> 40
Increased Information Technology Outsourcing
As information technology, or IT, systems have become more complex,
companies have increasingly outsourced many of their IT requirements. U.S. firms
are now spending 20% of their IT budgets on outsourcing services, according to
the industry trade publication Internet Week. IDC expects Web spending on IT
products and services to more than double from $119.1 billion in 2000 to $282.5
billion in 2003. Forrester Research predicts that E-business services, the
fastest-growing area of outsourcing, will increase from about $20 billion in
2000 to approximately $50 billion in 2002. These include packaged application
software implementation and support, customer support and network development
and maintenance. Companies are choosing to focus on their core businesses and
seeking to reduce costs associated with developing and maintaining IT networks
and software applications. In addition, by outsourcing, companies avoid major
challenges faced in hiring and retaining qualified IT employees and realize
increased time-to-market benefits.
THE AETHER SOLUTION
Mobile workers and consumers typically gain remote access to electronic
data and transactional capabilities in one of two ways:
- through continuous, real-time communications between databases and
handheld devices using wireless communications networks; or
- by periodically updating, or synchronizing, data between the device and
database using a direct connection, such as a phone line.
We provide the services and resources necessary to provide these capabilities
using our engineering staff, our wireless integration and mobile data management
software products and our customer service and network operations centers. Our
capabilities address most of the common issues companies face when designing,
building and supporting wireless and other mobile data systems.
Issue: Wireless and other mobile data communications systems are complex.
Many information technology managers lack the engineering and system
resources to design, develop, install and maintain new software and
systems that give their companies' workforces and customers mobile
access to corporate applications.
Solution: We provide comprehensive mobile communications services.
We have all the resources necessary to design, develop, install and
maintain wireless and other mobile data communications systems for
customers. We have over 200 engineers. Our engineers use our Aether
Intelligent Messaging software platform, or AIM, to extend corporate
applications to almost any wireless environment. We are also able to
provide a complete suite of software products that extend corporate data
to mobile handheld devices. We have established relationships with the
leading wireless network carriers, including Verizon Wireless, AT&T
Wireless Services and BellSouth Wireless Data. We have negotiated
favorable airtime agreements with these carriers, allowing us to offer
our end users flat-rate pricing no matter how much data is transmitted
or where a device is used. Our network operations centers offer a secure
gateway to wireless networks for data delivered to us by our customers,
and our customer service center provides call center support to end
users. We provide as many, or as few, of these elements as customers
require of us.
Issue: There is a wide variety of incompatible standards.
To build a wireless data system, a business must integrate disparate
networks, devices and operating systems. Companies often require
multiple networks to meet the needs of their workers and customers,
based on their geographic location and preferred devices, which may use
different communications protocols. This can involve complex
negotiations with several wireless carriers.
39
<PAGE> 41
Additionally, companies typically use a variety of operating systems for
their internal data applications.
Solution: Our software and systems can integrate a wide variety of
networks, operating systems and devices.
We give our customers a high degree of flexibility and choice, freeing
them from the need to integrate technologies from a variety of parties
to develop their systems. Our AIM software platform supports the most
widely used wireless data networks in the United States, known as CDPD,
Mobitex, Motient, iDEN and ReFLEX, as well as circuit-switched network
protocols, including GSM and CDMA. Our AIM software platform can
interact with the major operating systems on which most corporate
applications run, including Windows NT, UNIX, Linux and most mainframe
operating systems. Our AIM software platform is also compatible with the
Microsoft micro-browser and the operating system known as EPOC for
handheld devices developed by Symbian Ltd. (a wireless software company
jointly owned by Ericsson, Matsushita Communication Industrial Co.,
Ltd., Motorola, Nokia and Psion PLC). Our WAP Enterprise Center has a
team of engineers dedicated to supporting and developing applications
for WAP, a series of specifications that allow mobile phones to display
Internet information. As a result, our customers' end users can choose
the devices they prefer, including Palm, Windows CE and other personal
organizers, notebook computers, pagers and mobile phones.
As connections to new systems have been needed, our engineers have
adapted our AIM software platform to meet the needs of those systems. We
believe that as the wireless data market evolves there will continue to
be a multitude of protocols for networks, operating systems and devices.
We plan to update our software platforms continually to address the
ongoing need to integrate these protocols. We believe we are the only
firm that currently provides this level of service to companies seeking
to develop wireless data systems.
Issue: Wireless data transmissions are slow and expensive.
Most of today's wireless data networks operate at less than half the
speed of telephone dial-up connections, limiting the delivery of useful
data to only small amounts of text and few graphics. Data feeds
typically include large amounts of unnecessary data, including message
headers and routing information. Because wireless carriers typically
charge by the kilobyte of data transmitted, extraneous data add
unnecessary cost.
Solution: Our systems optimize data transmissions for wireless networks.
Our AIM software platform optimizes data transmission by employing
compression and data-thinning techniques. As a result, users get
information faster when they send queries from their devices, and they
get more useful information for the price. Our AIM software platform
reduces the number of data packets required in a typical wireless
transmission by as much as 66.0%. We ensure reliable message delivery
through measures that confirm data have arrived properly and resend data
if no acknowledgement has been received.
Over the next several years, wireless carriers and equipment vendors are
planning to build so-called third generation, or 3G, networks, which
promise to transmit data at much higher speeds and offer more
compatibility among devices. No matter how fast networks become, the
need for low cost, secure and reliable data transmission will continue.
We have designed our AIM software platform to grow with the capabilities
of wireless networks. For example, we are currently working with U.S.,
European, Middle Eastern and African wireless network carriers to
develop our services to operate over networks using General Packet Radio
Services, known as GPRS, a new high-speed wireless network standard.
Issue: Corporate managers require rigorous security standards when
entrusting their data to third parties.
Solution: We provide secure network operations centers.
40
<PAGE> 42
Our network operations centers have numerous redundant elements and
serve as a high-security physical link between data feeds from our
business customers' and others' data systems and wireless carrier
networks. This relieves corporations from the burden of constructing
similar facilities. Our network operations centers are capable of
meeting the security standards of our customers who include leading
financial institutions that we believe have stringent security
requirements. We believe that our network operations centers are a vital
component of our wireless data service offerings that differentiates us
from our competitors. We encrypt, or scramble, digital messages as they
move along wireless networks using technology licensed from Certicom
Corp. We recently began to develop an additional network operations
center in Tempe, Arizona to serve, among other things, as a backup
facility, which we expect to be operational in the beginning of 2001.
Issue: Corporate information technology managers are reluctant to
configure and maintain inventories of wireless devices and provide
ongoing customer support.
Solution: We provide product fulfillment and customer service.
We send end users fully functioning mobile devices configured for the
wireless data networks and applications they will use. We also have a
customer service center providing ongoing end user support. Companies do
not have to worry about configuring devices for use by their employees
and customers, fixing broken units, handling warranties or answering
questions from users.
THE AETHER STRATEGY
Our strategy is to be the dominant provider of wireless data services and
systems to corporations by using our engineering expertise, our software
platforms, our customer service and network operations centers and our other
resources. We seek to maximize recurring revenue by developing wireless data
services. We believe our capabilities and experience have established us as an
early market leader in wireless data services, and a key element of our strategy
is to move quickly into new opportunities to extend our leadership position. Our
strategy includes the following key elements:
Target a variety of industries and market segments for development of
wireless data communications and services in the United States and
internationally. Our strategy initially focused on developing services for the
financial services sector, whose participants we believe are among the earliest
adopters of wireless data services. We have since moved into and continue to
expand into other industries and market segments in the United States and
internationally, including software products, logistics, field sales,
healthcare, wireless commerce, mobile government and messaging. We execute this
strategy in the following ways:
- we acquire existing companies for reasons such as obtaining proprietary
technologies or a significant customer base in a targeted market segment;
- we form joint ventures with strategic partners in new market segments or
geographies; and
- we enter into strategic relationships with companies that develop new
technology or have existing products that can be used in combination with
our services or extend their reach. In connection with these
relationships, we may also make equity investments, through our recently
formed investment vehicle, Aether Capital, when we believe it will
strengthen our working relationship and create additional value for our
stockholders.
Offer the widest range of software products that address every aspect of
wireless integration and mobile data management for mobile workers and
consumers. We plan to provide services and products that meet all mobile and
wireless software needs, including our AIM wireless integration software and the
ScoutWare mobile data management software suite. These offerings give corporate
software engineers a complete set of development tools for designing mobile and
wireless data applications for a wide variety of handheld devices and networks.
Expand our customer base and strengthen the Aether brand through enhanced
sales and marketing efforts. We have increased our sales and marketing
expenditures to advertise the Aether brand and
41
<PAGE> 43
increase our direct sales force. We intend to build our sales force focused on
companies that want to provide wireless access to their data applications. We
will target large corporations in industries that both invest heavily in
technology and have significant numbers of mobile customers or employees. In
addition, we will continue to build relationships with third party software
developers who wish to use our software platforms to provide their applications
with wireless capabilities. Our branding efforts will include advertising,
public relations, speaking engagements and sponsorship of major conferences.
Maintain and strengthen our strategic relationships with suppliers and
customers. A key to our ability to provide complete wireless data services to
our customers is our relationships with wireless network carriers and
manufacturers of wireless devices. These relationships take time to develop, and
having already formed them provides us with an advantage in getting our services
to market before our competitors. We intend to maintain and strengthen these
relationships by negotiating more cost-effective rate plans with existing
wireless network carriers, testing our wireless services with providers of next-
generation, high-speed wireless networks and working with manufacturers and
industry forums to guide development of new devices and applications. We also
invest in suppliers when appropriate to strengthen our relationships.
Maximize recurring revenue. Our financial model is focused on creating and
maintaining monthly recurring revenue. We seek to enter into customer contracts
that will provide a continuous revenue stream over the contract period. Although
we do not currently have such contracts with our engineering services and
software licensing customers, we also look for opportunities to sell recurring
revenue services to those customers as well. When we acquire companies, our goal
is to transition their existing business model to our recurring revenue model.
Apply the expertise we gain through engineering services and research and
development activities to emerging business opportunities. While we no longer
provide engineering services strictly to generate revenue, we do take on
engineering assignments that might allow us to embrace technological advances or
expand into new industry sectors or services. To this end, we have established a
research and development division that evaluates new technologies, applications
and business opportunities that demonstrate significant market potential. The
division is staffed by 11 engineers, including our chief technology officer, who
heads that division.
SERVICES AND PRODUCTS
We currently offer and are developing services and products in the
following areas:
- wireless financial information and transaction services;
- wireless transportation and delivery services (logistics);
- wireless information and transaction services in Europe through Sila;
- other wireless services (such as electronic commerce, healthcare and
messaging); and
- software licensing.
Wireless Financial Information and Transaction Services
Our wireless financial information and transaction services and customers
are described below.
- Reuters MarketClip. In March 1998, we introduced the Reuters MarketClip
service, which delivers news stories, real-time financial market price
quotes, historical graphs and stock alerts from Reuters to Palm, RIM and
Windows CE devices. We charge individual subscribers a flat monthly fee
for unlimited usage of this service in addition to the fees charged by
the securities exchanges and markets for the right to view real-time
price quotes. The service operates using the wireless network systems
known as CDPD and Mobitex. These networks cover geographic areas that
enable us to provide service to more than 90% of the U.S. population. We
also continue to support
42
<PAGE> 44
AirBroker, a predecessor service to Reuters MarketClip that provides
market information using mobile phones.
- Morgan Stanley Dean Witter Online TradeRunner. In August 1999, we
launched TradeRunner, a service that allows Morgan Stanley Dean Witter
Online's customers to trade stocks, mutual funds and options using Palm
devices. In addition, subscribers receive news stories, real-time
financial market price quotes, historical graphs and stock alerts from
Reuters. We charge Morgan Stanley Dean Witter Online account holders who
subscribe to this service a flat monthly fee for unlimited usage,
including fees charged by the securities exchanges and markets for the
right to view real-time price quotes. Users pay Morgan Stanley Dean
Witter Online's regular commission fees for any trades. We support
TradeRunner through our customer service and network operations centers.
The service operates using CDPD or Mobitex networks.
- F/X Alert. Since our acquisition of Mobeo in September 1999, we have
offered real-time information on foreign exchange rates and selected
commodities markets. These services deliver time-sensitive financial
information from Reuters over wireless networks that reach the largest
100 metropolitan markets in the United States. F/X Alert offers real-time
price quotes, news and alert tracking for more than 150 financial
instruments including foreign exchange, fixed income, futures/derivatives
and commodities. In addition, we continue to offer other Mobeo services,
called Scrappy, Energy and Pocket Futures, which track the scrap metals,
energy and futures markets, respectively, as well as Mobeo 1.0, a two-way
financial market price quotes and information service, similar to Reuters
MarketClip, that operates using the RIM 950 two-way pager with the RIM
Blackberry messaging service.
- Charles Schwab PocketBroker. In June 2000, we launched PocketBroker, a
service that allows Charles Schwab's customers to trade stocks, mutual
funds and options using wireless devices. The service is currently
available on Palm devices and will soon be available on RIM pagers. In
addition, subscribers receive news stories, real-time financial market
price quotes, historical graphs and stock alerts from Bridge. We charge
Charles Schwab account holders who subscribe to this service a flat
monthly fee for unlimited usage, including fees charged by the securities
exchanges and markets for the right to view real-time price quotes. Users
pay Charles Schwab's regular commission fees for any trades. We support
PocketBroker through our customer service and network operations centers.
The service operates using CDPD or Mobitex networks.
- National Discount Brokers. In July 2000, we began a trial allowing a
limited number of National Discount Brokers' customers to trade stocks,
mutual funds and options using wireless devices. The trial uses Palm
devices and we intend to launch versions that use RIM pagers and
WAP-enabled mobile phones. In addition, subscribers receive news stories,
real-time financial market price quotes, historical graphs and stock
alerts from Reuters and will have usage of OmniSky's wireless e-mail and
Internet access. We charge National Discount Brokers account holders who
subscribe to this service a flat monthly fee for unlimited usage,
including fees charged by the securities exchanges and markets for the
right to view real-time price quotes. Users pay National Discount
Brokers' regular commission fees for any trades. National Discount
Brokers will pay an additional monthly fee for hosting of the WAP
application. We support service through our customer service and network
operations centers. The service operates using CDPD or Mobitex networks.
- Additional financial services under development. We are also developing
wireless financial trading and information services for Bear Stearns, TD
Waterhouse Investor Services and Merrill Lynch, a financial information
product for Nextel and a financial information product for Multex. The
Bear Stearns, TD Waterhouse, Merrill Lynch, Nextel and Multex projects
are each in a preliminary stage, and we cannot assure you that definitive
agreements will be signed for any of them.
-- The Bear Stearns project involves developing wireless trading
applications for its correspondent firms and their brokers, clients
and other financial professionals who clear transactions through Bear
Stearns.
43
<PAGE> 45
-- We are developing a wireless financial trading and information
service for TD Waterhouse. Using our network operations center, we
will provide wireless access to TD Waterhouse's Website for a monthly
recurring fee.
-- We are currently developing an application for Merrill Lynch which
will be used by clients of their Private Client Services group. In
addition to providing online trading services, the application will
allow access to customer account information and Merrill Lynch's
proprietary research.
-- We are developing a WAP version of the Reuters MarketClip for Nextel
phones that will provide real-time market quotes, news and alerts.
-- Pursuant to a strategic relationship, we plan to develop a product
that will provide Multex's financial information services via
wireless handheld devices. The Multex product will provide brokerage
research, earnings estimates and company fundamental information. The
service will initially be available on the Palm OS and RIM platforms
but plans to expand into other platforms.
Wireless Transportation and Delivery Services (Logistics)
We currently offer or are developing the following services that support
logistics applications.
- Wireless transportation and delivery services (e-Mobile Delivery).
e-Mobile Delivery, a service we have offered since our acquisition of
LocusOne, allows corporations to track customer orders, inventory and
fleet vehicle locations more efficiently. The e-Mobile Delivery group of
products offers comprehensive ways to automate the point of customer
contact, sales, delivery or service. These products integrate with
corporate data systems and work using a variety of wired and wireless
communications networks. LocusOne customers for the e-Mobile group of
products include Physician Sales & Service, MAC Papers, Office Depot,
NuCo2 and Suntory Water Group.
- Wireless dispatch services. We are currently piloting a wireless
dispatch service for Pop-A-Lock through our strategic relationship with
Videre. We enhanced Videre's dispatch application and will host the
application in our network operations center for a monthly recurring fee.
The service will be provided on RIM pagers.
Wireless Information and Transaction Services in Europe
We develop and offer wireless information and transaction services in
Europe through Sila Communications Ltd., a company we formed in May 2000 with
Reuters. Sila will host, design and manage services for customers through
enterprise wireless data centers throughout Europe. Sila offers or plans to
offer the following services:
- miniReuters. Sila's existing products and services are those previously
offered by IFX and Futures Pager, which are sold primarily under the name
miniReuters. miniReuters offers mobile access of real-time financial
information from Reuters and other data feeds to specialized paging
devices throughout Europe and Singapore. Financial information made
available over these services includes foreign exchange prices, quotes
from international futures exchanges, local stock exchanges and
international indices as well as general and financial news. Financial
professionals from leading global institutions as well as corporate
treasury officers subscribe to this service. Sila charges a monthly flat
fee for this service.
- MobiQuote/MobiTrader. Sila is in the process of launching its
MobiQuote/MobiTrader service. This service will allow users to obtain
real-time financial instrument prices, charts, alerts, news, research and
analysis using browser enabled mobile phones and other handheld devices,
including Palms and RIM pagers over any wireless network. Sila can
provide data feeds from Reuters as well as a financial institution's own
databases. The system will also have the capability, called MobiTrader,
to pass transactions directly to a financial institution's trading
systems in a highly
44
<PAGE> 46
secure manner. The users of this service are anticipated to be a financial
institution's trading professionals and clients.
- Carrier loyalty and fee-paying services. Sila has developed a service
using GSM and its proprietary technology embedded on a subscriber
identity module, or SIM, card. The service will offer wireless carriers
the ability to deliver large amounts of content to their entire
subscriber base using small amounts of bandwidth. Sila expects to expand
this service to networks using GPRS. Sila will offer this service, called
the Carrier Loyalty service, to the carriers free of charge. Using this
service, Sila will be able to send Reuters or third party content to an
entire subscriber base or target content to distinct user groups. Using
Sila's filtering capability, the carrier's subscribers will be able to
customize the service and choose which content they want to receive. Sila
expects to receive a fee each time the user makes a request to change the
information that they receive. Sila plans to transmit advertisements and
share the revenue from the advertisements with the carrier. Additionally,
Sila can allow subscribers to add services for an additional fee, such as
real-time stock quotes. Sila has agreements with leading SIM card
manufacturers Gemplus and Schlumberger to use Sila software on the next
generation of SIM cards.
Other Wireless Services
- Field Sales. NetSearch's Merchant Notification System, a service we have
offered since our acquisition of NetSearch, allows merchants to have real
time communication with Internet customers, distribute Internet inquiries
to merchant-defined employees and track the effectiveness of employees
translating the inquiry into sales. This product is currently used in the
automotive industry, and customers include DealerKid.com, STONEAGE.com,
Sonic Automotive, Brandon Automotive Group and Ed Murie Automotive Group.
We also have agreements with Lexus and Lincoln-Mercury to encourage their
dealerships to use our service. We plan to market this product in other
industries as well, such as real estate and insurance.
- Wireless Web. Under our wireless web hosting service we enhance a
customer's web site for wireless viewing and host it on our network to be
accessed via any wireless device with an Internet browser. We charge an
upfront fee for setup and a flat monthly recurring fee based on the
number of users. We currently provide this service for SmartContractor
Inc. and are under development for Providian Financial Corp. and
WallStreetView.com.
- Messaging. Under the strategic agreement with RIM, we license and resell
the Blackberry messaging service for a monthly recurring fee. The service
provides messaging to other two-way pagers and to any e-mail account and
is bundled with a date book, address book and other organizer functions.
The service can be provided with any service sold on RIM 950 or RIM 957
pagers. In addition, we are currently developing a messaging service in
conjunction with Critical Path. Once developed, Aether plans to sell the
service as a stand alone service or bundled with other services. We will
host the application on our network and Critical Path will host the
mailboxes.
- Mobile Government. Assuming completion of our acquisition of Cerulean,
we will have a suite of software products for sale to the public safety
sector. PacketCluster Patrol provides police in the field with wireless
access to vehicle and warrant information. PacketWriter Reporting allows
officers in the field to create, review, approve and store reports.
PacketCluster Rescue allows for the wireless dispatch of fire and rescue
workers. Revenues for these products currently are in the form of
software licenses but we plan to begin converting to a monthly recurring
revenue model in 2001.
- Healthcare. We will provide wireless network services, devices and
customer support to support the wireless transmission of health
information including patient vital signs and other diagnostic data
developed by Data Critical. We own a 9.9% interest in Data Critical's
equity. Data Critical focuses on the hospital, physician and at-home
consumer markets. We are also working on a healthcare application with
ParkStone, a company in which we plan to invest $15.0 million. This
45
<PAGE> 47
service will enable physicians to access patient records and treatment protocols
and to prescribe medicine. We plan to host the service on our network for a
recurring monthly fee.
- Wireless Commerce. We have entered into an alliance with MICROS Systems,
Inc., a company that provides applications for the hospitality industry,
to jointly develop wireless technology products and services for the
hospitality industry, including the ability to view and pay tabs at
restaurants, ballparks and theme parks. We are developing an application
for Juniper Financial whereby customers of Juniper will be able to
wirelessly access their bank account, view balances, transfer cash and
pay bills. Through our strategic relationship with CyberBills we are
developing a wireless bill payment application. Pursuant to our strategic
relationship with First Data, we plan to develop payment applications,
point of sale applications and shopping portals. We also plan to make
accessible, through wireless devices, the money transferring capabilities
of Western Union, a subsidiary of First Data.
Software Licensing
We currently license our AIM software platform, which is the core
technology underpinning most of our wireless data services, and the ScoutWare
software platform. We earn software licensing revenue through upfront and
per-user licensing fees. We currently license our AIM software platform to
Inciscent and Data Critical, and expect to license it to MindSurf. We have also
licensed our AIM software platform to OmniSky on a royalty fee basis in
connection with our equity investment in OmniSky. We license our ScoutWare
family of software products to customers such as Palm, the U.S. Postal Service,
Becton Dickinson and Oracle. We describe these software platforms below.
Aether Intelligent Messaging
AIM is a package of wireless messaging software and development tools -- or
software platform -- that facilitates the development of wireless data systems.
We developed the AIM software platform in 1997 to improve the performance of
data delivery over wireless networks and to provide a development kit to speed
the software development process. We use the AIM software platform internally to
develop and support the wireless data services we offer our customers. We have
launched a program to license the AIM software platform to both software
developers and large corporations. Software developers can integrate the AIM
software platform with their applications to provide those applications with a
wireless capability. When the AIM-based application is sold, we can then earn
one-time revenue from per-user license fees or recurring revenue if the
application is run from our network operations centers. Similarly, corporate
customers who develop AIM-based applications for their own use can pay us
license fees per user or recurring services fees if we host the application.
How the AIM software platform works. The diagram below illustrates how the
AIM software platform works to integrate sources of data with wireless networks
and devices. Data and applications come from internal corporate systems, from
public data sources via the Internet or from proprietary systems such as Reuters
Selectfeed Plus. The AIM software platform then takes the data, replaces
unnecessary or repetitive message-header information with more streamlined tags,
compresses and encrypts it so the data can move quickly and securely outside the
security system (or "firewall"), controlling access to and from the source's
network, and then sends it over the airwaves using any of a number of wireless
networks to the intended device. Not all devices will work on all wireless
carrier networks. Our AIM software platform is designed with the flexibility to
support other networks as they are developed and as customer needs require.
46
<PAGE> 48
[HOW THE AIM SOFTWARE PLATFORM WORKS FLOW CHART]
The AIM software platform has the following features and benefits.
- The AIM software platform enhances the speed, efficiency and security of
data transmission over wireless networks. The AIM software platform
trims unnecessary electronic message tags and compresses data, with no
loss in the reliability of message delivery. As a result, users get data
quickly and at a low cost. The AIM software platform uses a sophisticated
technology known as elliptic curve cryptography, or ECC, which was
developed by Certicom, to encode the data so it cannot be read by a third
party that intercepts the data.
- The AIM software platform simplifies programming required to convert data
into a form that can be transmitted over wireless networks. The AIM
software platform uses industry-standard programming languages and
includes application program interfaces. The AIM software platform comes
with a software development kit that provides programmers step-by-step
guides and automatically generates code for major system components based
on the options selected. As a result, programmers can focus on the
business objectives the system is designed to meet, rather than becoming
immersed in unfamiliar and complex software and wireless network
protocols.
- The AIM software platform facilitates the interaction of major operating
systems on which most corporate applications run with the most widely
used wireless data networks and devices. To date, the AIM software
platform is compatible with the following wireless network carrier
protocols, mobile device operating systems and corporate operating
systems:
-- wireless network carrier protocols: CDPD, Mobitex, Motient, iDEN and
ReFLEX;
-- mobile device operating systems: Palm computing platform, Windows CE,
two-way pagers and Windows 95/98/NT and their corresponding modems;
and
47
<PAGE> 49
-- corporate operating systems: Windows NT, Sun Solaris and Linux.
As a result, our business customers can offer a wide variety of
applications for wireless transmission, and end users can similarly choose from
a number of devices. Our engineers continually develop the capabilities of the
AIM software platform as new protocols, devices and systems emerge.
ScoutWare
We offer the ScoutWare family of software products we acquired in our
acquisition of Riverbed. ScoutWare is a package of mobile data management
software and development tools that allows remote and mobile workers to exchange
information with corporate databases and the Internet. ScoutWare also gives
information technology personnel tools to manage, deploy and connect their
corporate data with handheld devices. We are in the process of integrating
ScoutWare with our AIM wireless integration platform, to offer customers a
complete set of wireless and mobile data solutions. ScoutWare products reside
both on handheld devices and on corporate computer servers. Mobile workers use
ScoutWare when they electronically exchange, or synchronize, data between their
handheld devices and corporate databases. There are four product categories in
the ScoutWare software suite -- ScoutSync, ScoutIT, ScoutArchitect and
ScoutWeb -- each of which is explained below:
- ScoutSync provides the core connection between a handheld device and a
corporate database. ScoutSync operates on both the Palm OS platform and
the Windows CE operating system to connect to a corporate network using
the common Internet protocol TCP/IP. Any number of remote devices may be
simultaneously connected to a single network, and the devices can be a
combination of Palm or Windows CE devices. ScoutSync can exchange
information either over a wireless network or through a cradle that is
connected to a computer linked to a corporate network. ScoutSync is made
up of four key components, illustrated in the diagram below:
[SCOUTSYNC SOFTWARE PLATFORM WORKS FLOW CHART]
(1) ScoutSync Client, a software application that is loaded
into the handheld device, allows the device to initiate and
carry out a synchronization session.
48
<PAGE> 50
(2) ScoutSync Server, a software application that resides on a
computer workstation linked to the corporate network,
allows two-way communication between a device and corporate
data sources and lets system administrators monitor, update
and back up remote devices.
(3) ScoutSync Service, a set of computerized instructions that
resides on the ScoutSync Server, manages central processing
components, called "conduits," enabling them to transfer
data between the remote device and a corporation's software
programs.
(4) ScoutSync Conduit, a central processing component that
resides on a ScoutSync Server, carries out synchronization
tasks and can access and manipulate files and databases on
both the corporate database side and the mobile device
side.
- ScoutIT allows corporate information technology professionals to manage
the interaction between corporate databases and handheld
devices. Residing on either a Windows NT or Solaris server, ScoutIT
allows information technology managers to control how handheld devices
share information with corporate databases. Managers can administer a
system allowing thousands of remote devices to send and receive
information from a single location, including backing up and restoring
data to ensure security, upgrading and configuring applications and
tracking how applications are being used.
- ScoutArchitect is a package of software applications and software
developer tools that allows developers to create mobile-ready versions of
their corporate software applications. ScoutArchitect allows corporate
developers to quickly identify the most critical elements of a corporate
software application for a handheld device. Applications can be developed
independent of the software the device operates on or development
environment, allowing the customer to avoid reconstruction of critical
elements of an application when moving to different operating software or
development tools. ScoutArchitect also includes programmer and
application interfaces that allow independent software vendors to write
handheld device applications that can plug into their own applications
and systems.
- ScoutWeb allows handheld devices to receive Internet and intranet
data. ScoutWeb manipulates data from the Internet so that the data can
be effectively used on mobile devices, including WAP smartphones.
ENGINEERING SERVICES
We began operations in 1996 by providing engineering services to businesses
seeking to develop wireless data systems. Our customers have included the U.S.
Postal Service and Reuters Group Overseas Holdings (UK) Limited. Our engineers
have experience in developing wireless applications for a variety of businesses.
Since 1998, we have focused our efforts more on developing wireless data
services that will result in recurring subscription revenue to us. While we
therefore no longer provide engineering services strictly to generate revenue,
we do take on engineering assignments that might allow us to embrace
technological advances or expand into new industry sectors or services. In
addition to our contract with OmniSky, our current engineering services clients
include Response Services Center, LLC, an emergency vehicle response company,
Inciscent and Merrill Lynch. Through our work with Response Services, we hope to
develop new services for the transportation industry. Through our work with
Inciscent, we are developing wireless e-mail, two-way wireless data
applications, Internet access and other applications for the small business and
home office segments. Through our work with Merrill Lynch, we are developing
wireless trading and financial information services for financial professionals.
We generally charge our clients for engineering time on an hourly basis or a per
project flat fee.
49
<PAGE> 51
STRATEGIC INVESTMENTS
We make investments in a variety of businesses engaged in wireless and
mobile computing. These investments support the development of new technology
that can be used in combination with systems and products developed by Aether
and create relationships that support our efforts to develop and sell wireless
data products and systems.
We recently formed Aether Capital as a separate division of Aether to focus
our investment efforts. Wayne Jackson, formerly chief executive officer of
Riverbed, is the Managing Director of Aether Capital. We are planning to
contribute $150.0 million to Aether Capital, and may obtain other investors in
Aether Capital. Aether Capital will hold all our investments.
Our strategic investments to date include the following:
OmniSky
We formed OmniSky in August 1999 with 3Com. We have a 30.4% equity interest
in OmniSky in the form of preferred stock, which we acquired for an aggregate
purchase price of $9.2 million. OmniSky is currently conducting its initial
public offering of 9.1 million shares, which if completed will dilute our
percentage interest and result in the conversion of our interests into common
stock. We provide additional details regarding our interest in OmniSky in
"Transactions Between Aether and Its Officers, Directors and Significant
Shareholders -- OmniSky" on page 72.
OmniSky's main business objectives and strategies include those set forth
below.
- OmniSky's wireless service, for use on handheld devices, enables its
subscribers to access and navigate the Internet, send and receive e-mail
messages and securely conduct e-commerce transactions. OmniSky made its
service commercially available beginning in May 2000.
- OmniSky will expand its wireless service internationally through a joint
venture created with the News Corporation, in which OmniSky owns a 50.0%
stake. OmniSky will extend its sales reach by pursuing agreements with
retail outlets additional to the selected retailers through which it
sells its wireless services, including stores operated by wireless
telecommunications carriers and selected computer stores.
- OmniSky will extend its service offerings to additional types of handheld
mobile devices, operating systems and wireless data network technologies.
- OmniSky will pursue selected acquisitions of business or technologies
that will enable it to increase its subscriber base and enhance its
wireless service offerings.
We provide engineering services to OmniSky on a time and materials basis
and OmniSky has a perpetual, royalty-free license to use our AIM software
platform. Additionally, we have a two-year right of first refusal to design and
develop custom systems and applications for all services relating to investment
banking and brokerage activities. We also have the right to bundle OmniSky
services for a period of five years as an added feature to the other services we
offer at a monthly cost to us of $6.70 per subscriber.
Our chairman and chief executive officer, David S. Oros, is a member of the
OmniSky board of directors. Janice M. Roberts, one of our directors, is also a
director of OmniSky. Patrick McVeigh, former vice president of worldwide sales
for the Palm Computing division of 3Com, serves as president and chief executive
officer of OmniSky and also serves on the OmniSky board of directors. OmniSky is
based in Palo Alto, California.
Inciscent/Metrocall
On March 17, 2000, we acquired a 27.5% interest in Inciscent in the form of
preferred stock for a purchase price of $10.0 million. We formed Inciscent with
Metrocall, PSINet, Hicks, Muse, Tate & Furst and other investors to develop
wireless e-mail, Internet access and other applications for the small office and
home office market segments. Aether has the right to appoint two of the seven
directors of Inciscent.
50
<PAGE> 52
As part of the investment, we also acquired approximately 9.9% of the
outstanding capital stock of Metrocall for approximately $17 million.
In connection with our investment, we provided Inciscent with a
non-exclusive, perpetual, non-transferable license to use our AIM software
platform for $1.0 million, and also agreed to provide technical consulting and
development services billed on a time and materials basis.
Sila
We own ordinary shares and preference shares of Sila, which equal 60% of
the equity interests of Sila that are outstanding or could be issued pursuant to
outstanding stock options and warrants. We acquired our interest in Sila in
exchange for $13.5 million in cash plus 100% of the equity interests of IFX
Group Plc, a company we purchased in April 2000 for $85 million. Reuters holds
40% of the equity interests of Sila, which it received in exchange for $22
million in cash plus contribution of all of its rights to Futures Pager,
Reuters' wireless applications product. Under a marketing and strategic
agreement with Sila and Reuters, we have agreed to give Sila sales leads and to
assist its sale of our products. The agreement also gives Sila the right to a
non-exclusive license to use our technology and requires Sila to give us an
opportunity to sell them our products. For as long as we continue to own a
greater than 50% equity interest in Sila, we have the right to appoint four
directors to its seven-director board. David S. Oros, Chairman of Sila, and J.
Carter Beese, Jr., a director of Sila, also serve as directors of Aether.
Sila acquired three companies in July 2000 and August 2000 and has signed a
definitive agreement to acquire a fourth company. The total investment for these
four acquisitions is approximately $22.0 million. All of these companies are
engineering services companies and were acquired to increase the engineering
resources of Sila.
Other Investments
On June 2, 2000, we acquired a 9.9% interest in Data Critical Corporation
for an initial purchase price of $10.0 million, with an option for an additional
$10 million investment. Data Critical develops systems for wireless transmission
of health information, including patient vital signs and other diagnostic data.
Data Critical focuses on the hospital, physician and at-home consumer markets.
In connection with this investment, we entered into a products development
agreement.
On June 30, 2000, we acquired 6.9% of Novatel Wireless, Inc. for $20
million. Novatel designs, develops and markets a family of wireless data modems
and enabling software for use with hand-held computing devices, notebook
computers and vertical OEM applications. Novatel is one of only two companies
which provide wireless modems for use with Palms. The company also provides
systems integration services to developers of wireless data communications
products.
On July 11, 2000, we acquired 19.9% of VeriStar Corporation for $5.6
million. VeriStar links consumers to their checking, banking or debit accounts
by the consumer's unique biometric identities. As part of the investment, we
agreed to enter into an agreement to develop biometrically-enabled wireless
commerce applications.
On July 24, 2000, we acquired 11.4% of ePhones for $8 million. ePhones
enables retailers to add a fully functioning wireless e-commerce operation. As
part of the investment, Aether will become a preferred provider of wireless data
solutions for ePhones, thereby allowing ePhones' partners to offer Aether's
services.
RECENT ACQUISITIONS
Since January 1, 2000, we have completed or expect to complete the
following acquisitions.
51
<PAGE> 53
LocusOne
On February 3, 2000, we acquired all of the capital stock of LocusOne for a
purchase price of $40.0 million, including the retirement of a line of credit
and payment of the legal fees of LocusOne. At closing, we paid $20.0 million in
cash and granted options to acquire 308,500 shares to existing LocusOne
employees. We subsequently paid the former LocusOne holders $5.4 million and
have 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
us expiring on the later of February 2, 2002 or ten months after their
termination with LocusOne.
Riverbed
On March 6, 2000, we acquired Riverbed for shares of our common stock. In
the merger, we issued 4,537,281 shares of our common stock and converted
existing options held by Riverbed employees into options to acquire shares of
our common stock. If all current Riverbed options vest and are exercised, we
would be obligated to issue 862,480 shares of our common stock. As part of the
transaction, we are holding in escrow 270,000 of the shares payable to Riverbed
shareholders for 12 months to secure their post-closing indemnification
obligations to us and we have agreed to indemnify up to $40.5 million of damages
the sellers may incur.
IFX
On April 6, 2000, we acquired 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 May 5, 2000, we contributed IFX along
with $13.5 million to the Sila joint venture in exchange for a 60.0% interest in
Sila.
NetSearch
On April 20, 2000, we acquired all of the membership interests in NetSearch
LLC for a purchase price of $25 million in cash, plus up to an additional $65.0
million payable over 13 months if NetSearch meets revenue targets set out in the
purchase agreement. In connection with the acquisition, the two principal
members of NetSearch have entered into non-competition agreements with us
expiring no earlier than the second anniversary of closing. Also, we agreed to
pay at least $600,000 per month for the first six months following closing to
support NetSearch's sales and marketing plan.
PENDING ACQUISITIONS
Cerulean
On August 25, 2000, we entered into a merger agreement to acquire Cerulean
Technology, Inc. Cerulean licenses software to the public safety sector, giving
us access to another market segment. In the merger, we will pay up to $150
million, approximately half of which will be paid in shares of our common stock.
We will convert existing options held by Cerulean employees into options to
acquire shares of our common stock. As part of the transaction, we will escrow
10% of the aggregate merger consideration to be paid to Cerulean shareholders
for one year from the date of the merger to secure their post-closing
indemnification obligations to us, and we have agreed to indemnify the sellers
for damages they may incur up to 10% of the merger consideration. The
shareholders of Cerulean will have the right to one shelf registration to
register their shares of our common stock after April 30, 2001. The closing of
the acquisition is subject to approval by the shareholders of Cerulean, a
sufficient number of whom have already agreed to vote for the merger, and to
customary closing conditions, and is expected to occur by September 30, 2000.
As part of our acquisition strategy, we routinely review and conduct
investigations of potential acquisitions. When we believe a favorable
opportunity exists, we seek to enter into discussions with the
52
<PAGE> 54
owners or management regarding the possibility of an acquisition, investment or
joint venture. At any given time, we may be in discussions with one or more
parties. We are currently reviewing acquisitions, investments and joint ventures
that could extend our business into new areas.
OPERATIONS
Engineering and Project Implementation
Our most important operational resource is our engineering staff. This
staff includes wireless systems engineers, software engineers who specialize in
developing applications for handheld devices and engineers who specialize in
systems integration and testing. We have steadily built our engineering ranks
from ten in 1998 to over 200 in August 2000. Many of our engineers come from
engineering departments at established companies, including IBM, Westinghouse
Electric Corporation and UPS/Roadnet. Eleven of our engineers, including our
chief technology officer, comprise our research and development division. This
group evaluates emerging technologies and business opportunities and plays a key
role in determining which projects to pursue.
Project implementation is critical to the effective delivery of services to
our customers. Projects generally consist of the following phases: project
definition, development, pilot testing, quality assurance and launch. Each
project has a project manager who works closely with the customer and
coordinates our engineers and our operations and marketing personnel through all
phases of the project. Our operations staff prepares documentation and training
manuals. During the product launch phase, we send operations teams to train
customer personnel on product use and support. Our marketing department works
closely with customers before commercial launch to coordinate advertising and
publicity.
Technology and Network Operations
We operate a secure network operations center at our headquarters in Owings
Mills, Maryland. We believe that this center is a vital component of our
wireless data service offerings and differentiates us from our competitors. By
outsourcing to us, our customers are relieved of the technology and operations
burden of managing a highly complex wireless data system. From our network
operations center, we maintain high speed data transmission lines, known as T1
connections, both to our customers' data sources and to the wireless data
networks we use. The center is equipped with Cisco and Hewlett-Packard
networking equipment, Sun Sparc UNIX servers and high-end clustered NT servers.
In the event of a power failure, we maintain backup power supplies, including
diesel-powered generators that are tested and serviced regularly. Our network
operations centers are capable of meeting the security standards for services we
developed or are developing for our clients. Our primary center is staffed 24
hours a day, seven days a week. We also maintain network operation facilities in
Bethesda, Maryland and Jacksonville, Florida. Our facility in Tempe, Arizona,
which we are now developing, will provide expanded capacity and serve as a
back-up facility when it is completed.
In December 1999, we established the WAP Enterprise Center. The center is
comprised of engineers who develop applications for WAP smartphones and the
systems to support data communication to these devices. The center currently is
developing WAP-enabled financial trading applications that will work with WAP
smartphones and is exploring WAP-based opportunities with wireless carriers, WAP
vendors and enterprise customers. We expect that National Discount Brokers and
Nextel will utilize the services of the WAP Enterprise Center when the products
we are developing for them are introduced.
Sales and Marketing
We are expanding our sales and marketing efforts for our services in the
financial services and other industries as well as for software licensing. As of
August 2000, we have over 120 sales and marketing professionals who specialize
in each market segment but who also can sell across the entire product and
service line. We intend to increase this number significantly in the next 12
months, with sales and marketing personnel focusing on each industry we pursue,
as well as a dedicated marketing team for software licensing. Our business
development personnel and senior executives also spend a considerable
53
<PAGE> 55
amount of time developing potential customer relationships and selling and
promoting our services. We intend to spend an estimated $20.0 million on a
branding campaign in the remainder of 2000 including print and television
advertising. Our current customer segments, the services we sell to them and how
we reach them are described below.
- Individual investors and financial market professionals. We believe
individual investors are the primary subscribers to our wireless
financial information and trading services, such as MarketClip,
PocketBroker and TradeRunner. Print advertising in finance-related
publications is our primary means of marketing these services. Our
strategy is to share marketing and advertising costs with our strategic
partners and corporate customers associated with particular services.
Except for the PocketBroker product, our customer service center handles
inbound calls generated from these marketing efforts and signs up new
subscribers. We also seek to develop relationships with financial
institutions, whose market professionals become the end users of our
services, such as F/X Alert. We market our products through direct sales
executives in New York, Atlanta and Chicago and through occasional
advertising in financial trade publications.
- Companies that track inventory, deliveries and logistics. We target
sales of our e-Mobile Delivery service to companies that need to track
the movement of their drivers and inventories across broad geographic
areas on a real-time basis. Examples of such customers include Physician
Sales & Service, MAC Papers, Office Depot, NuCo2 and Suntory Water Group.
We work with strategic partners, including Symbol Technologies, Intermec
Technologies Corp. and BellSouth Wireless Data to market e-Mobile
Delivery.
- Corporate software developers and independent software vendors. We
target as potential licensees of our AIM software platform large
corporations with significant mobile workforces who wish to develop their
own wireless applications, as well as software vendors and manufacturers
of handheld devices. We target the same customer segments for the
ScoutWare suite of mobile data management products and licensees of these
products include Palm Computing, the U.S. Postal Service, Becton
Dickinson and Oracle. Each of our salespeople offers AIM and ScoutWare
licensing along with our full array of wireless data design, development
and support services. In our experience, corporate customers who
initially sought only to license our AIM software have often decided to
purchase complete wireless data communications systems and services from
us. Our sales force targets independent software vendors for licensing of
both AIM and ScoutWare through conferences, trade shows, vendor forums
and trade advertising.
- Merchants who communicate with Internet customers. We target sales of
our merchant notification system to merchants who target Internet
customers requiring immediate responses. Our strategy is to target
automotive dealerships and real estate companies.
- Engineering services clients. As part of our business development
effort, we seek out engineering assignments that might allow us to
embrace technological advances or expand into new industry sectors or
services.
- Sila. Sila targets its marketing efforts to the following two primary
audiences in Europe and plans to expand its efforts to consumers in Asia,
Africa and the Middle East:
-- major corporations with a need to extend their mission critical
applications to handheld devices; and
-- wireless carriers, with the key individuals in these organizations
being the heads of data and value-added services development.
Sila has sales organizations in each country responsible for sales within
that country and these organizations are further supported by industry and
application sales staff with specific industry knowledge and/or
application expertise.
54
<PAGE> 56
Product Fulfillment, Customer Service and Billing
We provide product fulfillment, customer service and billing at our
customer service centers in Owings Mills, Maryland; Vienna, Virginia; Tempe,
Arizona; and Richmond, Virginia. Sila provides these services through customer
service representatives located throughout Europe and in Singapore. We maintain
a modest inventory of mobile devices and wireless modems, which we buy in bulk
from manufacturers and resellers. Our customer service representatives first
verify that a potential subscriber will have wireless network coverage where
that subscriber plans to use the service. For qualified subscribers, we load and
configure custom software on mobile devices, activate wireless modems and
perform quality assurance checks. We then pack, ship and track the product until
the subscriber receives it. For end users who already own a device, we provide
only the modem and software application. We handle all repair and warranty
issues for devices we provide to our subscribers.
We train our customer service representatives to handle inquiries about our
services, device features and wireless communications. Our customer service
personnel are available seven days a week from 8:00 a.m. until 11:00 p.m.
eastern time. We currently employ over 50 customer service representatives.
We handle customer billing for all subscription fees, device and modem
purchases, securities exchange and market fees and other charges. We bill
monthly for subscriber services, which our non-corporate customers must pay by
credit card. As a result, our billing system can support increases in our
subscriber base. We intend to enhance our billing capabilities as our needs
grow.
STRATEGIC RELATIONSHIPS
A key to our ability to provide complete wireless data services to our
customers is our relationships with third parties. These relationships take time
to develop, and having already formed them provide us with an advantage in
getting our services to market before our competitors. We maintain the strategic
relationships described below.
Wireless Network Carriers
We believe our relationships with wireless network carriers are mutually
beneficial. We believe we are among the largest buyers of wireless data network
capacity for many of the carriers we use. As a result, we are able to negotiate
favorable rates. 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. We have contracts with Verizon Wireless, AT&T Wireless
Services, BellSouth Wireless Data, SBC Communications, Inc., Metrocall and
Motient. As a result, we can give our customers a wide variety of wireless
carrier choices. In February 2000, we announced a strategic relationship with
Nextel to provide Internet and wireless data solutions to enterprise customers.
Hardware and Software Vendors
Our services increase the usefulness of wireless handheld devices, and we
believe our services will increase sales of these devices. Mobile device
manufacturers have therefore assisted us in various projects we have undertaken.
We worked closely with 3Com, an Aether investor, on the development of our
wireless applications for Palm devices. In August 1999, a subsidiary of
Ericsson, one of the largest manufacturers of wireless phones, agreed to assist
us in developing services using WAP phones and next-generation, high-speed GPRS
data networks. In December 1999, we announced a strategic alliance with
Phone.com to jointly pursue corporate customers using Phone.com's WAP browser
technology for Web-enabled smartphones and our development and service
capabilities. In April 2000, we announced a multi-tiered business and marketing
agreement with RIM, a manufacturer of wireless devices and software, to promote
each other's wireless solutions. We are working with Microsoft, Compaq and
Sierra Wireless to jointly provide the TD Waterhouse application. We participate
in industry development groups dedicated to bringing new applications to
wireless data, such as the Palm developers group, the WAP Forum and the Windows
CE developers forum.
55
<PAGE> 57
Financial Content Providers
Financial content providers supply us with real-time financial information,
which we provide to our wireless data subscribers. Reuters, which is an Aether
investor, is our primary provider of financial information and market data for
MarketClip and TradeRunner. We have a license to use information from Reuters
with an initial term extending through August 2001, and the term automatically
extends each year after that unless we or Reuters decide to end the license. We
also have a license to use financial data from Bridge Information Systems
America, Inc., another financial content provider, and its subsidiary Telerate,
Inc. We have agreements with the New York Stock Exchange, the Nasdaq Stock
Market, Inc., the Chicago Board of Trade and the Options Price Reporting
Authority that authorize us to provide real-time price quotes.
Other Strategic Relationships
We are working to develop new products through strategic relationships with
systems integrators such as Proxicom Inc. and TIBCO Software, Inc., electronic
messaging companies such as Critical Path and RIM and other companies in the
areas of wireless commerce (VISA, First Data, Cyberbills, MICROS), healthcare
(Data Critical, ParkStone), financial services (Multex), and transportation and
field services (Videre, LLC).
COMPETITION
The market for our services is becoming increasingly competitive. We
believe we offer the broadest range of services to businesses necessary to
enable the development, offering and ongoing support of wireless data
communication systems for their employees or customers. The widespread adoption
of industry standards may make it easier for new market entrants to offer some
or all of the services we offer and may make it easier for existing competitors
to introduce some or all of the services they do not now provide, or improve the
quality of their services. We expect that we will compete primarily on the basis
of the functionality, breadth, quality and price of our services. Our current
and potential competitors include:
- Wireless financial services providers, including w-Trade and 724
Solutions;
- Wireless communications software companies, including Phone.com, Nettech
Systems Inc. and Dynamic Mobile Data;
- Wireless data services providers, such as Wireless Knowledge, a joint
venture of Microsoft and Qualcomm Inc., RIM, GoAmerica, i3 Mobile, Inc.
and Infospace.com;
- Wireless systems integrators, such as IBM, Verizon and Razorfish, Inc.;
- Wireless network carriers, such as Verizon Wireless, AT&T Wireless
Services, Sprint PCS, Nextel Communications, Inc. and Metricom, Inc.; and
- Mobile data management software providers, including Puma Technology,
Inc., AvantGo, Inc. and Extended Systems, Inc.
Many of our existing and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we do.
Additionally, many of these companies have greater name recognition and more
established relationships with our target customers. Furthermore, these
competitors may be able to adopt more aggressive pricing policies and offer
customers more attractive terms than we can.
Notwithstanding the increasing competitiveness of our market, we believe
that our potential competitors face substantial barriers to market entry.
Development of wireless data systems comparable to those we have already
developed is time consuming and costly. Moreover, the engineering talent
necessary to develop such systems is scarce.
56
<PAGE> 58
INTELLECTUAL PROPERTY RIGHTS
We own applications for federal registration or common law rights in the
following trademarks: AirBroker(R), Aether Technologies(TM), Aether(TM) and our
logo, Aether International(TM), Aether Logistics(TM), Aether Wireless
Commerce(TM), Aether Healthcare(TM), Aether Financial Services(TM), Wireless
Solutions for a Portable Planet(TM) and e-Mobile(TM). In addition, we own
federal trademark registrations for LocusOne(R), PocketFutures(R), DocuPro(R)
and F/X Alert(R). We do not have any federal trademark registrations in the name
"Aether," "AIM" or "e-Mobile" and we may not be able to obtain such
registrations due to conflicting marks or for other reasons. We have been
informed that another party claims intellectual property in the mark e-Mobile.
We also own applications for federal registration or common law rights in the
following trademarks: MoneyClip(TM), E-Browse(TM), Mobeo(TM), Status Quote(TM),
Riverbed Technologies(TM), ScoutArchitect(TM), ScoutSync(TM), ScoutWeb(TM),
ScoutWare(TM), ScoutIT(TM), Free to Go Mobile(TM) and Solutions for the Mobile
Enterprise(TM). Reuters and Reuters MarketClip(TM) are the property of Reuters
Group Plc. Morgan Stanley Dean Witter Online TradeRunner(TM) is the property of
Morgan Stanley Dean Witter Online. This prospectus also includes trade dress,
trade names and trademarks of other companies. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders.
We rely on a combination of patent, copyright, trademark, service mark,
trade secret laws and contractual restrictions to establish and protect certain
proprietary rights in our services. We have applied for a patent on our AIM
platform, which addresses the technology employed to integrate various data
sources with wireless networks and devices. Mobeo has applied for seven patents
for its technology. Specifically, the patents cover the methodologies, systems
and apparatuses for providing: formatted information via two-way communications
systems; localized information; automatic updating features/ services on client
devices; information responsive to free-form requests; transaction databases in
client servers; value-added services to specific users; and focused information
based upon user history. We have applied for a patent on the ScoutWare(TM)
technology, which relates to a system and method for synchronizing information
records between a remote device and a server in a computer network. There can be
no assurances that these applications will be granted or, if granted, that
holders of other patents will not claim that the patents infringe their patents.
The steps taken by us to protect our intellectual property may not prove
sufficient to prevent misappropriation of our technology or to deter independent
third-party development of similar technologies. The laws of certain foreign
countries may not protect our services or intellectual property rights to the
same extent as do the laws of the United States. We also rely on certain
technologies that we license from third parties including data feeds and related
software from Reuters Select Feed Plus and Bridge Information Services and
encoding technology from Certicom. In addition, our ScoutWare software platform
relies on a license of Prism software by Spyglass, Inc. These third-party
technology licenses may not continue to be available to us on commercially
attractive terms. The loss of the ability to use such technology could require
us to obtain the rights to use substitute technology, which could be more
expensive or offer lower quality or performance, and therefore have a material
adverse effect on our business, financial condition or results of operations.
Third parties could claim infringement by us with respect to current or
future services. We expect that participants in our markets will be increasingly
subject to infringement claims as the number of services and competitors in our
industry segment grows. We have received two claims that we have infringed
patents developed by other parties. Although we believe these claims are without
merit, these and other intellectual property claims, with or without merit,
could be time-consuming and expensive to litigate or settle, could require us to
enter into costly royalty arrangements, could divert management attention from
administering our business and could hinder us from conducting our business.
Royalty or licensing agreements might not be available on terms acceptable to us
or at all. As a result, any such claim could have a material adverse effect upon
our business, financial condition or results of operations.
57
<PAGE> 59
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. The
wireless network carriers we contract with to provide airtime and certain of our
hardware suppliers are subject to regulation by the Federal Communications
Commission. Changes in FCC regulations could affect the availability of wireless
coverage these carriers are willing or able to sell to us. We or OmniSky could
also be adversely affected by developments in regulations that govern or may in
the future govern the Internet, the allocation of radio frequencies or the
placement of cellular towers. Regulations of the SEC governing online trading
could reduce the level of online trading or the demand for wireless financial
information. Also, changes in these regulations could create uncertainty in the
marketplace that could reduce demand for our services or increase the cost of
doing business as a result of costs of litigation or increased service delivery
cost or could in some other manner have a material adverse effect on our
business, financial condition or results of operations.
We currently do not collect sales or other taxes with respect to the sale
of services or products in states and countries where we believe we are not
required to do so. We do collect sales and other taxes in the states in which we
have offices and are required by law to do so. Some jurisdictions have sought to
impose sales or other tax obligations on companies that engage in online
commerce within their jurisdictions. A successful assertion by one or more
jurisdictions that we should collect sales or other taxes on our products and
services, or remit payment of sales or other taxes for prior periods, could have
a material adverse effect on our business, financial condition or results of
operations.
Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could have an adverse effect on our business.
FACILITIES
Our principal offices are located in Owings Mills, Maryland in a square
foot facility under a lease expiring in February 2010 with no renewal option. We
also lease an aggregate of approximately 35,000 square feet for our principal
offices in Larkspur, California; Long Beach, California; Boca Raton, Florida;
Jacksonville, Florida; Bethesda, Maryland; New York, New York; Richmond,
Virginia; Vienna, Virginia; and Tempe, Arizona. Sila has offices located
throughout Europe and in Singapore.
EMPLOYEES
As of August 15, 2000, we had a total of approximately 580 employees, and
of these employees over 215 were engineers. None of our employees is covered by
a collective bargaining agreement. We believe that our relations with our
employees are good.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. However, we
may from time to time become a party to legal proceedings arising in the
ordinary course of our business.
58
<PAGE> 60
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages and positions are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David S. Oros........................ 41 Chairman and Chief Executive Officer
George M. Davis...................... 43 President, Enterprise Solutions and Services
Group
E. Wayne Jackson III................. 38 Director and Managing Director, Aether Capital
David C. Reymann..................... 41 Chief Financial Officer
Dale R. Shelton...................... 38 Chief Technology Officer
Brian W. Keane....................... 41 Senior Vice President, Business Affairs
Mitch I. Selbiger.................... 41 Senior Vice President, Marketing
J. Carter Beese, Jr.(1)(2)........... 44 Director
Frank A. Bonsal, Jr.(2).............. 63 Director
Mark D. Ein.......................... 35 Director
Rahul C. Prakash(1).................. 39 Director
Janice M. Roberts.................... 44 Director
Dr. Rajendra Singh................... 46 Director
George P. Stamas..................... 49 Director
Robin T. Vasan....................... 34 Director
Devin N. Wenig....................... 33 Director
Thomas E. Wheeler(1)................. 54 Director
</TABLE>
---------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
David S. Oros founded Aether in 1996 and has been our chairman and chief
executive officer since Aether's inception. Mr. Oros also serves on the board of
directors of OmniSky. From 1994 until 1996, Mr. Oros was president of NexGen
Technologies, L.L.C., a wireless software development company that contributed
all of its assets to Aether. From 1992 until 1994, he was president of the
Wireless Data Group at Westinghouse Electric. Prior to that, Mr. Oros spent from
1982 until 1992 at Westinghouse Electric directing internal research and
managing large programs in advanced airborne radar design and development. He
currently serves on the board of OmniSky. Mr. Oros received a B.S. in
mathematics and physics from the University of Maryland and holds a U.S. patent
for a multi-function radar system.
George M. Davis has served as our chief operating officer since September
1997 and was appointed as president of our enterprise solutions and services
group in March 2000. He joined us in September 1996 as vice president, business
development to lead initiatives required to launch, maintain and develop
business opportunities for our services. From September 1994 until September
1996, Mr. Davis was director of enterprise management systems at Northrop
Grumman Corp. Prior to that time, Mr. Davis spent more than 14 years at
Westinghouse Electric where he managed advanced military electronic development
and production projects. He received a B.S. in business and economics from
Bethany College.
E. Wayne Jackson III became president of our software products group and a
director at the completion of our acquisition of Riverbed. In July, 2000, he was
appointed Managing Director, Aether Capital. Since October 1998, Mr. Jackson has
served as the president and chief executive officer and a director of Riverbed.
From September 1994 until October 1997, Mr. Jackson served as director of the
emerging technologies division of Noblestar Systems Corp. Riverbed was created
by Noblestar in 1998. He received a B.S. in business administration, finance,
from James Madison University.
David C. Reymann has served as our chief financial officer since joining us
in June 1998. Mr. Reymann is also responsible for our treasury management
services, investor relations and human
59
<PAGE> 61
resources. Before joining us, Mr. Reymann was director of finance and accounting
for The Sweetheart Cup Company from June 1996 until May 1998, where he managed
the financial analysis department and the accounting operations for 11 North
American manufacturing plants. Prior to that, Mr. Reymann spent 12 years with
Procter & Gamble serving in several key finance, accounting and operations
positions. Prior to that, Mr. Reymann spent five years at Ernst & Young where he
most recently specialized in emerging growth companies. Mr. Reymann received a
B.S. in accounting from the University of Baltimore and is a certified public
accountant.
Dale R. Shelton has served as our chief technology officer since February
2000. From June 1996 to February 2000, he served as our senior vice president,
engineering, during which time he directed the development of AIM and our
wireless data services. From January 1994 until June 1996, Mr. Shelton served as
the systems development leader for flash-flood prediction systems at the
National Weather Service. From June 1992 until January 1994, Mr. Shelton was
principal engineer for ARINC, Inc., where he led the development of aviation
tracking and maintenance systems. He received a B.S. in computer science from
the University of Maryland.
Brian W. Keane has served as senior vice president, business affairs since
joining us in August 1999. Mr. Keane is responsible for mergers and
acquisitions, strategic investments, joint ventures and new strategic business
initiatives. From February 1998 until August 1999, Mr. Keane was chief financial
officer for Management Information Consulting, Inc., a technology consulting
company. Prior to that, Mr. Keane spent ten years as an investment banker with
Smith Barney Inc. Mr. Keane received a B.A. in history and mathematics from
Cornell University and an M.B.A. from Harvard Business School.
Mitch I. Selbiger has served as our senior vice president, marketing since
January 2000. Mr. Selbiger is responsible for our advertising, branding,
marketing and public relations activities. From March 1999 until January 2000,
Mr. Selbiger served as vice president of marketing for OTG Software. Prior to
that, from July 1998 until March 1999, he served as vice president of marketing
for NetFactory. From August 1997 to July 1998, he served as director of eastern
area marketing for Netscape Communications, Inc. 1995 to 1997, he served as
director of government marketing for Sybase, Inc. Mr. Selbiger received a B.S.
in business administration from the University of Vermont and an M.B.A. from
George Washington University.
J. Carter Beese, Jr. was elected a director of Aether on October 20, 1999.
Since July 1998, Mr. Beese has served as president of Riggs Capital Partners, a
division of Riggs National Corp., where he oversees a $100 million venture
capital fund. From September 1997 until July 1998, he served as vice chairman of
the Global Banking Group of BT Alex. Brown. Prior to the merger of Bankers Trust
and Alex. Brown, Mr. Beese was chairman of Alex. Brown International from
November 1994 until September 1997. From February 1992 until November 1994, Mr.
Beese served as a commissioner of the U.S. Securities and Exchange Commission.
Mr. Beese serves as a senior advisor to the Center for Strategic and
International Studies, a non-partisan public policy think tank, and is involved
in the World Economic Forum. He serves as a director on the boards of China.com;
Internet Securities, Inc., a company majority owned by Euromoney Institutional
Investor, Inc.; and Natural Solutions, Inc. Mr. Beese received a B.S. in
economics and political science from Rollins College.
Frank A. Bonsal, Jr. was elected a director of Aether on October 20, 1999.
Since 1978, Mr. Bonsal has been a founding partner of New Enterprise Associates,
one of the largest venture capital firms in the United States. Mr. Bonsal has
focused on the development of early stage companies. He currently serves as a
director on the boards of CARS, Inc. and CORVIS Corp., and Healthy Pet Inc. In
addition, he is a special limited partner of Amadeus Capital Partners, Boulder
Venture, Novak Biddle, Trellis Ventures and Windward Ventures. Mr. Bonsal
received an A.B. in economics from Princeton University.
Mark D. Ein was a co-founder of Aether, and was elected a director of
Aether on October 20, 1999. Mr. Ein is the founder and chief executive officer
of Venturehouse Group, a holding company that was established in September 1999
to create, invest in and acquire technology and telecommunications companies.
From 1992 until September 1999, Mr. Ein was a principal with The Carlyle Group,
where he was responsible for many of its telecommunications investment
activities. Prior to joining Carlyle, Mr. Ein
60
<PAGE> 62
was an associate with Brentwood Associates, where he worked on leveraged buyout
and venture capital investments. Prior to joining Brentwood Associates, he was
an analyst in the real estate department of Goldman, Sachs and Co. Mr. Ein
currently serves as a director on the boards of LCC International, Inc. and
several private companies. Mr. Ein received a B.S. in economics from the
University of Pennsylvania and an M.B.A. from Harvard Business School.
Rahul C. Prakash was elected a director of Aether on October 20, 1999.
Since January 1997, Mr. Prakash has served as president of Telcom Ventures,
L.L.C., a wireless communications investment company. From January 1994 until
December 1996, Mr. Prakash served as vice president, business development of
Telcom Ventures. Prior to that time, he served as a director of business
development at LCC International, Inc., a worldwide provider of wireless
engineering and design services. From 1993 until 1994, Mr. Prakash was the
director of business development for Telemate, a joint venture he helped
establish between LCC and France Telecom. Mr. Prakash is also a director of
several private telecommunications companies controlled by Telcom Ventures. He
received an M.B.A. in international finance from American University and an
M.B.A. from the University of New Delhi, Faculty of Management Studies.
Janice M. Roberts was elected a director of Aether on October 20, 1999.
Since April 2000, Ms. Roberts has been a general partner of Mayfield Fund. From
September 1992 until March 2000, Ms. Roberts served as senior vice president of
global marketing and business development for 3Com. She is also president of
3Com Ventures, a corporate investment fund, and a director of OmniSky. From
January 1992 until September 1992, Ms. Roberts served as vice president and
general manager for 3Com's enterprise networking division. From 1989 until
January 1992, Ms. Roberts was with BICC Communications where she held several
positions, including most recently, president and managing director of its
worldwide data networking business. Previously, she held a number of senior
international marketing, sales and business development positions in
engineering, electronics and communications-based companies. She currently
serves on the board of OmniSky. She holds an Honors degree in economics and
business from the University of Birmingham in the United Kingdom and is a member
of the Chartered Institute of Marketing.
Dr. Rajendra Singh was elected a director of Aether on October 20, 1999.
Since December 1993, Dr. Singh has served as chairman of the board of directors
and chief executive officer of Telcom Ventures, L.L.C. From 1983 until June
1996, Dr. Singh served as chairman of the board of directors of LCC
International, Inc., which he co-founded with his wife in 1983. Dr. Singh has
played an instrumental role in the cellular industry by developing key standards
used today in wireless system design and methodology. Dr. Singh is a member of
the board of directors of Teligent, Inc., XM Satellite Radio Holdings, Inc. and
LCC International, Inc. He received a Ph.D. in electrical engineering from
Southern Methodist University.
George P. Stamas was elected a director of Aether on October 20, 1999.
Since January 2000, Mr. Stamas has served as a Vice Chair of Deutsche Banc Alex.
Brown. From April 1996 until December 1999, Mr. Stamas was a partner with the
law firm of Wilmer, Cutler & Pickering and now serves as a consultant to Wilmer,
Cutler & Pickering. From 1983 until April 1996, Mr. Stamas was a partner at
Piper & Marbury L.L.P. Mr. Stamas is counsel to, and a limited partner of, the
Baltimore Orioles baseball team. Mr. Stamas also serves on the board of
directors of FTI Consulting, Inc., a provider of litigation support services,
Luminant Worldwide Corporation, a provider of Internet consulting services and
Metrocall, a paging company. He received a B.S. in economics from the Wharton
School of the University of Pennsylvania and a J.D. from University of Maryland
Law School.
Robin T. Vasan was appointed as a director of Aether at the completion of
our acquisition of Riverbed. Since June 1998, Mr. Vasan has been a general
partner of Mayfield Fund, a venture capital fund. From June 1994 until February
1997, he served as vice president, core technology of Risk Management Solutions,
an insurance software company. In 1997 and 1998, he attended Harvard Business
School. He received a B.A.S. in industrial engineering and economics from
Stanford University and an M.B.A. from Harvard Business School. Mr. Vasan is a
member of the board of directors of WebMethods, Inc., a business-to-business
infrastructure software and service company.
61
<PAGE> 63
Devin N. Wenig was elected a director of Aether on October 20, 1999. In
April 1994, Mr. Wenig joined Reuters America, Inc. and was promoted to managing
director of Reuters Information in February 2000, where he has global
responsibility for the regional and central marketing function, product
development, electronic commerce, the data groups and commercial policy for
Reuters's information businesses in the Americas. Mr. Wenig serves as a director
on the boards of Loan Pricing Corp., Intralinks, Inc., FreeEdgar.com and
Multex.com. He received a B.S. from Union College and a J.D. from Columbia
University.
Thomas E. Wheeler was elected a director of Aether on October 20, 1999.
Since 1992, Mr. Wheeler has served as president and chief executive officer of
the Cellular Telecommunications Industry Association. In 1994, Mr. Wheeler was
appointed by President Clinton to a six-year term as a member of the board of
trustees of the John F. Kennedy Center for the Performing Arts. Mr. Wheeler is a
director on the boards of the Public Broadcasting System, the U.S. Capitol
Historical Society and OmniSky. He received a B.S. in business administration
from Ohio State University.
Our board has twelve directors. NexGen, Telcom-ATI Investors, L.L.C.,
Reuters and 3Com -- who will together hold 37.8% of the shares of common stock
outstanding after the offering -- are parties to a stockholders agreement that
governs voting for our directors. The agreement requires each party to vote all
its shares for two directors named by NexGen, two directors named by Telcom-ATI
Investors, two directors named jointly by NexGen and Telcom-ATI Investors and
one director named by each of Reuters and 3Com. Messrs. Oros and Ein were
appointed by NexGen, Dr. Singh and Mr. Prakash were appointed by Telcom-ATI
Investors, Mr. Wenig was appointed by Reuters and Ms. Roberts was appointed by
3Com as directors under the stockholder agreement. The terms of the stockholder
agreement are further described in "Transactions Between Aether and its
Officers, Directors and Significant Stockholders."
Directors serve for a term of one year.
Our executive officers are appointed by, and serve at the discretion of,
our board of directors. We expect that each of our officers will devote
substantially full time to our affairs. We expect that our non-employee
directors will devote such time to our affairs as is necessary to discharge
their duties. There are no family relationships among any of our executive
officers, directors or key employees.
COMMITTEES OF THE BOARD OF DIRECTORS
The compensation committee consists of Messrs. Beese, Prakash and Wheeler.
The compensation committee:
- determines the compensation of senior executive officers (such as the
chief executive officer and chief financial officer), subject, if the
board so directs, to the board's further ratification of the
compensation;
- determines the compensation for other officers or delegates such
determinations to the chief executive officer;
- grants options, stock or other equity interests under our stock option or
other equity-based incentive plans; and
- administers those plans and, where such plans specify, our other employee
benefit plans.
The audit committee consists of Messrs. Beese and Bonsal. The audit
committee:
- makes recommendations to the board concerning the engagement of
independent accountants;
- reviews with the independent accountants the plans and results of the
audit engagement;
- approves professional services provided by the independent accountants;
- considers the range of audit and non-audit fees;
- verifies that auditors are independent of management and are objective in
their findings;
- reviews annual CPA audit and recommendations of internal controls and
related management response;
62
<PAGE> 64
- reviews the audit reports with management and the auditor; and
- monitors management's efforts to correct deficiencies described in any
audit examination.
DIRECTOR COMPENSATION
Except for reimbursement for reasonable travel expenses relating to
attendance at board meetings and discretionary grants of stock options,
directors will not be compensated for their services as directors. Directors who
are employees will be eligible to participate in our equity incentive plan. In
October 1999, we granted options to purchase 12,600 shares to each director and
options to purchase 4,000 shares to each member of the audit and compensation
committees. The exercise price of these options is equal to $16.00 per share.
Mr. Wenig's options are held in trust, and he currently has no beneficial
interest in the options.
The following table identifies options that we have granted to non-employee
directors since January 1, 1999.
<TABLE>
<CAPTION>
NUMBER OF
SHARES UNDERLYING EXERCISE
NON-EMPLOYEE DIRECTOR OPTIONS(#) PRICE($)
--------------------- ----------------- --------
<S> <C> <C>
J. Carter Beese, Jr. .............. 20,600 16.00
Frank A. Bonsal, Jr. .............. 37,500 1.77
16,600 16.00
Mark D. Ein........................ 100,000 1.60
17,500 4.00
12,600 16.00
Rahul C. Prakash................... 16,600 16.00
Janice M. Roberts.................. 12,600 16.00
Dr. Rajendra Singh................. 12,600 16.00
George P. Stamas................... 5,000 2.40
12,600 16.00
Devin N. Wenig..................... 12,600 16.00
Thomas E. Wheeler.................. 37,500 1.77
16,600 16.00
</TABLE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth compensation for 1998
and 1999 awarded to, earned by or paid to our chief executive officer and the
four other most highly paid executive officers. We refer to these five officers
as the "named executive officers."
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------- -------------------------
SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (#) ($)
--------------------------- ---- ---------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
David S. Oros................ 1999 $200,000 $250,000 -- 945,100 --
Chairman and Chief 1998 200,000 150,000 -- -- --
Executive Officer
George M. Davis.............. 1999 157,292 24,504 -- 55,000 $7,750
President, Enterprise 1998 133,333 52,895 $2,420 75,000 --
Solutions and Services
Group
Dale R. Shelton.............. 1999 129,167 20,000 -- 42,500 --
Chief Technology Officer 1998 109,200 4,000 -- 50,000 --
</TABLE>
63
<PAGE> 65
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------- -------------------------
SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (#) ($)
--------------------------- ---- ---------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
David C. Reymann............. 1999 126,042 -- -- 51,250 --
Chief Financial Officer 1998 64,905 -- -- 62,500 --
Brian W. Keane............... 1999 56,817 50,000 -- 125,000 --
Senior Vice President, 1998 -- -- -- -- --
Business Affairs
</TABLE>
Option Grants. The following table shows information regarding stock
options granted to the named executive officers during the year ended December
31, 1999. No stock appreciation rights were granted to these individuals during
the year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENTAGE ANNUAL RATES OF STOCK
OF TOTAL PRICE APPRECIATION FOR
NUMBER OF SHARES OPTIONS EXERCISE OPTION TERM($)
UNDERLYING OPTIONS GRANTED TO PRICE PER EXPIRATION ---------------------------------------
NAME GRANTED(#)(*) EMPLOYEES SHARE($) DATE 0%(6) 5%(7) 10%(7)
---- ------------------ ---------- --------- ------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
David S. Oros........ 775,000(1) 28.04% $ 1.60 June 22, 2009 $11,160,000 $18,958,293 $30,922,407
157,500(1) 5.70% $ 4.00 September 20, 2009 $ 1,890,000 $ 3,474,814 $ 5,906,231
12,600(2) 0.46% $16.00 October 20, 2009 $ -- $ 126,785 $ 321,298
George M. Davis...... 50,000(1) 1.81% $ 1.60 June 22, 2009 $ 720,000 $ 1,223,116 $ 1,994,994
5,000(3) 0.18% $ 8.00 September 26, 2009 $ 30,000 $ 74,023 $ 141,562
Dale R. Shelton...... 37,500(1) 1.36% $ 1.60 June 22, 2009 $ 540,000 $ 917,337 $ 1,496,245
5,000(3) 0.18% $ 8.00 September 26, 2009 $ 30,000 $ 74,023 $ 141,562
David C. Reymann..... 18,750(1) 0.68% $ 1.60 June 22, 2009 $ 270,000 $ 388,668 $ 678,123
12,500(4) 0.45% $ 8.00 October 11, 2009 $ 100,000 $ 225,779 $ 418,748
20,000(3) 0.72% $ 8.00 September 26, 2009 $ 120,000 $ 296,090 $ 566,248
Brian W. Keane....... 125,000(5) 4.52% $ 4.80 August 16, 2009 $ 900,000 $ 1,843,342 $ 3,290,614
</TABLE>
---------------
* Options expire 90 days after the termination of employment of the option
holder.
(1) The warrants are immediately exercisable in their entirety.
(2) Fifty percent of the options will become exercisable beginning on October
20, 2000, and the other 50% will become exercisable on October 20, 2001.
None of the options will become exercisable prior to such dates unless there
is a change of control of Aether, which includes a sale of all our assets or
the sale of at least 80% of the equity of our company.
(3) The options will become immediately exercisable in their entirety on
September 26, 2001 and none of them will become exercisable prior to that
date unless there is a change of control of Aether, which includes a sale of
all our assets or the sale of at least 80% of the equity of our company.
(4) The options will become immediately exercisable in their entirety on October
11, 2001 and none of them will become exercisable prior to that date unless
there is a change of control of Aether, which includes a sale of all our
assets or the sale of at least 80% of the equity of our company.
(5) One-third of the options are immediately exercisable. The remaining
two-thirds of the options become exercisable annually over a two-year period
in equal one-third increments, beginning on August 16, 2000.
(6) The options listed in this column were issued with an exercise price below
the fair market value of the option at the time of issuance.
(7) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the SEC and are based on the assumption that the exercise
price was the fair market value of the shares on the date of grant. Prior to
October 20, 1999, the fair market value on the date of grant was determined
by our board of directors. There is no assurance provided to any executive
officer or any
64
<PAGE> 66
other holder of our securities that the actual price appreciation over the
ten-year option term will be at the assumed 5% and 10% levels or at any
other defined level.
Aggregate Option Exercises and Holdings. No options were exercised by the
named executive officers during the year ended December 31, 1999. The following
table provides information concerning the shares represented by outstanding
options held by each of the named executive officers as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DEC. 31, IN-THE-MONEY OPTIONS AT
1999(#) DEC. 31, 1999($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David S. Oros................................ 932,500 12,600 $64,920,313 $ 700,875
George M. Davis.............................. 175,000 80,000 $12,404,375 $5,578,250
Dale R. Shelton.............................. 150,000 67,500 $10,638,751 $4,715,187
David C. Reymann............................. 39,583 74,167 $ 2,774,115 $4,600,104
Brian W. Keane............................... 41,667 83,333 $ 2,784,375 $5,568,750
</TABLE>
---------------
(1) Options were "in the money" because the closing price of Aether's common
stock on December 31, 1999 exceeded the exercise price of the options. The
value of unexercised options represents the difference between the exercise
price of net options and $71.625, which was the last reported sale price of
Aether common stock on December 31, 1999.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
We have entered into employment contracts with Messrs. Oros, Reymann and
Jackson.
Mr. Oros' contract became effective June 22, 1999 and provides for a salary
of $200,000 per year, a performance bonus of up to $100,000 per year and
additional bonuses based on annual revenue targets and proceeds raised from
private placements of our equity securities in 1999. The contract has an initial
term expiring in June 2002 and automatically extends for additional one month
increments until terminated by Aether or Mr. Oros on 15 days notice. Pursuant to
the contract, we granted Mr. Oros a warrant to acquire 875,000 shares of our
common stock. The warrant has an exercise price of $1.60 per share of common
stock. We also gave Mr. Oros the right to allocate to key employees of his
choosing warrants to acquire 125,000 shares of common stock having the same
terms and conditions. Mr. Oros has awarded warrants for 50,000 shares of our
common stock to Mr. Davis, 37,500 shares of our common stock to Mr. Shelton and
18,750 shares of our common stock to Mr. Reymann. Mr. Oros subsequently received
our permission to assign part of his warrant, leaving him with a warrant to
acquire 775,000 shares. In September 1999, Mr. Oros received a warrant to
acquire 175,000 shares of our common stock at an exercise price of $4 per share.
From this grant, Mr. Oros subsequently assigned a warrant exercisable for 17,500
shares of our common stock. If we terminate Mr. Oros without cause, he is
entitled to receive from us an amount equal to the salary he would have received
during the balance of the term of the employment contract. Under the contract,
"cause" means committing an act of gross negligence or other willful act that
materially adversely affects Aether, refusing to comply in any respect with
specific directions of our board of directors, or being convicted or pleading no
contest to any felony or any misdemeanor involving fraud, breach of trust or
misappropriation. Each of these warrants became exercisable upon completion of
our initial public offering.
Mr. Reymann's contract was entered into June 1, 1999 and provides for a
minimum salary of $127,500 per year. The contract has an initial term expiring
on June 1, 2001. We and Mr. Reymann have agreed that if we terminate him without
cause, he is entitled to receive from us an amount equal to the salary he would
have received during the balance of the term of the employment contract.
At the closing of our acquisition of Riverbed, we amended Mr. Jackson's
existing employment agreement with Riverbed to provide that he would serve as
president of our software products group.
65
<PAGE> 67
Mr. Jackson was subsequently given the title of Managing Director, Aether
Capital. Mr. Jackson is paid a base salary of $194,000 per year. The contract is
on a year-to-year basis and automatically extends for additional one-year
periods on each January 22 until terminated by Aether or Mr. Jackson on 30 days
notice. If we terminate him without cause, he will be entitled to receive from
us an amount equal to 12 months of his base salary.
1999 EQUITY INCENTIVE PLAN
Before our initial public offering, we adopted an equity incentive plan to
promote our long-term growth and profitability, improve stockholder value and
attract, retain and reward highly motivated and qualified employees and
directors. The compensation committee of our board of directors administers the
equity incentive plan unless the board of directors specifies another committee
of the board of directors or chooses to act itself as administrator. The board
of directors has given Mr. Oros authority as a special committee of the Board to
make option grants.
Under the equity incentive plan, we can grant options for approximately 7.7
million shares of common stock, which number will adjust automatically to be 20%
of our outstanding common stock from time to time. We can grant options to
employees in the form of incentive stock options for up to 3,000,000 shares, but
may choose not to do so. Any options we grant that are not incentive stock
options will be nonqualified stock options.
All of our employees, directors and certain service providers are eligible
to receive options under the equity incentive plan. For tax reasons, the equity
incentive plan limits the number of shares covered by the options that an
individual can receive in a calendar year to 50% of the original pool. The
administrator will determine the prices, exercise schedules, expiration dates
and other material conditions under which optionees may exercise their options.
The exercise price of these options may be less than the fair market value of
the common stock on the date of grant when the administrator considers that to
be appropriate. We replaced the options Aether Systems LLC granted with options
under this plan when we converted to a corporation before completion of our
initial public offering.
All options will become exercisable if we have a change of control, except
as option agreements provide otherwise or as necessary to allow pooling of
interest accounting. The plan's administrator may provide that an optionee must
cooperate with us in connection with the change of control to receive this
acceleration. In general, we will have a change of control if:
- anyone acquires or holds at least 80% of our voting securities, excluding
holdings by our benefit plans and some other related parties;
- we complete a merger or consolidation, unless, in general, our pre-merger
shareholders own more than 20% of the voting securities of the merged
companies;
- our board changes in specified ways in connection with proxy contests or
as a result of adding new directors who are not approved by existing
directors; or
- if we complete a liquidation or dissolution or sell or otherwise dispose
of all or substantially all of our assets.
In addition, unless we provide otherwise, or as necessary to allow pooling of
interest accounting, the equity incentive plan and all options will terminate in
defined circumstances if:
- we are not the surviving company in a merger, consolidation or
reorganization;
- we complete a liquidation or dissolution or sell substantially all our
assets; or
- our board approves and we complete a transaction that results in a person
or entity's owning all of our stock, unless the person or entity is
related to us in specified ways.
However, before the equity incentive plan would terminate for one of those
reasons, we would either agree that our successor would assume the options
and/or the equity incentive plan, allow optionees to exercise
66
<PAGE> 68
the options if these options were in-the-money, or cancel the options by paying
the amount, if any, by which the value determined with respect to that
transaction exceeds the exercise price of the options.
The equity incentive plan limits the time during which an optionee can
exercise an option to no more than ten years. In addition, an optionee who
leaves employment will generally have no more than 90 days to exercise an
option, reduced to no days after employment in terminations for cause, and
additional rules apply to death and disability. The compensation committee may,
however, override the plan's rules, other than the ten year limit. We cannot
grant additional options under the equity incentive plan after September 20,
2009.
SENIOR BONUS PLAN
We adopted a senior bonus plan before our initial public offering. A
special tax rule in Section 162(m) of the Internal Revenue Code of 1986, as
amended, limits the compensation that we can deduct for payments to our chief
executive officer and the four other most highly compensated executive officers
to $1 million per officer per year. We intend the senior bonus plan to provide
incentive compensation that does not count against each executive's deduction
limit. We may choose to use the senior bonus plan, or we may pay bonuses under
some other future plan to which the tax deduction limits will apply, as long as
we do not use the other payments to make up bonuses a participant loses under
the senior bonus plan.
Unless our board of directors selects another committee, the compensation
committee administers the senior bonus plan and selects participants from our
key employees and those of any subsidiaries, although we expect that most
participants will be executive officers. When we refer to the "compensation
committee" in discussing the senior bonus plan, we also mean any other committee
that administers this plan. Only "outside directors" under the tax rules can
determine the participants, set the performance goals and certify that we or the
participants have met those goals. The compensation committee consists solely of
two outside directors and one director affiliated with a 5% stockholder. The
compensation committee has broad administrative authority to, among other
things, designate participants, establish performance goals and performance
periods, determine the effect of participant termination of employment and
"change in control" transactions before paying an award, and generally interpret
and administer the senior bonus plan. Neither we nor the board has designated
any participants or established any performance goals under the senior bonus
plan.
The compensation committee will select participants for any given time
period based primarily on its judgment as to which executive officers are likely
to be named in our proxy statement as the chief executive officer or one of our
other four most highly compensated executive officers as of the end of the
performance period and that the compensation committee reasonably expects to
have compensation in excess of $1 million. None of our employees exceeded that
limit in 1999.
In setting performance goals, the compensation committee will specify the
applicable performance criteria and targets it will use for such performance
period, which may vary from participant to participant. The performance criteria
and targets will measure one or more of the following company, subsidiary,
operating unit or division financial performance measures:
- pre-tax or after-tax net income or earnings;
- earnings before interest expense, taxes, depreciation and amortization;
- operating income or gross revenue;
- profit or operating margin;
- earnings per share;
- stock price;
- cash flows;
67
<PAGE> 69
- total stockholder return;
- total stockholder return as compared total return, on a comparable basis,
of a publicly available index such as the Standard & Poor's 500 Stock
Index;
- return on equity, on capital or on investment;
- ratio of debt to stockholders' equity;
- subscriber growth;
- working capital; or
- strategic business criteria consisting of one or more objectives based
upon meeting specified revenue, market penetration, geographic business
expansion goals, cost targets and goals relating to acquisitions or
divestitures.
The compensation committee may set these goals (1) on an absolute
stand-alone basis, or on a relative basis in comparison to others, (2) based on
internal targets, (3) based on comparison with prior performance, (4) based on
comparison to capital, shareholders' equity, shares outstanding, assets or net
assets, and/or (5) based on comparison to the performance of other companies.
For example, the compensation committee could express an income-based
performance measure in a number of ways, such as net earnings per share, or
return on equity or with reference to meeting or exceeding a specific target, or
with reference to growth above a specified level, such as prior year's
performance or peer group performance. The compensation committee can also
ignore unusual or nonrecurring accounting effects. The senior bonus plan
provides that achieving these goals must be substantially uncertain at the time
the goals are established and are subject to the committee's right to reduce the
amount of any award payable as a result of the performance as discussed below.
The compensation committee may set a participant's target bonus, that is,
the amount the participant will receive if the targets are met, as a dollar
amount or in a formula, for example as a percentage share of a bonus pool,
provided that, if the committee uses a pool approach, the total bonus
opportunity for all participants who are part of the pool may not total more
than 100% of the pool. The committee has the sole discretion to reduce, but not
increase, the actual bonus awarded under the plan. The committee must determine
the extent to which the performance goals are met and the participant becomes
entitled to a bonus.
The maximum bonus payable under the senior bonus plan to any one individual
in any one calendar year is $3 million, although we have no plans or
expectations at this time to pay bonuses of that size.
Our board or the committee may at any time amend the senior bonus plan, and
our board may terminate the plan. However, without a participant's written
consent, no amendment or termination may materially adversely affect the annual
bonus rights, if any, of any already designated participant for a given
performance period after the participants and targets are set. Our board may
make any amendments necessary to comply with applicable regulatory requirements,
including the tax deduction limit for senior executives. If necessary to
preserve the intended tax treatment, the board may submit future amendments of
the senior bonus plan to our shareholders for approval.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee is an officer or employee
of Aether. None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving on our board of directors or compensation committee.
68
<PAGE> 70
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that a director
of a corporation will not be personally liable for monetary damages for breach
of an individual's fiduciary duties as a director except for liability:
- for any breach of a director's duty of loyalty to Aether or to its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- for any transaction from which a director derives an improper personal
benefit.
Our bylaws provide that Aether will indemnify its directors and executive
officers and may indemnify its officers, employees and other agents to the full
extent permitted by law. We believe that indemnification under our bylaws will
cover at least negligence and gross negligence on the part of an indemnified
party. Our bylaws also permit us to advance expenses incurred by an indemnified
party in connection with the defense of any action or proceeding arising out of
a party's status or service as a director, officer, employee or other agent of
Aether upon an undertaking by the party to repay the advances if it is
ultimately determined that he or she is not entitled to indemnification.
We entered into separate indemnification agreements with each of our
directors and officers. These agreements require us to, among other things,
indemnify the director or officer against expenses (including attorney's fees),
judgments, fines and settlements paid by the individual in connection with any
action, suit or proceeding arising out of the individual's status or service as
a director or officer of Aether (other than liabilities arising from willful
misconduct or conduct that is knowingly fraudulent or deliberately dishonest)
and to advance expenses incurred by the individual in connection with any
proceeding against the individual with respect to which he or she may be
entitled to indemnification by us.
We believe that our certificate of incorporation and bylaw provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers. We also maintain directors' and officers' liability
insurance.
At present we are not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of Aether where
indemnification will be required or permitted. Furthermore, we are not aware of
any threatened litigation or proceeding that might result in a claim for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling our company
pursuant to the foregoing provisions, we have been informed that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
69
<PAGE> 71
TRANSACTIONS BETWEEN AETHER AND ITS
OFFICERS, DIRECTORS OR SIGNIFICANT STOCKHOLDERS
Since January 1, 1997, we have engaged in the following transactions with
our executive officers, directors and owners of 5% or more of our equity
securities, or entities related to them.
EQUITY INVESTMENTS
The following discussion describes the issuance of equity interests in
connection with the initial capitalization of our predecessor, Aether Systems,
LLC, and subsequent financings. Immediately prior to our initial public offering
on October 26, 1999, we converted into a Delaware corporation, at which time
each unit in our limited liability company was converted into two and one-half
shares of our common stock and each option or warrant for one unit was converted
into an option or warrant for two and one-half shares of our common stock. The
discussion below gives only the number of shares of our common stock into which
units were converted.
Aeros L.L.C., our predecessor, was formed in January 1996 by NexGen
Technologies, L.L.C. and a predecessor to Transettlements, Inc. At the time
Aeros was formed, NexGen contributed assets in the wireless data field in
exchange for 7,500,000 shares and Transettlements contributed $1,000,000 in cash
in exchange for 2,500,000 shares. In May 1996, Transettlements contributed an
additional $500,000 in exchange for an additional 1,250,000 shares. In August
1996, we changed our name to Aether Technologies International, L.L.C. Then, in
September 1999, we changed our name to Aether Systems, LLC.
In February 1997, a subsidiary of Telcom Ventures, L.L.C. acquired 725,000
shares from Transettlements and 107,500 shares from NexGen and contributed
$1,000,000 to Aether in exchange for 1,562,500 shares. Additionally, Telcom
Ventures was granted an option to purchase 1,775,000 shares from Transettlements
and two options to purchase a total of 2,267,500 shares from NexGen. In December
1997, Telcom Ventures and its subsidiary contributed an additional $690,369 to
Aether in exchange for an additional 575,308 shares. In June 1999, Telcom
Ventures exercised its option with Transettlements and one of its options with
NexGen to purchase 1,775,000 and 392,500 shares, respectively. Aether did not
receive any proceeds from the exercise of these options.
In October 1997, we borrowed $100,000 from Reuters Group Overseas Holdings
(UK) Limited pursuant to a demand note that accrued interest at 7% per year. In
January 1998, we borrowed an additional $100,000 from Reuters at an accrued
interest rate of 7% per year pursuant to a second demand note. In March 1998, as
part of the consideration paid by Reuters for Aether's development of
MarketClip, Reuters cancelled both of these notes.
In January 1998, Pyramid Ventures, Inc., a subsidiary of Bankers Trust
Corporation, acquired 833,333 shares at $1.20 per share and 1,004,903 shares at
$1.49 per share for total proceeds to Aether of approximately $2.5 million. At
that time, Aether redeemed 208,333 shares held by NexGen for $249,999 and
625,000 shares held by Transettlements for $750,000. As part of the financing
arrangement, Pyramid agreed to use reasonable efforts (1) to cause BT Alex.
Brown to purchase 100 subscriptions to MarketClip for a 12-month period or (2)
to refer affiliates of BT Alex. Brown or third parties to Aether for the purpose
of entering into development contracts with an aggregate price of $300,000 over
a two-year period.
In June 1998, Telcom Ventures and Pyramid each loaned us $250,000. The
notes accrued interest at 8% per year and were due on demand with a stated
maturity date of the earlier of December 31, 1998 or the closing of an
anticipated private placement of units. The notes were convertible into shares
at the option of the holder at the rate of $250,000 divided by the per share
price to be paid in the anticipated private placements. In connection with the
issuance of these notes, we also issued warrants to acquire 14,140 shares with
an exercise price of $0.01 per share to each of Telcom Ventures and Pyramid.
Pyramid converted its $250,000 loan plus accrued interest in August 1998 to
142,950 shares at a per share price of $1.77 and exercised its warrant and
acquired 14,140 shares. In August 1998, we repaid the amount owed
70
<PAGE> 72
Telcom Ventures, including $2,520 in interest. In August 1999, Telcom Ventures
exercised its warrant and acquired 14,140 shares at a per share price of $0.01.
In August 1998, Reuters received 2,828,055 shares in exchange for
$4,735,020 in cash and forgiveness of $530,980 we owed Reuters for hardware and
other inventory, offset by $266,000 Reuters owed us under a license agreement we
previously entered into with Reuters relating to sales of MarketClip and related
fees.
In October 1998, 3Com Corp. contributed $6,000,000 in exchange for
2,500,000 shares. At the same time, we issued 3Com a conditional warrant to
purchase 893,665 shares exercisable at $0.01 per share if the milestones
described below are achieved before October 20, 2001. 3Com achieved the first
milestone entitling it to exercise 143,665 shares as a result of having
completed a joint sales and marketing plan. 3Com may exercise an additional
375,000 shares if and when we receive $6 million in engineering services revenue
from business opportunities introduced by 3Com. 3Com may exercise an additional
375,000 shares if we attain 6,000 wireless service subscribers as a result of
business opportunities introduced to us by 3Com. 3Com has not attained either of
these last two milestones and has not exercised any of its warrants.
Effective June 1999, we issued to Mr. Oros a warrant to acquire 875,000
shares at an exercise price of $.01 per share. We subsequently agreed with Mr.
Oros to amend the exercise price to $1.60 per share. We also gave Mr. Oros the
right to allocate to key employees of his choosing warrants to acquire 125,000
shares having the same terms and conditions. Mr. Oros has awarded warrants to
acquire 50,000 shares to Mr. Davis, 37,500 shares to Mr. Shelton and 18,750
shares to Mr. Reymann. Mr. Oros subsequently received our permission to
subdivide his warrant to give Mark Ein a warrant to acquire 100,000 shares,
leaving Mr. Oros with a warrant to acquire 775,000 shares. In September 1999,
when we increased the exercise price on the warrants that had been issued to Mr.
Oros in June 1999, we granted Mr. Oros a warrant to acquire an additional
175,000 shares at an exercise price of $4 per share to compensate him for the
increase in the exercise price of the earlier warrants. From this grant, Mr.
Oros subsequently assigned a warrant exercisable for 17,500 shares to Mr. Ein.
In August 1999, we issued to Mr. Ein 100,000 shares upon exercise of his
options at an exercise price of $0.40 per share. In September 1999, Mr. Beese
exercised an option for 75,000 shares at an exercise price of $0.40 per share.
NexGen, Telcom-ATI Investors, Reuters and 3Com entered into a stockholder
agreement under which each party will vote all of its shares for two directors
nominated by NexGen, two directors nominated by Telcom-ATI Investors, two
directors nominated jointly by NexGen and Telcom-ATI Investors and one director
nominated by each of Reuters and 3Com. The right to name directors will end when
parties to the agreement reduce their share ownership below levels set forth in
the agreement.
We entered into a registration rights agreement with NexGen, Telcom-ATI
Investors, Reuters, 3Com and Transettlements, which entitles these parties to an
aggregate of three demand registrations at any time after October 27, 2000, and
at the request of these parties, to include in any registration statement for
our own account or the account of any other stockholder, the shares of common
stock held by those parties, subject to limitations set forth in the agreement.
The agreement also requires us to file a shelf registration statement covering
the sale of all shares held by parties to the stockholder agreement from time to
time. The agreement requires us to file the shelf registration statement only
when we are eligible to use the short form registration statement on Form S-3,
which would be no earlier than October 20, 2000. Following our acquisition of
Riverbed, the shareholders of Riverbed became parties to this registration
rights agreement under which the shareholders of Riverbed and their assignees
have equivalent rights to the original holders and their assignees thereunder.
In addition, the shareholders of Riverbed and their assignees, in the aggregate,
have the right to one additional shelf registration after October 20, 2000 (or
earlier if the original holders sell shares in reliance on Rule 144) provided
that the sales by any Riverbed shareholder or assignee under such additional
right will not exceed the amount that would be permitted under Rule 144(e) if
the one year holding period had expired.
71
<PAGE> 73
LOAN TO NEXGEN
In September 1998, we loaned NexGen $155,000 at an interest rate of 7.5%
per year pursuant to two notes. One note for $95,000 was due in December 1998,
and one note for $60,000 was due in October 1998. In August 1999, both notes
were amended to be due upon 30 days notice. On December 24, 1998, NexGen made a
payment of $19,346 with respect to these notes. At December 31, 1999, the
balance outstanding on these notes was $150,445. During 1999, NexGen paid
interest of $0 on the notes. On February 15, 2000, NexGen made an additional
payment of $151,716 in full satisfaction of the notes.
REUTERS LICENSE AGREEMENT
In August 1998, we entered into an amended license, marketing and
distribution agreement with Reuters, which continues through August 11, 2001 and
renews automatically for successive one-year terms unless either party provides
180 days prior written notice. Reuters granted us a non-exclusive license to use
the information supplied by Reuters Selectfeed Plus for distribution to
subscribers of MarketClip, AirBroker and for development purposes. In August
1999, Reuters granted us permission to use Selectfeed Plus information for the
TradeRunner service developed for Morgan Stanley Dean Witter Online and other
services we are developing. Pursuant to the agreement, Aether granted Reuters an
exclusive license to use the systems developed by Aether to transmit Reuters
information to wireless handheld devices and a license to use the MarketClip
software for purposes of supplying subscribers with MarketClip. The geographic
scope of all of the licenses under the agreement is limited to the United
States. Under the agreement, Reuters has a right of first refusal to purchase
shares of Aether if Aether or any stockholder sells shares and, as a result, a
competitor of Reuters holds 50% or more of our shares, or if we sell all or
substantially all of our assets to a competitor of Reuters. Under the terms of
the license, we pay Reuters a monthly fee for each subscriber to our services
that uses information provided by Reuters. During 1998 we paid Reuters $40,300
under this contract and the average monthly fee per subscriber was $4.89; during
1999 we paid Reuters $122,356 under this contract and the average monthly fee
per subscriber was $8.02.
OMNISKY
On August 9, 1999, we formed a new company with 3Com in which we acquired
an interest in AirWeb Corporation, which was doing business as OpenSky and is
currently known as OmniSky Corporation. We contributed a perpetual,
non-exclusive, non-assignable, royalty-free worldwide license to our AIM
software platform in exchange for 7,000,000 shares of Series A Preferred Stock.
In connection with the formation of OmniSky, 3Com paid $7.0 million in cash and
agreed to contribute to OmniSky a perpetual, non-exclusive, non-assignable
license to 3Com's Web Clipping technology (including rights to derivative works)
and Palm OS software in exchange for 10,000,000 shares of Series A Preferred
Stock, which initially represented a 33% equity interest in OmniSky on a fully
diluted basis. The management team of OmniSky acquired in the aggregate 4.2
million shares of common stock and options to acquire an additional 5.8 million
shares. Following our initial public offering, we exercised a warrant to acquire
an additional 3,000,000 shares of Series A Preferred Stock for $2,500,000
increasing our equity interest in OmniSky to 33% on a fully diluted basis. In
January 2000, we exercised our right of first refusal to maintain our 33% equity
interest by acquiring 1,439,809 shares of Series B Preferred Stock for $6.7
million, net of the cancellation of approximately $613,000 of indebtedness owed
by OmniSky to us. 3Com did not exercise its right of first offer and thus its
33% interest has been diluted. 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, our ownership in OmniSky decreased to approximately
30.4%.
As part of our investment with 3Com in OmniSky, we each received
registration rights, including two demand registration rights that we can use
after the earlier of the completion of OmniSky's initial public offering and
August 9, 2004. We also entered into a right of first refusal and co-sale
agreement, which, among other things, requires the management team to first
offer any OmniSky securities to OmniSky and then to us and 3Com before selling
the securities to a third party. This agreement also allows us and 3Com to sell
a pro rata portion of our stock to a third party along with the management team
if the right of first refusal is not exercised. We and 3Com have also agreed
that before either of us sells any shares of
72
<PAGE> 74
Series A Preferred Stock to an unrelated third party, we would first offer the
other (or any other holders of Series A Preferred Stock) those shares on a pro
rata basis and then offer their shares to OmniSky.
Aether, 3Com and OmniSky's management are each entitled to appoint one
director to OmniSky's board of directors. OmniSky's board of directors currently
includes: David S. Oros, our chairman, chief executive officer and president and
Janice M. Roberts, who is one of our directors. We have entered into a voting
agreement with 3Com and OmniSky's management in which each of the parties has
agreed to vote in favor of each of the directors named by Aether, 3Com and
OmniSky's management until the earliest of (1) OmniSky's completion of an
initial public offering of at least $15.0 million, (2) OmniSky's completion of a
sale of substantially all of the assets of OmniSky or the transfer of more than
50.0% of the voting power of OmniSky or (3) the parties' termination of the
agreement. OmniSky cannot take certain major corporate actions, such as selling
the company or issuing securities with rights and preferences senior to the
Series A Preferred Stock, without the approval of holders of two-thirds of the
Series A Preferred Stock.
On August 9, 1999, we entered into a letter agreement with OmniSky under
which we have agreed to provide OmniSky, for a period of ten months from the
date of the letter agreement, engineering services for the design and
development of its proposed systems and services. The letter agreement
originally provided that OmniSky will pay us $250,000 per month for these
services but we subsequently amended it to be on a time and materials basis. In
addition, they paid us $500,000 for work performed prior to the date of the
letter agreement. Additionally, for a period of five years from the date of the
letter agreement, OmniSky has agreed to provide us the right to resell OmniSky's
basic package of services. We also have a right of first refusal for development
of all investment banking and brokerage applications for OmniSky for a period of
two years from the date of the letter agreement, subject to approval of the
company for whom the service is developed.
In October 1999, we agreed to purchase 25,000 Minstrel V modems from
OmniSky for a price per modem of $230, which was OmniSky's cost. OmniSky has an
exclusive buying arrangement with Novatel for Minstrel V modems, which runs
through March 2000. We have paid for 20,000 of the 25,000 modems in two
installments: $1,400,000 on October 15, 1999 and $3,200,000 on November 15,
1999. The modems are being delivered to us through April of 2000. Subsequent to
June 30, 2000, we received $1.8 million from OmniSky pursuant to an agreement
for OmniSky to repurchase 8,000 modems, reducing our purchase commitment from
25,000 to 17,000.
RIVERBED
On March 6, 2000, we acquired Riverbed for an aggregate of 5.4 million
shares of our common stock. We issued 4,537,281 shares in exchange for the
outstanding shares of Riverbed capital stock and reserved an additional 862,480
shares of our common stock for issuance upon exercise of options issued to
Riverbed employees. At the closing, E. Wayne Jackson, the chairman and chief
executive officer of Riverbed, became the president of our software products
group and a director of Aether and Robin T. Vasan, a director of Riverbed,
became a director of Aether. In addition, Mr. Jackson entered into an employment
agreement, which includes a provision restricting him from competing with us or
Riverbed, for one year following his termination. As part of the closing,
licensing fees for our AIM software platform that have been incurred by Riverbed
are no longer payable.
As a result of our acquisition of Riverbed, the shareholders of Riverbed
became parties to the registration rights agreement we entered into at the time
of our initial public offering with several of our shareholders, and the
shareholders of Riverbed are deemed to have equivalent rights to the original
holders and their assignees. In addition, the shareholders of Riverbed, in the
aggregate, have the right to one additional shelf registration after October 20,
2000, or sooner if any of the original holders sell shares sooner pursuant to
Rule 144. The additional shelf registration is limited to the number of shares a
holder could sell under Rule 144.
73
<PAGE> 75
REUTERS
On May 6, 2000, we and Reuters formed Sila. We own 60% of Sila and Reuters
owns the remaining 40%. David S. Oros, our chief executive officer, serves as
chairman and one of our directors, J. Carter Beese, Jr. also serves on the board
of Sila. Our investment was funded through our contribution of IFX, a company
which we purchased in April 2000 for $85 million, and $13.5 million in cash.
Reuters contributed $22 million in cash and its wireless applications asset,
Futures Pager.
74
<PAGE> 76
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of August 21, 2000, and as adjusted
to reflect the sale of 3,500,000 shares of common stock offered in this offering
(assuming no exercise of the over-allotment option), as to:
- each person (or group of affiliated persons) known by us to own
beneficially more than 5% of our outstanding common stock;
- each stockholder selling shares of our common stock in this offering;
- each of our directors and persons we have identified will become
directors;
- each of the executive officers named in the summary compensation table;
and
- all our directors and executive officers as a group.
Except as indicated in the footnotes to this table and under applicable
community property laws, to our knowledge, the persons named in the table have
sole voting and investment power with respect to all shares of common stock.
Options exercisable on or before October 31, 2000, are included as shares
beneficially owned. For the purposes of calculating percent ownership as of
August 21, 2000, 38,328,147 shares were issued and outstanding and, for any
individual who beneficially owns shares represented by options exercisable on or
before October 31, 2000, these shares are treated as outstanding for that
person, but not for any other person. Unless otherwise indicated, the address of
each of the individuals and entities named below is: c/o Aether Systems, Inc.,
11460 Cronridge Drive, Owings Mills, Maryland 21117.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
SHARES BEFORE THE BENEFICIAL OWNERSHIP OF
OFFERING SHARES AFTER THE OFFERING
----------------------- SHARES TO -------------------------
NAME AND ADDRESS NUMBER PERCENT BE SOLD** NUMBER PERCENT
---------------- ----------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
David S. Oros(1)......................... 5,449,584 13.9% 60,000 4,977,646 12.6%
George M. Davis(2)....................... 110,000 * 65,000 45,000 *
Dale R. Shelton(3)....................... 90,000 * 60,000 30,000 *
David C. Reymann......................... 35,416 * 30,000 5,416 *
Brian W. Keane........................... 58,334 * 30,000 28,334 *
Frank A. Bonsal, Jr.(4).................. 42,250 * 0 42,250 *
1119 St. Paul Street
Baltimore, MD 21202
J. Carter Beese(5)....................... 77,500 * 0 77,500 *
Mark D. Ein(6)........................... 149,500 * 0 149,500 *
E. Wayne Jackson III(7).................. 223,564 * 65,000 157,984 *
6608 Corine Court
Columbia, MD 21044
Rahul C. Prakash(8)...................... 2,000 * 0 2,000 *
c/o Telcom Ventures, L.L.C.
211 N. Union St., Suite 300
Alexandria, VA 22314
Janice M. Roberts(9)..................... 0 * 0 0 *
c/o Mayfield Fund
2800 Sand Hill Road
Menlo Park, CA 94025
Dr. Rajendra Singh(10)................... 6,851,274 17.9% 0 5,481,019 14.2%
c/o Telcom Ventures, L.L.C.
211 N. Union St., Suite 300
Alexandria, VA 22314
George P. Stamas(11)..................... 6,250 * 0 6,250 *
c/o DeutscheBanc Alex. Brown
One South Street
Baltimore, MD 21202
</TABLE>
75
<PAGE> 77
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
SHARES BEFORE THE BENEFICIAL OWNERSHIP OF
OFFERING SHARES AFTER THE OFFERING
----------------------- SHARES TO -------------------------
NAME AND ADDRESS NUMBER PERCENT BE SOLD** NUMBER PERCENT
---------------- ----------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Robin T. Vasan(12)....................... 0 * 0 0 *
c/o Mayfield Fund
2800 Sand Hill Road
Menlo Park, CA 94025
Devin N. Wenig........................... 0 * 0 0 *
c/o Reuters America, Inc.
1700 Broadway, 2nd Floor
New York, NY 10019
Thomas E. Wheeler(13).................... 47,500 * 2,850 44,650 *
All directors and executive officers as a
group
(16 persons)(14)....................... 13,146,022 33.1% 310,000 11,053,249 28.4%
5% AND SELLING STOCKHOLDERS:
3Com Corporation(15)..................... 2,643,665 6.9% 528,733 2,114,932 5.5%
5400 Bayfront Plaza
Santa Clara, CA 95052
NexGen Technologies, L.L.C............... 4,577,084 11.9% 411,938 4,165,146 10.8%
Pyramid Ventures, Inc.(16)............... 1,945,442 5.1% 389,088 1,556,354 4.0%
One Bankers Trust Plaza
130 Liberty Street
New York, NY 10006
Reuters MarketClip Holdings Sarl(17)..... 2,828,055 7.4% 0 2,828,055 7.3%
c/o Reuters America, Inc.
1700 Broadway, 2nd Floor
New York, NY 10019
Telcom-ATI Investors, L.L.C.............. 6,851,274 17.9% 1,370,255 5,481,019 14.2%
211 N. Union St., Suite 300
Alexandria, VA 22314
Columbia Riverbed Partners, LLC.......... 754,632 2.0% 141,945 612,687 1.6%
201 N. Union Street, Suite 300
Alexandria, VA 22314
Columbia Capital Equity
Partners II (QP), L.P. ................ 693,956 1.8% 130,532 563,424 1.5%
201 N. Union Street, Suite 300
Alexandria, VA 22314
FBR Technology Venture Partners L.P. .... 911,960 2.4% 166,583 745,377 1.9%
11600 Sunrise Valley Drive, Suite 460
Reston, VA 20191
Cynthia L. Jackson(18)................... 190,602 * 580 125,022 *
Joan H. and E. Wayne Jackson, Jr. ....... 1,447 * 290 1,157 *
P.O. Box 1487
8381 Raymond Brown Lane
(Route 705)
Gloucester, VA 23061
The Adam Wayne Jackson Irrevocable 1,447 * 290 1,157 *
Trust..................................
P.O. Box 1487
8381 Raymond Brown Lane
(Route 705)
Gloucester, VA 23061
The Audrey Louise Jackson Irrevocable 1,447 * 290 1,157 *
Trust..................................
P.O. Box 1487
8381 Raymond Brown Lane
(Route 705)
Gloucester, VA 23061
</TABLE>
76
<PAGE> 78
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
SHARES BEFORE THE BENEFICIAL OWNERSHIP OF
OFFERING SHARES AFTER THE OFFERING
----------------------- SHARES TO -------------------------
NAME AND ADDRESS NUMBER PERCENT BE SOLD** NUMBER PERCENT
---------------- ----------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
The Nicholas Wayne Jackson Irrevocable 1,447 * 290 1,157 *
Trust..................................
P.O. Box 1487
8381 Raymond Brown Lane
(Route 705)
Gloucester, VA 23061
</TABLE>
---------------
* Less than 1%.
** Shares set forth in this column are shares to be sold by the person named
and do not include shares over which the named person has indirect
beneficial ownership.
(1) Includes 4,577,084 shares owned by NexGen Technologies, L.L.C. over which
Mr. Oros exercises voting and investment control by virtue of his position
as Managing Member of NexGen. Also includes warrants to purchase 872,500
shares of common stock.
(2) Includes exercisable options to purchase 60,000 shares of common stock and
warrants to purchase 50,000 shares of common stock.
(3) Includes exercisable options to purchase 40,000 shares of common stock and
warrants to purchase 37,500 shares of common stock.
(4) The amount shown excludes approximately 18,170 shares in which Mr. Bonsal
has an indirect interest as a result of his non-voting limited liability
company membership interest in Telcom-ATI Investors and excludes the
indirect interest Mr. Bonsal has in 6,713 shares Telcom-ATI Investors has
the right to acquire.
(5) The amount shown excludes approximately 103,825 shares in which Mr. Beese
has an indirect interest as a result of his non-voting limited liability
company membership interest in Telcom-ATI Investors and excludes the
indirect interest Mr. Beese has in 38,355 shares Telcom-ATI Investors has
the right to acquire.
(6) Includes warrants to purchase 97,000 shares of common stock and warrants to
purchase 17,500 shares of common stock at $4 per share.
(7) Includes 2,972 shares owned by his wife, Cynthia L. Jackson and options to
purchase 46,430 shares exercisable on or before October 31, 2000.
(8) Mr. Prakash, the president of Telcom-ATI Investors, (which is controlled by
Telcom Ventures, LLC), disclaims beneficial ownership of the 6,851,274
shares owned by Telcom-ATI Investors including approximately 52,000 shares
in which he has an indirect interest as a result of his option to acquire a
non-voting limited liability company membership interest in Telcom-ATI
Investors.
(9) Ms. Roberts is a partner with Mayfield Fund. Ms. Roberts disclaims
beneficial ownership of shares held by Mayfield Fund except to the extent
of any pecuniary interest.
(10) Includes 6,851,274 shares owned by Telcom-ATI Investors and entities it
controls, over which Dr. Singh exercises voting and investment control by
virtue of his position as chairman and chief executive officer of
Telcom-ATI Investors.
(11) Includes exercisable options to purchase 6,250 shares of common stock. The
amount shown excludes approximately 15,572 shares in which Mr. Stamas has
an indirect interest as a result of his non-voting limited liability
company membership interest in Telcom-ATI Investors and excludes the
indirect interest Mr. Stamas has in 5,753 shares Telcom-ATI Investors has
the right to acquire. Mr. Stamas also disclaims beneficial ownership of the
1,945,442 shares beneficially owned by Pyramid Ventures, Inc., an affiliate
of Deutsche Banc Alex. Brown.
(12) Mr. Vasan is a partner with Mayfield Fund. Mr. Vasan disclaims beneficial
ownership of shares held by Mayfield Fund except to the extent of any
pecuniary interest.
77
<PAGE> 79
(13) Includes exercisable options to purchase 37,500 shares of common stock.
Also includes 5,000 shares owned by the Carol and Tom Wheeler Foundation of
which Mr. Wheeler is the trustee.
(14) Includes all the shares and options identified above.
(15) Includes exercisable warrants to purchase 143,665 shares of common stock.
(16) Pyramid Ventures, Inc. is an indirect wholly-owned subsidiary of
DeutscheBank AG.
(17) Reuters MarketClip Holdings Sarl is an indirect wholly-owned subsidiary of
Reuters Group Plc.
(18) Includes 223,564 shares and options owned by her husband, E. Wayne Jackson
III.
78
<PAGE> 80
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 1,000,000,000 shares of common
stock, $.01 par value, and 1,000,000 shares of preferred stock, $.01 par value.
COMMON STOCK
As of August 21, 2000, there were 38,328,147 shares of common stock
outstanding that were held of record by approximately 66 recordholders. As of
the same date, there were options and warrants to purchase a total of 5,140,709
shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends that may be declared from time to time
by the board of directors out of funds legally available therefor. In the event
of a liquidation, dissolution or winding up of Aether, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior rights of holders of preferred stock, if any, then
outstanding. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
available to the common stock. All outstanding shares of common stock are fully
paid and non-assessable.
PREFERRED STOCK
Aether is authorized to issue 1,000,000 shares of undesignated preferred
stock. The board of directors has the authority to issue the undesignated
preferred stock in one or more series and to determine the powers, preferences
and rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated preferred stock and to
fix the number of shares constituting any series and the designation of a
series, without any further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of Aether without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock.
Furthermore, this preferred stock may have other rights, including economic
rights senior to the common stock, and, as a result, the issuance of preferred
stock could have a material adverse effect on the market value of the common
stock. At present, we have no plans to issue any shares of preferred stock.
STOCKHOLDER'S AGREEMENT
NexGen, Telcom-ATI Investors, Reuters and 3Com entered into a stockholders
agreement which requires these parties to vote to elect to the board of
directors two persons named by each of NexGen and Telcom-ATI Investors, two
persons named jointly by NexGen and Telcom-ATI Investors and one person named by
each of Reuters and 3Com. We describe the terms of this agreement in further
detail in "Transactions Between Aether and its Officers, Directors or
Significant Stockholders" on page 71.
REGISTRATION RIGHTS OF STOCKHOLDERS
We and NexGen, Telcom-ATI Investors, Reuters, 3Com, J. Carter Beese, Jr.
and Mark D. Ein entered into a registration rights agreement requiring us to
register their shares on demand beginning October 27, 2000. Following our
acquisition of Riverbed, the former Riverbed stockholders became parties to this
agreement. We describe the terms of this agreement in further detail in
"Transactions Between Aether and its Officers, Directors or Significant
Stockholders" on page 71.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
Our certificate of incorporation and bylaws contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the polices formulated by our board
of directors. In addition, provisions of Delaware law may hinder or delay an
79
<PAGE> 81
attempted takeover of Aether other than through negotiation with our board of
directors. These provisions could have the effect of discouraging attempts to
acquire us or remove incumbent management even if some or a majority of our
stockholders believe this action to be in their best interest, including
attempts that might result in the stockholders' receiving a premium over the
market price for the shares of common stock held by stockholders.
Removal and replacement of directors. Under our certificate of
incorporation and bylaws, directors may only be removed with cause. In addition,
a majority of the directors then in office can fill board vacancies and
newly-created directorships resulting from any increase in the size of the board
of directors, even if those directors do not constitute a quorum or only one
director is left in office. These provisions could prevent stockholders,
including parties who want to take over or acquire us, from removing incumbent
directors without cause and filling the resulting vacancies with their own
nominees.
Advance notice provisions for stockholder proposals and stockholder
nominations of directors. The bylaws establish an advance notice procedure
regarding stockholder proposals and nominations for director. The advance notice
procedure will not apply to proposals by our board of directors or management.
Any stockholder that wishes to make a proposal or nominate a director for
election at an annual meeting must deliver us notice of the proposal or the
nomination not less than 45 days nor more than 90 days before the first
anniversary of the proxy statement for the preceding year's annual meeting. For
a special meeting, the notice must generally be delivered not less than 70 days
nor more than 90 days before a special meeting or ten days following the day on
which public announcement of the meeting is first made. This advance notice
proposal could prevent someone interested in acquiring us from proposing actions
that could facilitate the takeover.
Special meetings of stockholders and actions in lieu of a meeting. Our
certificate of incorporation and bylaws permit special meetings of the
stockholders to be called only by the board of directors, the chairman of the
board or the president or holders of at least 50% of our securities that are
outstanding and entitled to vote generally in an election of directors. The
stockholders may take action by written consent in lieu of a meeting only if
such consent is signed by all stockholders. These provisions may make it more
difficult for stockholders to take actions opposed by the board of directors.
Authorized but unissued shares. Without further stockholder approval, we
can issue shares of common stock and preferred stock up to the number of shares
authorized for issuance in our certificate of incorporation, except as limited
by Nasdaq rules. We could use these additional shares for a variety of corporate
purposes. These purposes include future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. Our ability to issue
these shares of common stock and preferred stock could make it more difficult,
or discourage an attempt, to obtain control of Aether by means of a proxy
contest, tender offer, merger or otherwise.
Amendment of bylaws. The Delaware General Corporation Law generally
provides that the affirmative vote of a majority of the shares entitled to vote
on any matter is required to amend a corporation's certificate of incorporation
or bylaws, unless the corporation's certificate of incorporation or bylaws, as
the case may be, requires a greater percentage. Our certificate of incorporation
and bylaws require the affirmative vote of the holders of at least 66 2/3% of
our outstanding voting stock to amend or repeal our bylaws. Our bylaws may also
be amended or repealed by a simple majority vote of the board of directors.
Section 203 of Delaware Law. In addition to the foregoing provisions of
our certificate of incorporation and bylaws, we will be subject to the
provisions of Section 203 of the Delaware General Corporation Law. In general,
the statute prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date that the person became an interested stockholder unless
(with exceptions) the business combination or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale or
other transaction resulting in a financial benefit to the stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's
80
<PAGE> 82
outstanding voting stock. This provision may have the effect of delaying,
deferring or preventing a change in control of Aether without further action by
the stockholders. Transactions with NexGen or Telcom-ATI Investors or their
affiliates are not covered by this provision.
Our stock option plan generally provides for assumption of our plan or
substitution of an equivalent option of a successor corporation or,
alternatively, at the discretion of the board of directors, exercise of some or
all of the options stock, including non-vested shares, or acceleration of
vesting of shares issued pursuant to stock grants, upon a change of control or
similar event. The ability to accelerate vesting may make a takeover more
expensive and thus discourage a takeover attempt.
WARRANTS
As of the date of this prospectus, warrants were outstanding for the
purchase of 1,925,498 shares of common stock. Of these warrants, warrants for
856,833 shares are exercisable at a price of $1.60 per share and 175,000
warrants are exercisable at a price of $4.00 per share. 3Com holds the remaining
warrants to purchase 893,665 shares at a price of $.01 per share. The warrants
exercisable for $1.60 per share and the warrants exercisable for $4.00 per share
are currently exercisable and remain exercisable until June 2002. The remaining
warrants become exercisable from time to time upon the satisfaction of
conditions described on page 71 of this prospectus.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is BankBoston, N.A.
LISTING
Our shares of common stock are quoted on the Nasdaq National Market under
the symbol "AETH."
81
<PAGE> 83
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock, including shares
issued upon exercise of outstanding options and warrants or conversion of
outstanding convertible notes, in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through sale of our equity securities. Sales
of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise the equity capital in the future.
As of August 21, 2000, assuming the exercise of options by selling
stockholders in connection with this offering, we would have outstanding
38,603,852 shares of common stock. Of these shares, 17,682,666 shares (including
the 3,500,000 shares to be sold in this offering), will be freely tradable in
the public market without restriction under the Securities Act, unless the
shares are held by "affiliates" of Aether, as that term is defined in Rule 144
under the Securities Act.
Of the 38,603,852 shares outstanding upon completion of this offering,
20,921,186 will be "restricted securities" as that term is defined under Rule
144. We issued and sold these restricted securities in private transactions in
reliance on exemptions from registration under the Securities Act. Restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701 under
the Securities Act, as summarized below.
Pursuant to "lock-up" agreements, all directors and officers and all
selling stockholders of Aether have agreed with the underwriters not to offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of any
of the 19,210,393 shares they hold or have the right to acquire (or additional
shares they may acquire) for a period of 150 days from the date of this
prospectus. We also have entered into an agreement with the underwriters that we
will not offer, sell or otherwise dispose of common stock for a period of 150
days from the date of this prospectus. However, Merrill Lynch & Co. may in its
sole discretion, at any time without notice, consent to the release all or any
portion of the shares subject to lock-up agreements.
Taking into account the lock-up agreements, and assuming Merrill Lynch &
Co. does not release stockholders from these agreements, the following shares
will be eligible for sale in the public market at the following times:
- on the date of this prospectus, 17,682,666 shares (18,207,666 shares if
the underwriters' over-allotment option is exercised in full) will be
immediately available for sale in the public market;
- on October 26, 2000, 580,000 shares will be eligible for sale under Rule
144;
- on , 2001 (150 days after the date of this prospectus),
14,434,023 shares will be eligible for sale under Rule 144;
- on March 6, 2001, 4,032,163 shares will be eligible for sale under Rule
144; and
- an additional 1,875,000 shares will be eligible for sale under Rule 144
at various times after March 6, 2001.
In general, under Rule 144, after the expiration of the lock-up period, a
person who has beneficially owned restricted securities for at least one year
would be entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of:
- 1% of the then-outstanding shares of common stock; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about Aether.
Under Rule 144(k), a person who has not been our affiliate at any time during
the three months before a sale and who has beneficially owned the shares
proposed to be sold for at least two years can sell these shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
82
<PAGE> 84
Through July 31, 2000, we have outstanding options and warrants to purchase
5,104,448 shares of common stock to specified persons pursuant to our equity
incentive plan. We have filed a registration statement on Form S-8 to register
5,400,000 shares of common stock reserved for issuance under our equity
incentive plan. See "Management -- Executive Compensation" on page 63. Shares
issued under the foregoing plan may be sold in the open market, subject, in the
case of some holders, to the Rule 144 limitations applicable to affiliates, the
lock-up agreements and vesting restrictions imposed by us.
In addition, following this offering, the holders of 20,757,669 shares of
outstanding common stock will, under some circumstances, have rights to require
us to register their shares for future sale. See "Description of Capital
Stock -- Registration Rights of Stockholders" on page 79.
83
<PAGE> 85
UNDERWRITING
GENERAL
The selling stockholders intend to offer the shares in the U.S. and Canada
through the underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Deutsche Bank Securities Inc., FleetBoston Robertson Stephens Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, U.S. Bancorp Piper Jaffray Inc. and
Friedman, Billings, Ramsey & Co., Inc. are acting as representatives of the
underwriters named below. Subject to the terms and conditions described in a
purchase agreement among us, the selling stockholders and the underwriters, the
selling stockholders have agreed to sell to the underwriters, and the
underwriters severally have agreed to purchase from the selling stockholders,
the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Deutsche Bank Securities Inc................................
FleetBoston Robertson Stephens Inc..........................
Donaldson, Lufkin & Jenrette Securities Corporation.........
U.S. Bancorp Piper Jaffray Inc..............................
Friedman, Billings, Ramsey & Co., Inc.......................
---------
Total.......................................... 3,500,000
=========
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to make in respect of
those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and the selling stockholders that the
underwriters propose initially to offer the shares to the public at the initial
public offering price on the cover page of this prospectus and to dealers at
that price less a concession not in excess of $ per share. The
underwriters may allow, and the dealers may reallow, a discount not in excess of
$ per share to other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
84
<PAGE> 86
The following table shows the public offering price, underwriting discount
and the proceeds before expenses to the selling stockholders. This information
assumes either no exercise or full exercise by the underwriters of their
over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price............................. $ $ $
Underwriting discount............................. $ $ $
Proceeds, before expenses, to the selling
stockholders.................................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $750,000 and are payable by Aether.
OVER-ALLOTMENT OPTION
The selling stockholders have granted an option to the underwriters to
purchase up to 525,000 additional shares at the public offering price less the
underwriting discount. The underwriters may exercise this option for 30 days
from the date of this prospectus solely to cover any over-allotments. If the
underwriters exercise this option, each will be obligated, subject to conditions
contained in the purchase agreement, to purchase a number of additional shares
proportionate to that underwriter's initial amount reflected in the above table.
NO SALES OF SIMILAR SECURITIES
We and the selling stockholders and our executive officers and directors
have agreed, with exceptions, not to sell or transfer any common stock for 150
days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, we and these other individuals have
agreed not to directly or indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
The shares are quoted on the Nasdaq National Market under the symbol
"AETH."
NASD REGULATIONS
The underwriters will not confirm sales of the common stock to any account
over which they exercise discretionary authority without the prior written
specific approval of the customer.
85
<PAGE> 87
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the representatives may reduce that short position
by purchasing shares in the open market. The representatives may also elect to
reduce any short position by exercising all or part of the over-allotment option
described above. Purchases of the common stock to stabilize its price or to
reduce a short position may cause the price of the common stock to be higher
than it might be in the absence of such purchases.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters make any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
PASSIVE MARKET MAKING
In connection with this offering, underwriters and selling group members
may engage in passive market making transactions in the common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act during a period before the commencement of offers or sales of
common stock and extending through the completion of distribution. A passive
market maker must display its bid at a price not in excess of the highest
independent bid of that security. However, if all independent bids are lowered
below the passive market maker's bid, that bid must then be lowered when
specified purchase limits are exceeded.
OTHER RELATIONSHIPS
Pyramid Ventures, Inc., an affiliate of Deutsche Bank Securities Inc.,
currently owns approximately 1,945,442 shares of the common stock of Aether and
is selling 291,816 shares in this offering. In addition, George P. Stamas, a
director of Aether, also serves as a Vice Chair of Deutsche Banc Alex. Brown.
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received and may receive
customary fees and commissions for these transactions.
86
<PAGE> 88
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Aether by Wilmer, Cutler & Pickering, Washington, D.C. George P. Stamas, a
consultant to Wilmer, Cutler & Pickering, is a director of Aether. Mr. Stamas
owns options to purchase 16,250 shares of common stock, and he holds a non-
voting interest in Telcom-ATI Investors, which owns 6,851,274 shares of common
stock. Certain legal matters in connection with this offering will be passed
upon for the underwriters by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements and schedule of Aether Systems, Inc.
as of December 31, 1998 and 1999, and for each of the years in the three-year
period ended December 31, 1999 have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Mobeo, Inc. as of December 31, 1997 and 1998
and for each of the three years in the period ended December 31, 1998 included
in this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of LocusOne Communications, Inc. as of December
31, 1998 and 1999, and for each of the years then ended have been included
herein and in the registration statement in reliance upon the reports of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements of Riverbed Technologies, Inc. as of December 31,
1998 and 1999, and for the period from October 21, 1998 (date of inception) to
December 31, 1998 and for the year ended December 31, 1999, have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act and we file reports, proxy and information statements and other information
with the SEC. You may read and copy all or any portion of the reports, proxy and
information statements or other information we file at the SEC's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7
World Trade Center, 13th Floor, New York, New York 10048 after payment of fees
prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on operation of the public reference rooms. The SEC also maintains a
Web site which provides online access to reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC at the address http://www.sec.gov.
We have filed with the SEC a Registration Statement on Form S-1 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits to the registration statement. For
further information with respect to Aether Systems, Inc. and our common stock
offered hereby, reference is made to the Registration Statement and the exhibits
filed as a part of the Registration Statement. Statements contained in this
prospectus concerning the contents of any contract or any other document are not
necessarily complete; reference is made in each instance to the copy of such
contract or any other document filed as an exhibit to the registration
statement. Each such statement is qualified in all respects by such reference to
such exhibit. The registration statement, including exhibits thereto, may be
inspected without charge at the locations described above, or obtained upon
payment of fees prescribed by the SEC.
87
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
AETHER SYSTEMS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and June 30, 2000 (unaudited)............................. F-3
Consolidated Statements of Operations and Other
Comprehensive Loss for the years ended December 31, 1997,
1998 and 1999 and for the six months ended June 30, 1999
and 2000 (unaudited)...................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999 and for the
six months ended June 30, 2000 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 1999 and 2000 (unaudited).................. F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
MOBEO, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-28
Balance Sheets as of December 31, 1997 and 1998 and June 30,
1999 (unaudited).......................................... F-29
Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and for the six months ended June 30,
1999 (unaudited).......................................... F-30
Statements of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1996, 1997 and 1998 and for
the six months ended June 30, 1999 (unaudited)............ F-31
Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and for the six months ended June 30,
1999 (unaudited).......................................... F-32
Notes to Financial Statements............................... F-33
</TABLE>
LOCUSONE COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-40
Balance Sheets as of December 31, 1998 and 1999............. F-41
Statement of Operations for the years ended December 31,
1998 and 1999............................................. F-42
Statement of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1998 and 1999................ F-43
Statement of Cash Flows for the years ended December 31,
1998 and 1999............................................. F-44
Notes to Financial Statements............................... F-45
</TABLE>
RIVERBED TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-52
Balance Sheets as of December 31, 1998 and 1999............. F-53
Statements of Operations for the period from October 21,
1998 (Date of Inception) to December 31, 1998 and for the
year ended December 31, 1999.............................. F-54
Statements of Stockholders' Equity (Deficit) for the period
from October 21, 1998 (Date of Inception) to December 31,
1998 and for the year ended December 31, 1999............. F-55
Statements of Cash Flows for the period from October 21,
1998 (Date of Inception) to December 31, 1998 and for the
year ended December 31, 1999.............................. F-56
Notes to Financial Statements............................... F-57
</TABLE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-65
Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of June 30, 2000.......................................... F-66
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the six months ended June 30, 2000......... F-67
Unaudited Pro Forma Condensed Consolidated Statement of
Operations Adjustments for Completed Transactions for the
six months ended June 30, 2000............................ F-68
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1999........... F-69
Unaudited Pro Forma Condensed Consolidated Statement of
Operations Adjustments for the year ended December 31,
1999...................................................... F-70
</TABLE>
F-1
<PAGE> 90
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Aether Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Aether
Systems, Inc. and subsidiary as of December 31, 1998 and 1999, and the related
consolidated statements of operations and other comprehensive loss,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aether
Systems, Inc. and subsidiary as of December 31, 1998 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
McLean, Virginia
February 9, 2000
F-2
<PAGE> 91
AETHER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1998 1999 2000
------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $1,755 $ 78,542 $1,193,450
Restricted cash........................................... -- -- 46,698
Short-term investments.................................... 6,191 2,092 2,383
Trade accounts receivable, net of allowance for doubtful
accounts of $157 and $56 at December 31, 1998 and 1999,
respectively........................................... 118 1,003 7,515
Inventory, net of allowance for obsolescence of $170 and
$115 at December 31, 1998 and 1999, respectively....... 144 688 2,188
Prepaid expenses and other current assets................. 46 4,995 10,181
------ -------- ----------
Total current assets.............................. 8,254 87,320 1,262,415
Property and equipment, net................................. 510 2,796 13,698
Investments................................................. -- -- 140,182
Intangible assets, net...................................... -- 12,209 1,277,012
Other assets................................................ -- 209 9,935
------ -------- ----------
$8,764 $102,534 $2,703,242
====== ======== ==========
LIABILITIES, MEMBERS' CAPITAL AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 196 $ 1,426 $ 4,561
Accrued expenses.......................................... 288 1,620 20,740
Accrued employee compensation and benefits................ 251 971 2,629
Accrued interest on notes payable......................... -- -- 5,072
Deferred revenue.......................................... -- 175 2,832
Notes payable............................................. -- -- 13,911
------ -------- ----------
Total current liabilities......................... 735 4,192 49,745
Long term liabilities -- convertible subordinate notes
payable and other notes payable........................... -- -- 310,500
Deferred tax liability...................................... -- -- 11,221
Minority interest in assets of subsidiary................... -- -- 65,304
Members' capital............................................ 8,029 -- --
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; 0 shares issued and outstanding at December
31, 1999............................................... -- -- --
Common stock, $0.01 par value; 75,000,000 shares
authorized; 27,154,398 issued and outstanding at
December 31, 1999...................................... -- 271 381
Additional paid-in-capital................................ -- 120,892 2,352,944
Accumulated deficit....................................... -- (22,614) (145,799)
Notes receivable from stockholder......................... -- (137) --
Unrealized loss on investments available for sale......... -- (70) 58,946
------ -------- ----------
Total stockholders' equity........................ -- 98,342 2,266,472
------ -------- ----------
Commitments and contingencies
$8,764 $102,534 $2,703,242
====== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 92
AETHER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- -------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Subscriber revenue................................... $ 161 $ 549 $ 3,732 $ 599 $ 9,674
Engineering services revenue......................... 1,625 963 2,594 188 3,040
Software and related service revenue................. -- -- -- -- 3,442
------- ------- -------- ------- ---------
Total revenue............................... 1,786 1,512 6,326 787 16,156
Cost of subscriber revenue........................... 447 797 2,110 531 5,469
Cost of engineering services revenue................. 846 304 1,366 120 1,640
Cost of software and related service revenue......... -- -- -- -- 1,542
------- ------- -------- ------- ---------
Total cost of revenue....................... 1,293 1,101 3,476 651 8,651
------- ------- -------- ------- ---------
Gross profit................................ 493 411 2,850 136 7,505
------- ------- -------- ------- ---------
Operating expenses:
Research and development (exclusive of option and
warrant expense)................................. 734 1,267 2,614 1,002 5,761
General and administrative (exclusive of option and
warrant expense)................................. 1,505 2,773 5,891 1,583 15,269
Selling and marketing (exclusive of option and
warrant expense)................................. 333 840 2,095 555 21,809
In process research and development................ -- -- -- -- 2,160
Depreciation and amortization...................... 189 265 1,089 194 84,451
Option and warrant expense:..........................
Research and development........................... -- -- 150 32 2,710
General and administrative......................... 40 33 18,005 329 2,563
Selling and marketing.............................. -- -- 1,043 902 777
------- ------- -------- ------- ---------
2,801 5,178 30,887 4,597 135,500
------- ------- -------- ------- ---------
Operating loss.............................. (2,308) (4,767) (28,037) (4,461) (127,995)
Other income (expense):
Interest income (expense), net..................... 7 70 (60) 141 16,976
Equity in losses of investments.................... (144) -- (2,425) -- (13,828)
Realized gain (loss) on sale of short-term
investments...................................... -- 4 (169) -- --
Realized loss on sale of investment................ (302) -- -- -- --
Minority interest.................................. -- -- -- -- 1,662
------- ------- -------- ------- ---------
Net loss.................................... $(2,747) $(4,693) $(30,691) $(4,320) $(123,185)
Other comprehensive loss:
Unrealized holding gain (loss) on
investments -- available for sale.................. -- (58) (12) (132) 59,016
Gain on sale of stock by equity method investee.... -- -- -- -- 31,172
------- ------- -------- ------- ---------
Comprehensive loss................................... $(2,747) $(4,751) $(30,703) $(4,452) $ (32,997)
======= ======= ======== ======= =========
Net loss per share-basic and diluted................. $ (3.65)
=========
Weighted average shares outstanding-basic and
diluted............................................ 33,765
=========
Pro forma statement of operations data (unaudited):
Loss before income taxes, as reported.............. $(2,747) $(4,693) $(30,691) $(4,320)
Pro forma income tax provision (benefit)........... -- -- -- --
------- ------- -------- -------
Pro forma net loss................................. $(2,747) $(4,693) $(30,691) $(4,320)
======= ======= ======== =======
Pro forma net loss per share-basic and diluted..... $ (0.22) $ (0.29) $ (1.45) $ (0.22)
======= ======= ======== =======
Pro forma weighted average shares outstanding-basic
and diluted...................................... 12,656 15,916 21,207 19,878
======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 93
AETHER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE UNREALIZED
PREFERRED COMMON PAID-IN ACCUMULATED FROM LOSS ON MEMBERS'
STOCK STOCK CAPITAL DEFICIT STOCKHOLDER INVESTMENTS CAPITAL TOTAL
--------- ------ ---------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997....................... $-- $ -- $ -- $ -- $ -- $ -- $ 1,101 $ 1,101
Issuance of member units in
February 1997............ -- -- -- -- -- -- 1,000 1,000
Issuance of member units in
December 1997............ -- -- -- -- -- -- 690 690
Unit option and warrant
expense.................. -- -- -- -- -- -- 40 40
Note receivable from
member................... -- -- -- -- -- -- (10) (10)
Net loss................... -- -- -- -- -- -- (2,747) (2,747)
--- ---- ---------- --------- ----- ------- ---------- ----------
Balance at December 31,
1997....................... -- -- -- -- -- -- 74 74
Issuance of member units in
January 1998............. -- -- -- -- -- -- 1,499 1,499
Issuance of warrants in
June 1998................ -- -- -- -- -- -- 50 50
Exercise of warrants in
August 1998.............. -- -- -- -- -- -- -- --
Conversion of note payable
and issuance of member
units in August 1998..... -- -- -- -- -- -- 252 252
Issuance of member units in
August 1998.............. -- -- -- -- -- -- 5,000 5,000
Issuance of member units in
October 1998............. -- -- -- -- -- -- 6,000 6,000
Unit option and warrant
expense.................. -- -- -- -- -- -- 32 32
Unrealized loss on
investments available for
sale..................... -- -- -- -- -- (58) (58)
Note receivable from
member................... -- -- -- -- -- -- (127) (127)
Net loss................... -- -- -- -- -- -- (4,693) (4,693)
--- ---- ---------- --------- ----- ------- ---------- ----------
Balance at December 31,
1998....................... -- -- -- -- -- 8,029 8,029
Issuance of replacement
options to Mobeo, Inc.
employees................ -- -- -- -- -- -- 374 374
Exercise of unit options
and warrants............. -- -- -- -- -- -- 70 70
Option and warrant
expense.................. -- -- -- -- -- -- 2,323 2,323
Net loss -- pre merger..... -- -- -- -- -- -- (8,077) (8,077)
Merger of Aether
Technologies
International, L.L.C.
into Aether Systems,
Inc. in October 1999... -- 200 2,714 -- (137) (58) (2,719) --
Net proceeds of initial
public offering.......... -- 69 101,045 -- -- -- 101,114
Unrealized loss on
investments available for
sale..................... -- -- -- -- -- (12) -- (12)
Option and warrant
expense.................. -- -- 16,875 -- -- -- -- 16,875
Exercise of stock
options.................. -- 2 258 -- -- -- -- 260
Net loss -- post merger.... -- -- -- (22,614) -- -- -- (22,614)
--- ---- ---------- --------- ----- ------- ---------- ----------
Balance at December 31,
1999....................... -- 271 120,892 (22,614) (137) (70) -- 98,342
Repayment of note
receivable from
stockholder
(unaudited).............. -- -- -- -- 137 -- -- 137
Issuance of stock for
Riverbed acquisition
(unaudited).............. -- 45 1,135,968 -- -- -- -- 1,136,013
Exercise of unit options
and warrants
(unaudited).............. -- 1 843 -- -- -- -- 844
Option and warrant
expense (unaudited)...... -- -- 6,050 -- -- -- -- 6,050
Net proceeds of secondary
offering (unaudited)..... -- 64 1,058,019 -- -- -- -- 1,058,083
Gain on sale of stock by
equity method investee
(unaudited).............. -- -- 31,172 -- -- -- -- 31,172
Unrealized gain on
investments available
for sale (unaudited)..... -- -- -- -- -- 59,016 -- 59,016
Net loss (unaudited)....... -- -- -- (123,185) -- -- -- (123,185)
--- ---- ---------- --------- ----- ------- ---------- ----------
Balance at June 30, 2000
(unaudited)................ $-- $381 $2,352,944 $(145,799) $ -- $58,946 $ -- $2,266,472
=== ==== ========== ========= ===== ======= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 94
AETHER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- --------------------
1997 1998 1999 1999 2000
------- ------- -------- ------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,747) $(4,693) $(30,691) $(4,320) $ (123,185)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 189 265 1,089 193 84,451
Minority interest....................................... -- -- -- -- (1,662)
Provision (recovery) for doubtful accounts.............. -- 157 (59) (85) --
Provision (recovery) for inventory obsolescence......... -- 170 (54) -- --
Realized (gain) loss on sale of short-term
investments........................................... -- (3) 169 -- --
Equity in losses of investments......................... 144 -- 2,425 12 13,828
Realized loss on sale of investment..................... 302 -- -- -- --
Issuance of warrants.................................... -- 50 -- -- --
Option and warrant expense.............................. 40 33 19,198 1,263 6,050
In process research and development charge.............. -- -- -- -- 2,160
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable...... 75 (153) (1,732) 79 (3,490)
(Increase) decrease in inventory...................... -- (313) (491) 55 (1,250)
(Increase) decrease in prepaid expenses and other
current assets..................................... 4 (31) (3,785) (26) (3,933)
Increase (decrease) in accounts payable............... 68 83 (377) 152 (944)
Increase in accrued expenses and employee compensation
and benefits....................................... 273 217 2,052 114 21,369
Increase (decrease) in deferred revenue............... 163 (163) 176 25 919
------- ------- -------- ------- ----------
Net cash used by operating activities.............. (1,489) (4,383) (12,080) (2,538) (5,687)
------- ------- -------- ------- ----------
Cash flows provided by (used in) investing activities:
Sales of short-term investments........................... 50 1,295 12,640 7,028 5,337
Purchases of short-term investments....................... -- (7,535) (8,722) (4,938) (3,274)
Purchases of property and equipment....................... (442) (228) (2,447) (850) (10,196)
Proceeds from sale of investment in joint venture......... 205 -- -- -- --
Cost of investments....................................... (23) -- (2,500) -- (63,217)
Cost of acquisitions, net of cash acquired................ -- -- (11,548) -- (154,083)
Increase in restricted cash............................... -- -- -- -- (13,600)
------- ------- -------- ------- ----------
Net cash provided by (used in) investing
activities....................................... (210) (6,468) (12,577) 1,240 (239,033)
------- ------- -------- ------- ----------
Cash flows provided by financing activities:
Issuance of member units.................................. 1,690 12,501 -- -- --
Net proceeds from issuance of common stock................ -- -- 101,114 -- 1,058,083
Repayments from member/stockholder........................ (50) -- -- -- 137
Proceeds from note payable................................ 150 500 -- -- --
Repayments on notes payable............................... -- (400) -- -- --
Proceeds from credit facility............................. -- -- 14,830 -- --
Repayments of credit facility............................. -- -- (14,830) -- --
Issuance of notes receivable from member.................. (10) (127) -- -- --
Net proceeds from issuance of convertible debt............ -- -- -- -- 300,564
Proceeds from exercise of options and warrants............ -- -- 330 -- 844
------- ------- -------- ------- ----------
Net cash provided by financing activities.......... 1,780 12,474 101,444 -- 1,359,628
------- ------- -------- ------- ----------
Net increase (decrease) in cash and cash
equivalents...................................... 81 1,623 76,787 (1,298) 1,114,908
Cash and cash equivalents, at beginning of period........... 51 132 1,755 1,755 78,542
------- ------- -------- ------- ----------
Cash and cash equivalents, at end of period................. $ 132 $ 1,755 $ 78,542 $ 457 $1,193,450
======= ======= ======== ======= ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 4 $ 20 $ 1,027 $ -- $ --
======= ======= ======== ======= ==========
</TABLE>
F-6
<PAGE> 95
---------------
Supplemental disclosure of noncash investing and financing activities:
In 1997, the Company made a $26,457 investment in Navox, Inc. by forgiving a
trade account receivable of an equal amount.
In 1998, a member converted a $250,000 promissory note payable into
membership units.
In 1998 and 1999, the Company incurred unrealized holding losses associated
with its investments available for sale totaling $58,030 and $12,039. These
amounts have been reported as reductions in members' capital and
stockholders' equity, respectively.
In September 1999, the Company issued 18,442 unit options (46,105 shares)
valued at $374,000 as part of the cost to acquire Mobeo, Inc. This amount
has been reported as an increase in members' capital.
In October 1999, approximately $1.1 million of trade receivables owed to the
Company by OmniSky, Inc. were settled against amounts due in connection
with the purchase of 20,000 modems from OmniSky, Inc.
In January 2000, approximately $600,000 (unaudited) 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 (unaudited) shares of the Company's common stock and converted
existing options held by Riverbed employees into options to acquire 862,480
(unaudited) shares of the Company's common stock. The value of the common
stock and replacement options of $1.136 billion (unaudited) 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,
the Company established a deferred tax liability of $11.2
million(unaudited). Such amount was offset by an equal increase in
goodwill.
For the quarter ended June 30, 2000, the Company recorded additions to
stockholders equity of $31.2 million (unaudited) from the issuance of stock
by OmniSky, Inc. to third parties at per share amounts in excess of the
book value per share of the Company's investment in OmniSky, Inc.
For the six months ended June 30, 1999 and 2000, the Company incurred an
unrealized net holding gain (loss) associated with its investments
available for sale totaling $(132,000) (unaudited) and (58.9 million)
(unaudited), respectively. These amounts have been reported as an increase
(decrease) in stockholders' equity.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 96
AETHER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Aether Systems, Inc. and its subsidiaries (the "Company") designs,
develops, sells and supports wireless data services and systems enabling people
to use handheld devices for mobile data communications and real-time
transactions. The Company operates in a highly competitive environment subject
to rapid technological change and emergence of new technology. Although
management believes its services are transferable to emerging technologies,
rapid changes in technology could have an adverse financial impact on the
Company.
The Company expects to expand its operations through continued capital
investment in new systems and services and through strategic acquisitions. The
Company has a limited operating history and has incurred net losses since its
inception. The Company expects to continue to incur significant sales and
marketing, systems development and administrative expenses. The Company may
require additional capital in the future to meet its operating and capital
needs.
(2) MERGER AND INITIAL PUBLIC OFFERING
The Company is the successor to the business formerly conducted by Aether
Systems, L.L.C. ("Aether") (previously Aether Technologies International,
L.L.C.), which was formed in January, 1996. Effective October 26, 1999, in
connection with the Company's initial public offering of common stock, Aether
merged with and into Aether Systems, Inc. The Company is the surviving company
in the merger, and owns all of the assets and rights and is subject to all of
the obligations and liabilities of Aether. Immediately prior to the merger, each
member of the Company contributed its membership units in Aether Systems, L.L.C.
to Aether Systems, Inc., a newly formed Delaware corporation, in exchange for
two and one-half shares of common stock of Aether Systems, Inc. Effective with
the merger, the Company converted to a Subchapter C Corporation under the
Internal Revenue Code of 1986 as amended.
On October 26, 1999, the Company completed its initial public offering,
which involved the sale of 6,900,000 shares of common stock at $16.00 per share,
including 900,000 shares from the exercise of the underwriters' over-allotment
option, at the initial public offering price less underwriting discounts and
offering expenses. Net proceeds to the Company after deducting underwriting
discounts, commissions and other expenses of the offering were approximately
$101.1 million.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Aether
Systems, Inc. and its subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
(b) 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 total
estimated
F-8
<PAGE> 97
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
(c) 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.
(d) Cash and Cash Equivalents
Cash equivalents include all highly liquid investments purchased with
original maturities of three months or less. Cash equivalents consist of
approximately $193,000 and $5,521,000 in overnight repurchase agreements,
$1,562,000 and $68,831,000 in money market accounts, and $0 and $3,979,000 in
commercial paper at December 31, 1998 and 1999, respectively.
(e) Short-term Investments
Short-term investments consist of highly liquid investments with original
maturities greater than three months and less than one year and those
longer-term investments that the Company expects to liquidate within twelve
months. The Company has classified its short-term investments as "available for
sale" and carries such investments at fair value. Unrealized gains (losses) are
excluded from earnings and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from the sale of
these investments are determined on a specific identification basis.
(f) Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate their fair values due to the relatively short duration of the
instruments.
(g) Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of accounts receivable. The Company extends
credit to its customers on an unsecured basis in the normal course of business.
(h) Inventory
Inventory, net of allowance for obsolete and slow-moving inventory,
consists primarily of handheld and laptop computers, pagers, wireless modems,
and accessories and is stated at the lower of cost or market.
F-9
<PAGE> 98
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cost is determined using the first-in, first-out (FIFO) method. The inventory of
the Company is subject to rapid technological changes which could have an
adverse impact on its realization in future periods. In addition, there are a
limited number of suppliers of the Company's inventory.
(i) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from three to seven years. The costs of leasehold improvements are
capitalized and amortized using the straight-line method over the shorter of the
lease term or the estimated useful life of the asset.
(j) Investment in OmniSky, Inc.
The Company uses the equity method of accounting for advances to and
earnings and losses of its investment in OmniSky, Inc.
(k) Goodwill and Recovery of Long-Lived Assets
Cost in excess of the fair value of tangible and identifiable intangible
net assets acquired is included in intangible assets and is amortized on a
straight-line basis over seven years.
The Company's policy is to review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The Company recognizes an impairment loss when the sum
of the expected future undiscounted cash flows is less than the carrying amount
of the asset. The measurement of the impairment losses to be recognized is based
upon the difference between the fair value and the carrying amount of the
assets.
(l) Stock Options and Warrants
The Company accounts for equity-based compensation arrangements in
accordance with the provisions of Accounting Principle Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, and
complies with the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25, compensation expense is based upon the difference, if any, on the date
of grant, between the fair value of the Company's stock and the exercise price.
All equity-based awards to non-employees are accounted for at their fair value
in accordance with SFAS No. 123.
(m) Pro Forma Income (Loss) Data (Unaudited)
The accompanying unaudited pro forma information has been prepared as if
the Company was treated as Subchapter C Corporation for Federal and state income
tax purposes from January 1, 1997. The Company has provided no income taxes on a
pro forma basis due to the losses incurred in all periods.
The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings Per Share," and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss)
per share is computed by the dividing the net income (loss) available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) for the period by the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
Pro forma basic and diluted net loss per share has been calculated assuming that
the capital structure established at the date of the initial public offering was
in effect during the periods presented. As the Company had a net loss in each of
the periods presented, pro forma basic and diluted net loss per share are the
same.
F-10
<PAGE> 99
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(n) Research and Development
Research and development costs are expensed as incurred.
(o) Advertising Expense
Advertising costs are expensed as incurred. Advertising expense was
approximately $248,000, $504,000, and $933,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
(p) Income Taxes
The Company recognizes income taxes using the asset and liability method,
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of a tax rate change on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
Prior to October 26, 1999, Aether had elected limited liability status and,
as such, was not directly subject to Federal and state income taxes. Rather, the
members were responsible for income taxes on their proportionate share of
taxable income and entitled to their proportionate share of tax deductions and
tax credits.
(q) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(r) Other Comprehensive Loss
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which established standards for reporting and displaying
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes changes in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. Other comprehensive income refers to revenue, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income, but excluded from net income.
For the years ended December 31, 1998 and 1999, other comprehensive income
(loss) consists of unrealized losses on investments available for sale.
(s) Unaudited Interim Financial Information
The unaudited interim financial information as of June 30, 2000 and for the
six months ended June 30, 1999 and 2000 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Article 10 of Regulation S-X. In the opinion of management,
such information contains all adjustments, consisting of only normal recurring
adjustments, considered necessary for a fair presentation of such periods. The
operating results for any interim period are not necessarily indicative of
results for any future periods.
F-11
<PAGE> 100
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(t) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. This
statement, as amended, is effective for all fiscal quarters beginning after June
15, 2000. The Company does not expect SFAS No. 133 to have a material affect on
its financial position or results of operations.
(4) ACQUISITION OF MOBEO, INC.
On August 19, 1999, the Company entered into a purchase agreement to
acquire all the outstanding common stock of Mobeo, Inc. ("Mobeo") for an
aggregate purchase price consisting of cash of approximately $11.5 million,
including acquisition costs of approximately $112,000, and 18,442 unit options
(46,105 shares) with an exercise price of $12.00 per unit ($4.80 per share)
valued at approximately $374,000. The acquisition was completed on September 28,
1999. Mobeo provides employees and customers at major banks and financial
institutions with continuous pricing information and news headlines for foreign
exchange, government securities, and commodity markets on wireless handheld
devices. Additionally, the Company entered into two-year advisory service
agreements with two former owners of Mobeo which provided for the grant of an
aggregate 125,000 unit options (312,500 shares) with an exercise price of $15.00
per unit ($6.00 per share). The Company also issued 22,000 options (55,000
shares) at an exercise price of $6.00 per unit ($2.40 per share) and 30,000
options (75,000 shares) at an exercise price of $12.00 per unit ($4.80 per
share) to employees of Mobeo. The Company has recorded option and warrant
expense of approximately $418,000 in 1999 associated with these options and
expects to record an additional $2.9 million in option and warrant expense over
the remaining service and vesting periods.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed have
been recorded at their estimated fair value as of the acquisition date. The
allocation of the purchase price is summarized as follows (in thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 258
Property and equipment...................................... 372
Other assets................................................ 133
Current liabilities......................................... (1,606)
Goodwill and other intangibles.............................. 12,765
-------
Total consideration paid.................................... $11,922
=======
</TABLE>
The following summary, prepared on a pro forma basis, presents the results
of operations (unaudited) of the Company as if the Mobeo acquisition had been
completed as of January 1, 1998 (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Revenue.............................................. $10,093 $ 13,836
Net loss............................................. (6,842) (31,749)
Net loss per share -- basic and diluted.............. (.43) (1.50)
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if Mobeo had been owned for the
entire periods presented or a projection of the Company's results of operations
for any future period.
(5) INVESTMENT IN OMNISKY, INC.
On August 9, 1999, the Company entered into a new venture with 3Com
Corporation ("3Com"), forming a new Company called OpenSky, which was later
renamed OmniSky, Inc. ("OmniSky").
F-12
<PAGE> 101
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OmniSky was formed to develop wireless Internet access, e-mail and electronic
commerce services that address opportunities in the emerging consumer and
business mass markets. The Company contributed a perpetual, non-exclusive,
non-assignable, worldwide license to certain proprietary software in exchange
for a 26% equity interest in OmniSky in the form of 7,000,000 shares of Series A
Preferred Stock and an option to purchase an additional 3,000,000 shares of
Series A Preferred Stock for an additional $2.5 million. Upon exercising the
option, the Company would increase its ownership in OmniSky to 33% on a fully
diluted basis. On November 9, 1999, the Company exercised its option to acquire
these additional shares. The chief executive officer of the Company serves as a
member of OmniSky's board of directors. The Company provides engineering
services to OmniSky under an agreement in the amount of $3.0 million through
June 2000. As of December 31, 1999, the Company has recognized $2.2 million in
engineering services revenue under the OmniSky agreement. This amount represents
86% of engineering services revenue and 35% of total revenue for the year ended
December 31, 1999. The agreement also provides for OmniSky to pay $1.50 per
month per subscriber for the use of the Company's network operations center. The
Company has the right to offer OmniSky's services to its subscribers for a
monthly fee of $3.00 per subscriber. There has been no activity as of December
31, 1999 under these provisions of the agreement.
The Company accounts for its investment in OmniSky under the equity method
of accounting. The Company recorded $2.4 million in expenses through December
31, 1999, to reflect its proportionate share of the losses in OmniSky based upon
unaudited financial information provided by OmniSky.
During 1999, OmniSky, Inc. reported a net loss of approximately $5.7
million (unaudited) and had net assets of $9.7 million (unaudited) as of
December 31, 1999.
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, which began in December 1999 and will run
through March of 2000. 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 the
Company by Omnisky. An additional $1.2 million will be paid to OmniSky, Inc. for
the remaining 5,000 modems after the delivery of the initial 20,000 modems,
which began in November 1999 and will continue through April of 2000. As of
December 31, 1999, the Company has recorded prepaid expenses of approximately
$4.5 million associated with this agreement. The Company received approximately
$58,000 of modems during 1999.
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 cancellation
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
percent ownership in OmniSky. The Company's per share purchase price was the
same as the other Series B Preferred Stock investors.
(6) SHORT-TERM INVESTMENTS
As of December 31, 1998, short-term available for sale investments consists
of (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
--------- ------------- -------------- ------
<S> <C> <C> <C> <C>
U.S. Treasury securities................. $1,930 $-- $(22) $1,908
Corporate debt securities................ 4,319 11 (47) 4,283
------ --- ---- ------
$6,249 $11 $(69) $6,191
====== === ==== ======
</TABLE>
F-13
<PAGE> 102
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Maturities of debt securities classified as available for sale were as
follows at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ------
<S> <C> <C>
Due within one year......................................... $2,125 $2,129
Due after one year through five years....................... 1,185 1,158
Due after five years through ten years...................... 1,435 1,412
Due after ten years......................................... 1,504 1,492
------ ------
$6,249 $6,191
====== ======
</TABLE>
As of December 31, 1999, short-term available for sale investments consists
of (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST HOLDING GAINS HOLDING LOSSES VALUE
--------- ------------- -------------- ------
<S> <C> <C> <C> <C>
U.S. Treasury securities................. $1,828 $-- $(46) $1,782
Corporate debt securities................ 334 -- (24) 310
------ --- ---- ------
$2,162 $-- $(70) $2,092
====== === ==== ======
</TABLE>
Maturities of debt securities classified as available for sale were as
follows at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ------
<S> <C> <C>
Due within one year......................................... $ 325 $ 326
Due after one year through five years....................... 856 834
Due after five years through ten years...................... 718 667
Due after ten years......................................... 263 264
------ ------
$2,162 $2,091
====== ======
</TABLE>
(7) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ----------------
USEFUL LIVES 1998 1999
------------ ------ -------
<S> <C> <C> <C>
Furniture and fixtures................................. 7 Years $ 102 $ 593
Computer and equipment................................. 3 - 5 Years 684 2,113
Software............................................... 3 Years 175 175
Leasehold improvements................................. 5 Years 48 947
------ -------
1,009 3,828
Less depreciation and amortization..................... (499) (1,032)
------ -------
$ 510 $ 2,796
====== =======
</TABLE>
F-14
<PAGE> 103
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) INTANGIBLE ASSETS
Intangible assets consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES 1999
------------ ------------
<S> <C> <C>
Goodwill.................................................... 7 Years $ 6,165
Acquired subscribers........................................ 5 Years 6,400
Assembled workforce......................................... 3 Years 200
-------
12,765
Less accumulated amortization............................... (556)
-------
$12,209
=======
</TABLE>
Goodwill represents the purchase price in excess of the fair value of the
tangible and identifiable intangible assets acquired.
(9) NOTES PAYABLE TO MEMBERS
The Company had an unsecured note payable of $150,000 as of December 31,
1997 due to one of its members, Telcom Ventures LLC ("Telcom Ventures"). The
note carried interest at a rate of 7.5 percent per annum and all principal and
accrued interest was due in January 1999, or earlier upon the occurrence of
specified criteria. The note payable, plus accrued interest, was repaid in 1998.
In June 1998, the Company borrowed $250,000 from one of its members,
Pyramid Ventures, Inc. ("Pyramid") under a convertible promissory note. The note
was unsecured, bore interest at 8 percent per annum, and was convertible into
membership units at the option of the member. In August 1998, the member elected
to convert the note and accrued interest of $2,467 into 57,180 membership units
(142,950 shares) in accordance with its terms.
In June 1998, the Company borrowed $250,000 from another one of its
members, Telcom Ventures, under a similar convertible promissory note. All
principal and accrued interest was paid by the Company in August 1998.
In connection with the convertible promissory notes, the Company granted
warrants to purchase 5,656 member units (14,140 shares) at an exercise price of
$0.01 per unit to Pyramid and Telcom Ventures (note 13). The estimated value of
the warrants on the grant date of $50,000 was recognized in interest expense in
1998. Pyramid exercised its warrants to purchase 5,656 member units (14,140
shares) in August 1998. In August 1999, Telcom Ventures exercised its warrants
to purchase 5,656 member units (14,140 shares).
All outstanding membership units were subsequently exchanged for common
stock in connection with the Company's initial public offering, effective
October 26, 1999 (Note 2).
(10) INCOME TAXES
Effective October 26, 1999, in connection with the Company's initial public
offering of common stock, Aether merged with and into and the merged entity
became a Subchapter C Corporation under the Internal Revenue Code of 1986. As a
result, the Company recorded a deferred tax expense of approximately $1.4
million, principally relating to intangible assets other than goodwill acquired
as part of the Mobeo acquisition prior to becoming a Subchapter C Corporation,
offset, in part, by deferred tax assets associated with option and warrant
expense. The Company recorded a deferred tax benefit of $1.4 million related to
losses generated subsequent to the change in tax status.
The Company has provided no income taxes on a pro forma basis due to the
losses incurred in all periods.
F-15
<PAGE> 104
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999, are
presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 2,274
Depreciation and amortization............................. 54
Option and warrant expense................................ 7,903
-------
Gross deferred tax assets................................... $10,231
Valuation allowance for deferred tax assets................. (7,692)
-------
Net deferred tax assets..................................... 2,539
-------
Deferred tax liabilities:
Allowance for doubtful accounts........................... 18
Intangibles............................................... 2,521
-------
Net deferred tax liabilities................................ 2,539
-------
Deferred income taxes, net.................................. $ --
-------
</TABLE>
As of December 31, 1999, the Company had Federal and state net operating
loss carryforwards of approximately $5,400,000 which expire in 2019.
In addressing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent on the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment.
(11) LEASES
The Company is obligated under noncancelable operating leases for office
space, that expire at various dates through 2010. Future minimum lease payments
under noncancelable operating leases are approximately as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 648
2001........................................................ 664
2002........................................................ 676
2003........................................................ 705
2004........................................................ 736
Thereafter.................................................. 3,866
------
Total minimum lease payments................................ $7,295
======
</TABLE>
Rent expense under operating leases was approximately $84,000, $91,000, and
$282,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
(12) PENSION PLANS
The Company has two defined contribution plans under Section 401(k) of the
Internal Revenue Code that provide for voluntary employee contributions of 1 to
15 percent of compensation for substantially all employees. The Company
contributed $4,000 to one of the plans for the year ended December 31, 1999.
F-16
<PAGE> 105
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(13) STOCK OPTIONS AND WARRANTS
(a) Options
In 1996, the Company adopted a Unit Option Plan. In September 1999, the
Company adopted the 1999 Equity Incentive Plan (the "Plan") to replace the Unit
Option Plan. Under the 1999 Equity Incentive Plan, the Company has the ability
to grant options to acquire up to 5.4 million shares of common stock to its
employees, directors, and service providers. Options under the Plan generally
expire after ten years and normally vest over a period of up to three years.
Options are generally granted at an exercise price equal to the fair value on
the grant date.
In June 1999, the Company entered into an employment agreement with its
Chief Executive Officer ("Executive"). As part of this agreement, the Executive
was granted 350,000 unit options (875,000 shares) at an exercise price of $4.00
per unit ($1.60 per share) and the right to grant an additional 50,000 unit
options (125,000 shares) at an exercise price of $4.00 per unit ($1.60 per
share) to other key executives. These options expire in June 2009. In September
1999, the Company granted the Executive an additional 70,000 unit options
(175,000 shares) at an exercise price of $10.00 per unit ($4.00 per share).
These options expire in September 2009. Both grants of options became fully
vested in October 1999, as a result of the completion of the Company's initial
public offering. In October 1999, the Company recorded option and warrant
expense of $16.5 million, which is equal to the difference between the fair
value of the shares of Aether System Inc.'s common stock and the exercise price
measured at the date of the initial public offering, times the number of
options.
The Company recorded total option and warrant expense of $40,277, $32,580
and $19,198,209 in 1997, 1998, and 1999, respectively. The Company expects to
record an additional $5.9 million in option and warrant expense through June 30,
2002 for the difference between the exercise price and the fair market value of
the units or stock at the date of grant.
The Company applies APB 25 and related interpretations in accounting for
its unit option plan. Had compensation cost been recognized consistent with SFAS
No. 123, The Company's net loss would have increased by $24,000, $41,000, and
$4,243,000 for 1997, 1998, and 1999, respectively.
The per share weighted-average value of options granted by the Company
during 1997, 1998, and 1999 was $0.16, $0.55, and $9.21, respectively, on the
date of grant using the Black-Scholes option-pricing model. These amounts were
calculated using an expected option life of 3 years and volatility of zero for
options granted in 1997 and 1998. In 1999, an expected option life of four years
and volatility of 70 percent was used for option grants. In addition, the
calculations assumed a risk-free interest rate of 5.77 percent to 6.25 percent
in 1997, 4.55 percent to 5.51 percent in 1998, and 4.60 percent to 6.11 percent
in 1999.
F-17
<PAGE> 106
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the stock option and warrant activity, as adjusted for the
exchange of unit options and warrants for stock options, is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------- ---------------------------- ----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
OF SHARES (PER SHARE) OF SHARES (PER SHARE) OF SHARES (PER SHARE)
-------------- ----------- -------------- ----------- -------------- -----------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year............... 693 $0.40 1,000 $0.40 1,545 $0.85
Options and warrants
granted............... 307 $0.40 604 $1.54 2,763 $6.19
Options exercised....... -- -- -- -- (365) $0.54
Options canceled........ -- -- (59) $0.40 (10) $1.49
----- ----- ----- ----- ----- -----
Outstanding at end of
year.................. 1,000 $0.40 1,545 $0.85 3,933 $4.48
===== ===== ===== ===== ===== =====
Options exercisable at
year-end.............. 597 $0.40 991 $0.50 2,451 $2.13
===== ===== ===== ===== ===== =====
</TABLE>
The following table summarizes information about stock options at December
31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE EXERCISE NUMBER AT AVERAGE EXERCISE
RANGE OF EXERCISE NUMBER AT CONTRACTUAL PRICE DECEMBER 31, PRICE
PRICES DECEMBER 31, 1999 LIFE (PER SHARE) 1999 (PER SHARE)
----------------- ----------------- ----------- ---------------- -------------- ----------------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 0.40 - $ 0.40 617 2.19 $ 0.40 591 $0.40
$ 1.49 - $ 8.00 3,085 8.36 $ 2.98 1,859 $2.68
$52.25 - $79.75 231 9.90 $35.34 -- --
------ ------
3,933 6.83 $ 4.48 2,450 $2.13
====== ======
</TABLE>
(b) Warrants Issued to Members
The Company granted warrants to purchase an aggregate 11,312 member units
(28,280 shares) at an exercise price of $0.01 per unit to Telcom Ventures and
Pyramid, as consideration for obtaining short-term loans (note 9).
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 vested in 57,466 units
(143,665 shares) in June 1999 upon completion of a joint sales and marketing
plan. As a result, the Company recorded option and warrant expense of
approximately $862,000. 3Com vests in the remaining 300,000 warrants (750,000
shares) as follows: 150,000 warrants (375,000 shares) upon the occurrence of the
Company obtaining $6 million in engineering services revenue from opportunities
introduced by 3Com and 150,000 warrants (375,000 shares) upon the Company
obtaining 6,000 wireless service subscribers, all from opportunities introduced
by 3Com. If and when it becomes probable that 3Com will attain the specified
milestones necessary for the warrants to vest, the Company will begin to record
an expense reflecting the fair value of the warrants, which will be determined
in part based on the market price of the common stock. The Company would begin
to recognize this expense based on the probability that the milestones would be
achieved, continuing through the actual vesting date. The Company would
initially estimate the amount of the expense at the time of
F-18
<PAGE> 107
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the determination that achievement is probable, based in part on the market
price of the common stock at that time. At the time of the actual vesting, the
fair value of the warrant would be remeasured and, if different from the value
used in initially estimating the expense, the difference would be reflected as
an additional charge or credit at that time. As of December 31, 1999, the
Company believes that it is not yet probable that 3Com will attain the specified
milestones relating to the remaining warrants to purchase 750,000 shares and,
accordingly, no expense relating to these warrants has been recorded.
(c) Notes Payable
In September 1999, the Company entered into a $17,000,000 senior secured
credit facility with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated. The credit facility was for a one-year term, with the possibility
of extension for an additional one-year term and accrued interest at a variable
rate. The credit facility was collateralized by substantially all of the assets
of the Company and contained certain financial covenants. In connection with the
credit facility, the Company granted warrants to Merrill Lynch Capital
Corporation to purchase up to 967,876 (2,419,690 shares) of the member units in
the Company which became exercisable for no consideration if the Company did not
repay the credit facility in a timely manner. On September 28, 1999, the Company
borrowed approximately $14,830,000 under the credit facility, primarily to pay
the purchase price of Mobeo. On October 26, 1999, the Company repaid the amount
outstanding under the credit facility and the warrants were canceled.
(14) OTHER RELATED-PARTY TRANSACTIONS
(a) Notes Receivable from Stockholder
As of December 31, 1998 and 1999, the Company has amounts due from a
stockholder under short-term promissory notes of $137,879. The Company has
classified the notes as a reduction of stockholders' equity in the accompanying
consolidated statements of stockholders' equity. The notes are callable by the
Company at any time and bear interest at a rate of 7.5 percent per annum. The
notes and accrued interest were repaid in February 2000.
(b) Consulting Agreements with Stockholders
The Company derived approximately 34 percent and 39 percent of its revenue
for 1997 and 1998, respectively, from consulting services arrangements with one
and two of its stockholders, respectively. The Company had trade no accounts
receivable due from these stockholders as of December 31, 1998 and 1999,
respectively.
As of December 31, 1997, the Company had received advances of $162,500 from
two of its members under consulting arrangements. This amount was recorded as
deferred revenue in the accompanying 1997 balance sheet, and was subsequently
recognized as revenue in 1998, when the related consulting services were
performed.
(c) Purchases from Stockholder
In 1998, the Company purchased approximately $560,000 of equipment and
inventory from a stockholder.
(15) INVESTMENTS
In February 1996, the Company made an investment of $750,000 to acquire a
20 percent interest in Real World Solutions, Inc. (RWS), a California company,
which was in the business of developing wireless middleware. The Company
accounted for its investment in RWS under the equity method and recorded its
proportionate share of losses generated by RWS. In July 1997, the Company sold
its interest in RWS to Puma Technology, Inc. (Puma), a Delaware company for
$205,000. The Company's carrying value of the investment in RWS as of the date
of sale was approximately $507,000 resulting in a realized loss on the sale of
the investment of approximately $302,000.
F-19
<PAGE> 108
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concurrently with the sale of the Company's investment in RWS to Puma, the
Company entered into an agreement with Puma for $175,000 to obtain perpetual
license rights for certain wireless middleware software. This amount was
capitalized and is being amortized over a three-year period.
In December 1996, the Company made an investment of $48,000 in Navox, Inc.,
(Navox) a privately-held Delaware company which provides wireless communication,
location and security system development services. In June 1997, the Company
made an additional investment of $26,457 in Navox. The Company's investment
represents an approximate 5.5 percent interest in Navox, and includes
representation on Navox's board of directors. The Company accounts for its
investment in Navox under the equity method of accounting and records its
proportionate share of losses generated by Navox. The Company derived
approximately 50 percent and 2 percent of its revenue for 1997 and 1998,
respectively, under consulting arrangements with Navox. The Company had no trade
accounts receivables due from Navox as of December 31, 1998 and 1999,
respectively. The Company does not anticipate significant revenue from Navox in
the future.
(16) RESERVED SHARE PROGRAM
Prior to October 20, 1999, the effectiveness of the Company's registration
statement for its initial public offering, the Company sent a letter to
approximately 90 employees, officers and directors of the Company whom it had
designated as potential offerees of up to 390,000 shares of common stock in a
directed share program in connection with its initial public offering. These
materials were not accompanied by a preliminary prospectus and may have
constituted a prospectus that does not meet the requirements of the Securities
Act of 1933. If the mailing of these original materials did constitute a
violation of the Securities Act of 1933, the recipients of the letter who
purchased common stock in the initial public offering could have the right, for
a period of one year from the date of their purchase of common stock, to obtain
recovery of the consideration paid in connection with their purchase of common
stock or, if they have already sold the stock, sue the Company for damages
resulting from their purchase of common stock. These refunds or damages could
total up to approximately $6.2 million, based on the initial public offering
price of $16.00 per share, in the event that investors suffer a total loss of
their investment during this period and seek refunds or damages.
(17) CONTINGENCY
The Company has received two claims that it has infringed patents developed
by other parties. Management believes that these claims are without merit and
intends to contest them vigorously. If the Company is unsuccessful in its
defense, it could be liable for damages or could be required to enter into
costly royalty arrangements.
(18) SUBSEQUENT EVENTS
(a) Acquisition of LocusOne Communications, Inc.
On February 3, 2000, the Company acquired all the outstanding common stock
and preferred stock of LocusOne Communications, Inc. ("LocusOne") for a purchase
price of approximately $40 million. LocusOne is a developer of wireless
communications for the supply chain management industry. The acquisition will be
accounted for under the purchase method of accounting. Approximately $19.0
million of the purchase price is payable in the form of non-interest bearing
notes payable due no later than December 31, 2000.
(b) Inciscent
On February 7, 2000 the Company agreed to form a new company with
Metrocall, Inc., PSINet, Inc. and Hicks, Muse, Tate & Furst Incorporated to be
called Inciscent. Inciscent will offer technology services to small and
medium-sized businesses and home office customers. The Company agreed to acquire
a
F-20
<PAGE> 109
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
27.5% interest in Inciscent for $10 million. The Company also agreed to acquire
a 9.9% interest in Metrocall for $17 million.
(c) Strategic Alliance with Reuters Plc
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 plans to acquire a 60% interest in this new company for
$100 million.
(d) Pending Acquisition of Riverbed Technologies, Inc.
On February 9, 2000, the Company entered into an definitive merger
agreement to acquire Riverbed Technologies, Inc. ("Riverbed") for approximately
4,537,000 shares of common stock, plus the issuance of options to acquire
approximately 862,000 additional shares of common stock for replacement of
existing options of Riverbed's employees. Riverbed develops products to extend
the accessibility of applications and information from corporate networks and
databases to handheld devices. The acquisition will be accounted for under the
purchase method of accounting and is subject to regulatory approval and
shareholder vote by Riverbed shareholders.
(19) UNAUDITED INTERIM FINANCIAL INFORMATION
(a) Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A and SAB 101B which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 provides guidance on necessary disclosures relating
to revenue recognition policies in addition to outlining the criteria that must
be met in order to recognize revenue. Dependant upon the final guidance on SAB
101, which is expected to be issued by the SEC in the fourth quarter of 2000,
the Company may be required to change its policy of recognizing activation fee
revenue upon service activation to recognizing the revenue ratably over the
initial term of the subscription contract. The Company does not expect this
change to have a material effect on its consolidated results of operations or
financial position.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. Interpretation No. 44 clarifies the application of Opinion 25
for the following issues: (1) the definition of employee for purposes of
applying Opinion 25, (2) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (3) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (4)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000.
(b) Secondary Public Offering
On March 17, 2000, the Company completed a follow-on 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
F-21
<PAGE> 110
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
(c) Inciscent and Metrocall
In March 2000, 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 obtained 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 six months ended June 30, 2000, the
Company recognized approximately $348,000 in revenue under the engineering
services agreement. As part of the Inciscent joint venture, the Company also
acquired 7,766,769 shares of Metrocall, Inc.'s common stock at $2.19 per share,
or a 9.9% interest, for $17 million. The Company also 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 $296,000 in expense
for the six months ended June 30, 2000 to reflect its proportionate share of the
losses in Inciscent based upon preliminary unaudited financial information
provided by Inciscent.
The Company accounts for its investment in Metrocall in accordance with
SFAS 115. Under the provisions of SFAS 115, the Company has classified its
investment in Metrocall as available-for-sale and the investment is being
carried at fair value. Fair value is determined based upon quoted market prices.
Unrealized gains (losses) are excluded from earnings and are reported as a
separate component of other comprehensive income until realized. As of June 30,
2000, the Company has recorded an unrealized gain of approximately $52.9 million
on its investment in Metrocall.
(d) Investments
On June 2, 2000, the Company entered into a common stock purchase agreement
with Data Critical Corporation (Data Critical) a publicly traded company. The
Company acquired 1,230,770 shares of Common Stock representing a 9.9% percent
interest in Data Critical for $10 million in cash, or $8.125 per share, and has
the right to appoint one of the six members of the Board of Directors of Data
Critical. The Company also has the right to purchase an additional $10 million
worth of shares provided however that the Company's ownership percentage in Data
Critical does not exceed 19.9%. In separate agreements, the Company granted to
Data Critical a perpetual AIM license for $250,000 and will be providing airtime
under a contract totaling a minimum of $600,000 over 24 months. The Company will
recognize the license revenue and airtime revenue over the term of the minimum
airtime charges cash payment schedule of two years. As of June 30, 2000, the
Company has not recognized any revenue under these agreements.
The Company accounts for its investment in Data Critical in accordance with
SFAS 115. Under the provisions of SFAS 115, the Company has classified its
investment in Data Critical as available-for-sale and the investment is being
carried at fair value. Fair value is determined based upon quoted market prices.
Unrealized gains (losses) are excluded from earnings and are reported as a
separate component of other comprehensive income until realized. As of June 30,
2000, the Company has recorded an unrealized gain of approximately $6 million on
its investment in Data Critical.
On June 30, 2000, the Company entered into a purchase agreement with
Novatel Wireless, Inc. (Novatel). The Company acquired approximately a 7%
interest in Novatel in the form of 1,159,420 shares of Series D Preferred Stock
and 231,884 Investor Warrants to purchase common stock, for $20 million in cash,
or $17.25 per share, and has the right to appoint one of the nine members of the
board of directors of Novatel. The Company accounts for its investment under the
cost method of accounting.
F-22
<PAGE> 111
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(e) Investment in OmniSky, Inc.
For the six months ended June 30, 2000, the Company has recognized
approximately $2.0 million in revenue from OmniSky under various agreements. As
of June 30, 2000, the Company's accounts receivable included $1.2 million due
from OmniSky. For the six months ended June 30, 2000, the Company has recorded
approximately $13.6 million in expenses to reflect its proportionate share of
the losses in OmniSky based upon preliminary unaudited financial information
provided by OmniSky.
In May 2000, News Corporation, PSINet Inc., and several other investors,
invested a total of $89.4 million in OmniSky. As a result of this transaction,
the Company's ownership in OmniSky decreased to approximately 27% on a fully
diluted basis. During the six months ended June 30, 2000, the Company has
recognized a gain through stockholders' equity of approximately $31 million
related to issuances of OmniSky equity to third party investors.
In October 1999, the Company agreed to purchase 25,000 Minstrel V modems
from OmniSky for $230 per modem. OmniSky has an exclusive buying arrangement
with Novatel for Minstrel V modems. In 1999, the Company purchased 20,000 of the
25,000 for cash of $3.5 million and cancellation of $1.1 million of trade
receivables owed to the Company by OmniSky. An additional $1.2 million will be
paid to OmniSky for the remaining 5,000 modems after the delivery of the initial
20,000 modems, which began in November 1999. As of June 30, 2000, the Company
has recorded prepaid expenses of approximately $4.4 million associated with this
agreement. As of June 30, 2000, the Company has received 930 modems, or
approximately $214,000 of modems. Subsequent to June 30, 2000 the Company
received $1.84 million from OmniSky pursuant to an agreement for OmniSky to
repurchase 8,000 modems, reducing the Company's purchase commitment from 25,000
to 17,000.
(f) Research in Motion Limited -- Preliminary Marketing Agreement
On April 11, 2000, the Company entered into a preliminary marketing
agreement with Research in Motion Limited (RIM). Under the agreement, the
Company committed to the following terms to be further defined in future
agreements:
- Purchase up to 140,000 RIM handheld devices over the next three years.
The total commitment is dependent on certain conditions being met over
the period of the agreement.
- License the RIM BlackBerry wireless e-mail service for $3.0 million.
- Provide the technology for the Company to build the BlackBerry service
infrastructure in its network operations center for payments by the
Company totaling $900,000 million over 15 months plus two annual
maintenance payments of $375,000 each.
The agreement also provided for joint marketing expenditures up to $1.0 million
each and joint research and development expenditures up to $1.5 million each.
The Company will be appointed a reseller and distributor of RIM products and
will receive favorable pricing on RIM handheld devices. As of June 30, 2000, the
terms and conditions of the anticipated definitive agreements were being
negotiated however, no subsequent definitive agreements had been signed.
(g) Acquisitions
In connection with the acquisition of LocusOne, the Company 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 $3.6
million for the six months ended June 30, 2000 related to these options and
expects to record approximately $23.2 million in option and warrant expense
related to these options over the remaining service and vesting period through
March 2003. At the closing of the Secondary Offering, 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 the remaining obligations, which will be paid on
December 31, 2000.
F-23
<PAGE> 112
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On March 6, 2000, the Company completed its acquisition of Riverbed
Technologies, Inc. ("Riverbed") for 4,537,281 shares of the Company's common
stock and converted existing options held by Riverbed employees into options to
acquire 862,480 shares of the Company's common stock. Riverbed develops products
to extend the accessibility of applications and information from corporate
networks and databases to handheld devices. As part of closing this transaction,
the Company is holding 270,000 of the shares payable to Riverbed shareholders
for 12 months to secure their post-closing indemnification obligations to the
Company and the Company has agreed to indemnify up to $40.5 million of damages
the sellers may incur.
The Company has valued the 4,537,281 shares of its common stock issued to
Riverbed based on the market price of the Company's common stock over the period
two days before and two days after the acquisition was agreed to and announced,
in accordance with Financial Accounting Standards Board ("FASB") Emerging Issues
Task Force ("EITF") Issue 95-19. The Company has valued the 862,480 shares of
common stock issued as replacement options to Riverbed employees using the
Black-Scholes option pricing model with the following assumptions: expected
dividend yield 0 percent, risk-free interest rate of 6.7 percent, expected life
of five years and volatility of 70 percent. The total value of common stock and
replacement options issued as consideration for the acquisition was
approximately $1.1 billion.
On April 6, 2000, the Company acquired IFX Group Plc ("IFX"), a European
provider of mobile financial data, for a purchase price of $85 million in cash,
excluding related expenses of approximately $1.4 million. IFX develops
leading-edge technologies to optimize the delivery of data over the next
generation of digital networks currently being deployed across Western Europe.
On May 5, 2000, Sila Communications ("Sila") was formed in connection with
the Company's non-binding letter of intent with Reuters Plc, and the Company
contributed its subsidiary, IFX to the joint venture plus cash of $13.5 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, plus up to an additional $65 million
earn-out payable over the next 13 months for reaching specified revenue targets.
As of June 30, 2000, no amount of earn-out had been accrued. NetSearch develops
and markets a high-end, wireless notification and response system designed to
increase sales productivity for companies engaged in electronic commerce on the
Internet by bridging the gap between website consumers and retailers.
These acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed have
been recorded at their estimated fair value as
F-24
<PAGE> 113
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of the acquisition date. The preliminary allocation of the total purchase price
for the LocusOne, Riverbed, NetSearch, IFX and the formation of Sila is
summarized as follows:
<TABLE>
<CAPTION>
(Amounts in thousands)
<S> <C>
Restricted cash............................................. $ 32,489
Current assets.............................................. 11,332
Property and equipment...................................... 1,872
Current liabilities......................................... (10,607)
Deferred tax liability...................................... (11,221)
In-process research and development......................... 2,160
Identifiable intangibles.................................... 74,614
Goodwill.................................................... 1,267,965
Minority interest........................................... (66,966)
-----------
Total consideration paid.......................... $ 1,301,638
===========
</TABLE>
The Company is in the process of completing a full valuation of the assets
and liabilities acquired. Therefore, the purchase price allocation will be
finalized upon completion of these valuations. The identifiable intangibles are
being amortized between four and five years and the goodwill is being amortized
between five and seven years.
The following summary, prepared on a pro forma basis, presents the results
of operations of the Company as if the Mobeo, LocusOne, Riverbed, IFX (including
the formation of Sila) and NetSearch acquisitions had been completed as of
January 1, 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
2000 1999
(In thousands, except per share data) --------- ---------
<S> <C> <C>
Revenue..................................................... $ 21,506 $ 13,880
Net loss.................................................... $(174,288) $(140,960)
Net loss per share -- basic and diluted..................... $ (4.93) $ (5.77)
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of what actually would have occurred if the acquisition of Mobeo,
LocusOne, Riverbed, NetSearch, IFX and the formation of Sila had taken place as
of January 1, 1999 nor is it a projection of the Company's results of operations
for any future period.
(h) Segment Information
During the first six months of June 30, 2000, as a result of the Company's
acquisitions, the Company reorganized its operations into four operating
segments. The Company's operating segments include Financial Services, Software,
Logistics and our Sila operations. The Financial Services segment provides
wireless data services and engineering services to develop applications for the
financial services industry. The Software segment develops, licenses and
supports software products to extends the accessibility of applications and
information from corporate networks and databases to handheld devices. The
Logistics segment develops and sells wireless data systems to companies that
distribute goods and services using their own delivery fleets. Sila is our
European joint venture with Reuters and has the majority of its customers in the
European financial services industry.
F-25
<PAGE> 114
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Segment detail is summarized as follows (in thousands):
<TABLE>
<CAPTION>
FINANCIAL SOFTWARE EUROPEAN CORPORATE
SERVICES PRODUCTS LOGISTICS OPERATIONS AND OTHER TOTAL
--------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Six months ended June 30, 1999
Revenue............. $ 599 $ -- $ 188 $ -- $ -- $ 787
Gross profit........ $ 68 $ -- $ 68 $ -- $ -- $ 136
Total assets........ $ 5,867 $ -- $ -- $ -- $ -- $ 5,867
Six months ended June 30, 2000
Revenue............. $ 6,230 $ 2,125 $ 2,211 $ 3,338 $ 2,252 $ 16,156
Gross profit........ $ 2,415 $ 1,161 $ 1,011 $ 1,601 $ 1,317 $ 7,505
Total assets........ $12,651 $1,069,131 $36,780 $180,647 $1,404,033 $2,703,242
</TABLE>
A reconciliation of net income reported for the operating segments to the
amount in the condensed consolidated financial statements as follows (in
thousands):
<TABLE>
<CAPTION>
UNALLOCATED
SEGMENT CORPORATE EXPENSES CONSOLIDATED
TOTAL AND OTHER TOTAL
------- ------------------ ------------
<S> <C> <C> <C>
Six months ended June 30, 1999.................. $ 136 $ (4,456) $ (4,320)
Six months ended June 30, 2000.................. $7,505 $(130,690) $(123,185)
</TABLE>
(i) Geographic Region
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>
SIX MONTHS
ENDED JUNE 30,
--------------
2000 1999
------- ----
<S> <C> <C>
Revenue:
United States............................................. $12,777 $787
Aggregate Foreign......................................... 3,379 --
------- ----
$16,156 $787
</TABLE>
(j) Investment in VeriStar Corporation
On July 12, 2000 the Company entered into a purchase agreement with
VeriStar Corporation (VeriStar) a provider of biometric recognition devices. The
Company acquired a 19.9% interest in VeriStar in the form of 3,250,649 shares of
Series B Preferred Stock for approximately $5.6 million in cash or $1.73 per
share, and has the right to appoint one of the six members of the board of
directors. The investment will be accounted for under the cost method of
accounting.
(k) Launch of MindSurf
On July 17, 2000, the Company entered into a non-binding Alliance Agreement
with Sylvan Learning Systems, Inc (Sylvan) to establish a new company focused on
educational services. The Company committed to acquire a 42% interest in this
new company for $29.4 million in cash. The Company intends to form the new
company, MindSurf, Inc. (Mindsurf) on or before August 31, 2000. Sylvan also
intends to contribute $29.4 million for a 42% interest while Critical Path and
other minority investors will own the remaining 16%.
(l) Investment in ePhones Inc
On July 31, 2000, the Company invested $8 million in ePhones, a leading
provider of retail wireless products and services. The Company acquired a 11.4%
interest in ePhones in the form of 2,539,683 shares
F-26
<PAGE> 115
AETHER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of Series C convertible preferred shares, and has the right to appoint one of
the 7 members of the board of directors.
(m) Intent to purchase Cerulean Technology, Inc.
On August 14, 2000, the Company signed a letter of intent to purchase
Cerulean Technology, Inc. (Cerulean), a leader in wireless mobile software for
the public safety field. The Company intends to purchase Cerulean for
approximately $150 million, which is comprised of $75 million in cash and $75
million in stock.
(n) Formation of Aether Capital
On June 13, 2000, the Company formed Aether Capital as a vehicle for Aether
to invest in a diversified group of early-stage, high-growth private companies,
principally engaged in wireless data communications.
(o) Intent to invest in ParkStone Medical Information Systems, Inc.
On August 14, 2000, the Company announced plans to invest $15 million in
ParkStone Medical Information Systems, Inc., a provider of wireless services in
the medical field.
F-27
<PAGE> 116
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Mobeo, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity (deficit) and cash flows, present
fairly, in all material respects, the financial position of Mobeo, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
McLean, Virginia
March 10, 1999
F-28
<PAGE> 117
MOBEO, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 125,446 $ 193,913 $ 558,732
Accounts receivable, net............................... 278,620 293,895 276,263
Prepaid expenses and other............................. 37,032 28,724 23,464
Income tax refund receivable........................... 20,756 20,756 --
Deferred income tax.................................... 142,365 186,549 465,417
---------- ---------- ----------
Total current assets........................... 604,219 723,837 1,323,876
Property and equipment, net.............................. 321,876 405,148 335,703
Patents, net............................................. -- 30,307 29,411
Deposits................................................. 24,475 23,609 27,609
Deferred income tax...................................... 71,476 14,542 17,938
---------- ---------- ----------
Total assets................................... $1,022,046 $1,197,443 $1,734,537
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $ 989,316 $1,130,184 $ 406,550
Accrued expenses....................................... 275,541 390,172 811,431
Income tax payable..................................... -- -- 54,154
Capital lease obligations.............................. 12,159 -- --
Deferred revenue....................................... 71,220 104,170 826,788
---------- ---------- ----------
Total current liabilities...................... 1,348,236 1,624,526 2,098,923
---------- ---------- ----------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock; no par value, 10,000 shares authorized,
1,171 shares issued and outstanding................. -- -- --
Additional paid-in capital............................. 172,625 172,625 172,625
Accumulated deficit.................................... (455,795) (556,688) (537,011)
Notes receivable-related parties....................... (43,020) (43,020) --
---------- ---------- ----------
Total stockholders' deficit.................... (326,190) (427,083) (364,386)
---------- ---------- ----------
Total liabilities and stockholders' deficit.... $1,022,046 $1,197,443 $1,734,537
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-29
<PAGE> 118
MOBEO, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------
1996 1997 1998 1999
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Service revenue............................... $6,484,864 $7,088,993 $8,580,786 $5,047,195
Cost of services.............................. 2,947,185 3,148,051 3,040,743 1,757,188
---------- ---------- ---------- ----------
Gross profit.................................. 3,537,679 3,940,942 5,540,043 3,290,007
---------- ---------- ---------- ----------
Selling, general and administrative expenses:
Sales and marketing......................... 1,641,502 1,812,696 2,302,360 1,250,230
General and administrative.................. 1,149,218 1,937,829 2,706,544 1,451,285
Research and development.................... 94,609 174,867 496,570 427,210
Depreciation and amortization............... 355,276 464,419 112,903 60,405
---------- ---------- ---------- ----------
3,240,605 4,389,811 5,618,377 3,189,130
---------- ---------- ---------- ----------
Other expense (income):
Interest expense (income)................... -- 2,628 (4,969) (15,559)
Loss on disposal of assets.................. -- 148,000 14,778 50,569
---------- ---------- ---------- ----------
Total other expenses (income)....... -- 150,628 9,809 35,010
---------- ---------- ---------- ----------
Income (loss) before income taxes............. 297,074 (599,497) (88,143) 65,867
Provision for (benefit from) income taxes..... 120,150 (211,841) 12,750 46,190
---------- ---------- ---------- ----------
Net income (loss)............................. $ 176,924 $ (387,656) $ (100,893) $ 19,677
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-30
<PAGE> 119
MOBEO, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PAID-IN ACCUMULATED RELATED
SHARES AMOUNT CAPITAL DEFICIT PARTIES TOTAL
------ ------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995............... 1,171 $-- $172,625 $(245,063) $ -- $ (72,438)
Issuance of notes receivable-related
parties................................ -- -- -- -- (171,250) (171,250)
Net income............................... -- -- -- 176,924 -- 176,924
----- --- -------- --------- --------- ---------
Balance at December 31, 1996............... 1,171 $-- $172,625 $ (68,139) $(171,250) $ (66,764)
Issuance of notes receivable-related
parties................................ -- -- -- -- (65,603) (65,603)
Collections on notes receivable-related
parties................................ -- -- -- -- 71,250 71,250
Allowance for notes receivable-related
parties................................ -- -- -- -- 122,583 122,583
Net loss................................. -- -- -- (387,656) -- (387,656)
----- --- -------- --------- --------- ---------
Balance at December 31, 1997............... 1,171 -- 172,625 (455,795) (43,020) (326,190)
Net loss................................. -- -- -- (100,893) -- (100,893)
----- --- -------- --------- --------- ---------
Balance at December 31, 1998............... 1,171 $-- $172,625 $(556,688) $ (43,020) $(427,083)
----- --- -------- --------- --------- ---------
Allowance for notes receivable-related
parties (unaudited).................... -- -- -- -- 43,020 43,020
Net income (unaudited)................... -- -- -- 19,677 -- 19,677
----- --- -------- --------- --------- ---------
Balance at June 30, 1999 (unaudited)....... 1,171 $-- $172,625 $(537,011) $ -- $(364,386)
===== === ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-31
<PAGE> 120
MOBEO, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -----------
1996 1997 1998 1999
--------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 176,924 $(387,656) $ (100,893) $ 19,677
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Bad debt expense................................ 23,976 62,956 51,620 23,697
Deferred income taxes........................... 62,200 (211,841) 12,750 (282,264)
Depreciation and amortization................... 355,276 464,419 112,903 60,405
Loss on disposal of assets...................... 57,472 148,009 14,778 50,569
Allowance for notes receivable-related
parties...................................... -- 122,583 -- 43,020
Changes in assets and liabilities:
Accounts receivable.......................... 74,989 (181,580) (66,895) (6,065)
Income tax refund receivable................. 6,414 (16,259) -- 20,756
Restricted cash.............................. 15,000 -- -- --
Deposits, prepaid expenses and other......... 24,353 (30,990) 9,174 1,260
Accounts payable and accrued expenses........ (66,407) 179,434 255,499 (302,375)
Income tax payable........................... (60,940) (49,560) -- 54,154
Deferred revenue............................. (127,115) 4,114 32,950 722,618
--------- --------- ----------- ---------
Net cash provided by operating
activities............................... 542,142 103,629 321,886 405,452
--------- --------- ----------- ---------
Cash flows from investing activities:
Purchase of property and equipment................ (347,526) (68,558) (210,804) (40,633)
Payments to acquire patent........................ -- -- (30,456) --
Advances of notes receivable-related parties...... (171,250) (78,103) -- --
Collections on notes receivable-related parties... -- 83,750 -- --
--------- --------- ----------- ---------
Net cash used in investing activities...... (518,776) (62,911) (241,260) (40,633)
--------- --------- ----------- ---------
Cash flows from financing activities:
Principal payments on capital leases.............. (42,268) (48,414) (12,159) --
--------- --------- ----------- ---------
Net cash used in financing activities...... (42,268) (48,414) (12,159) --
--------- --------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... (18,902) (7,696) 68,467 364,819
Cash and cash equivalents at beginning of the
year.............................................. 152,044 133,142 125,446 193,913
--------- --------- ----------- ---------
Cash and cash equivalents at end of the year........ $ 133,142 $ 125,446 $ 193,913 $ 558,732
========= ========= =========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $ 20,360 $ 13,428 $ 1,378 $ 152
========= ========= =========== =========
Cash paid for income taxes........................ $ 112,476 $ 65,819 $ -- $ --
========= ========= =========== =========
Supplemental disclosure of non-cash investing and
financing activities:
Allowance for notes receivable-related
parties...................................... $ -- $ 122,583 $ -- $ 43,020
========= ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-32
<PAGE> 121
MOBEO, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 1999 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED
1. ORGANIZATION
DocuPro, Inc. was incorporated in the District of Columbia and commenced
operations in January 1989. In June 1998, DocuPro reincorporated in the state of
Delaware and in September 1998 changed its name to Mobeo, Inc. (the Company).
The Company is an electronic publisher specializing in providing financial
information over wireless networks. The Company's F/X Alert(R) service provides
major banks and financial institutions with continuous pricing and news
headlines of foreign exchange, government securities, and commodity markets on a
palm sized data terminal. The Company's PocketFutures(R) product provides the
individual futures trader with continuous pricing and news headlines of future
markets. Subsequent to December 31, 1998, the Company launched the Mobeo1.0(R)
product, designed for the individual equities trader.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited interim financial statements
The unaudited balance sheet as of June 30, 1999, the unaudited statements
of operations and cash flows for the six months ended June 30, 1999 and the
statement of changes in stockholders equity (deficit) for the six months ended
June 30, 1999, have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting of only normal remaining accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1999 are not necessarily indicative of
results that may be expected for the year ending December 31, 1999.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents
All highly liquid instruments with original maturities of three months or
less are considered to be cash equivalents. The Company invests its cash
balances in repurchase accounts with a large financial institution.
Revenue recognition
The Company enters into one year service contracts for providing financial
information over wireless networks. For substantially all its customers, the
Company bills on a monthly cycle and recognizes revenue monthly. Certain of the
Company's customers are billed in advance annually with revenue deferred and
recognized on a monthly basis over the life of the agreement. Non-refundable
activation fees are billed and recognized at the time of initial subscription.
F-33
<PAGE> 122
MOBEO, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 1999 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED--(CONTINUED)
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains its cash and cash equivalents in
bank accounts which, at times, may exceed federally insured limits. The Company
has not experienced any losses in such bank accounts. The Company believes it is
not exposed to any significant credit risk on cash and cash equivalents. The
Company regularly monitors all outstanding accounts receivable balances to
assess collectibility. Accounts receivable as of December 31, 1997 and 1998, are
net of an allowance for doubtful accounts of $30,000 and $32,700, respectively.
The accounts receivable, which are not collateralized, are due mainly from banks
and financial institutions.
Although the Company has sales on a national basis, 75% of their revenue
were derived in the New York City area. No individual accounts receivable were
greater than 10% of total accounts receivable as of December 31, 1997 and 1998.
Property and equipment
Property and equipment are recorded at cost. Property and equipment under
capital leases are recorded at the lower of their fair market value or the
present value of future minimum lease payments determined at the inception of
the lease.
Amortization of leasehold improvements is recorded on a straight-line basis
over the shorter of the estimated useful life of the improvement or the term of
the lease. Amortization of property and equipment under capital leases is
recorded on a straight-line basis over the lease term. Property and equipment
under capital leases for which title passes to the Company at the conclusion of
the lease term is amortized on a straight line basis over the estimated useful
life of the related asset. Depreciation of other property and equipment is
recorded on a straight-line basis over expected useful lives of 3 to 10 years.
When property and equipment is retired or otherwise disposed, the related
cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income. Costs associated with repairs and
maintenance are expensed as incurred.
Patents
The cost of acquiring patents was approximately $30,000 as of December 31,
1998. Upon approval, the patents are to be amortized on a straight-line basis
over their estimated economic life, which is less than the statutory life of the
patents.
Income taxes
The Company accounts for income taxes in accordance with the liability
method. Deferred tax assets and liabilities are recognized for tax consequences
in future years for differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
provision for income taxes includes the current tax provision and the change
during the year in the net deferred tax liability or asset. A valuation
allowance is provided to reduce the deferred tax asset to a level which, more
likely than not, will be realized.
F-34
<PAGE> 123
MOBEO, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 1999 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED--(CONTINUED)
Recent accounting pronouncements
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB No.
133 an amendment of FASB Statement No. 133, which defers the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company will adopt SFAS No. 133 for the year ending December 31, 2000.
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Currently, the Company does not utilize
derivative instruments, therefore the adoption of SFAS No. 133 is not expected
to have a significant effect on the Company's results of operations or its
financial position.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
System hardware and software....................... $ 278,202 $ 196,038 205,195
Office furniture and equipment..................... 216,158 454,817 381,889
Leasehold improvements............................. 44,106 44,106 44,106
--------- --------- ---------
538,466 694,961 631,190
Less accumulated depreciation and amortization..... (216,590) (289,813) (295,487)
--------- --------- ---------
$ 321,876 $ 405,148 $ 335,703
========= ========= =========
</TABLE>
During 1997, the Company leased certain office equipment under capital
leases. As of December 31, 1997, the cost of the office equipment related to
these capital leases was $44,035, and the accumulated amortization was $27,684.
These leases were fully amortized in 1998. The Company did not enter into any
new capital leases in 1998 or as of June 30, 1999.
During 1997, the Company reassessed the useful life of their pagers, which
are provided to customers upon activation of services at no fee. Since the
Company's service agreements are for a one-year period and subject to
cancellation, non-payment and non-return risk, management changed the estimated
useful life from three years to immediate expense recognition when the pagers
are acquired. As a result, the remaining net book value of pagers acquired prior
to 1997 of $228,000 was charged to depreciation expense for the year ended
December 31, 1997, while pagers purchased for the years ended December 31, 1997
and 1998 totaled $138,000 and $281,000, respectively, and $165,000 (unaudited)
for the six months ended June 30, 1999 were expensed as incurred.
During 1997 and 1998, the Company disposed of certain system hardware and
software equipment with an original cost of $435,000 and $54,310, respectively,
and accumulated amortization of $287,000 and
F-35
<PAGE> 124
MOBEO, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 1999 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED--(CONTINUED)
$35,675, respectively. The resulting losses on disposals are included as a
separate component on the statement of operations.
4. INCOME TAXES
The components of the provision for (benefit from) income taxes consisted
of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- ----------------
1997 1998 1999
--------- ------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Current provision (benefit):
Federal.......................................... $ -- $ -- $ 263,090
State and local.................................. -- -- 65,364
--------- ------- ---------
-- -- 328,454
--------- ------- ---------
Deferred provision (benefit):
Federal.......................................... (169,073) 10,200 (255,775)
State and local.................................. (42,768) 2,550 (26,489)
--------- ------- ---------
(211,841) 12,750 (282,264)
--------- ------- ---------
Total provision for (benefit from) income
taxes.......................................... $(211,841) $12,750 $ 46,190
========= ======= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's net deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax assets
Allowance for doubtful accounts...................... $ 64,848 $ 65,995 $ 79,718
Deferred revenue..................................... 30,264 36,611 325,122
Other................................................ 10,714 3,163 4,564
Net operating loss carryback......................... 36,539 80,780 56,013
-------- -------- --------
Total current deferred tax assets.................... $142,365 $186,549 $465,417
-------- -------- --------
Noncurrent deferred tax assets
Accumulated depreciation............................. 71,476 14,542 17,938
-------- -------- --------
Total noncurrent deferred tax assets................. 71,476 14,542 17,938
-------- -------- --------
Total deferred tax assets............................ $213,841 $201,091 $483,355
======== ======== ========
</TABLE>
The change in the deferred tax assets in 1998 primarily represents the
effect of changes in the amounts of temporary differences. The Company's 1998
provision for income taxes differs from the provision that would have resulted
from applying the federal statutory rates to net loss before taxes due to
permanent differences primarily attributable to deductible business meals and
entertainment and other permanent differences of 48%. The Company believes it is
more likely than not to realize the net deferred
F-36
<PAGE> 125
MOBEO, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 1999 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED--(CONTINUED)
tax asset and accordingly no valuation allowance has been provided as of
December 31, 1997 and 1998. This conclusion is based on, (i) the Company's
ability to carryback net operating losses to offset taxable income from previous
years and (ii) the Company's expected future profitability.
5. PROFIT SHARING AND 401(k) PLANS
The Company has a discretionary profit sharing plan and a self-directed
401(k) plan which cover all employees employed more than six months. Employees
become fully vested after three years of service. Employer contributions to the
profit sharing plan were $102,172 and $94,664 and contributions to the 401(k)
plan were $44,040 and $60,490 for the years ended December 31, 1997 and 1998,
respectively.
6. STOCK-BASED COMPENSATION
On April 30, 1998, the Company adopted the Omnibus Stock Option Plan (the
Plan), under which incentive stock options, non-qualified stock options, stock
appreciation rights, restricted or unrestricted stock awards, phantom stock,
performance awards or any combination thereof may be granted the Company's
employees and certain other persons in accordance with the Plan. The Board of
Directors, which administers the Plan, determines the number of options granted,
the vesting period and the exercise price. The Board of Directors may terminate
the Plan at any time. Options granted under the Plan generally vest over a four
year period and expire ten years after the date of grant. Prior to the common
stock becoming publicly traded, the Company retains the right of first offer to
buy the employees' shares at the offer price. At December 31, 1998, 48 shares
were reserved for issuance under the Plan.
As of December 31, 1998 and June 30, 1999, a total of 35 and 45 incentive
stock options respectively, had been granted to employees, at an exercise price
of $3,250 per share. The exercise price was established by the Board of
Directors.
<TABLE>
<CAPTION>
WEIGHTED
INCENTIVE AVERAGE
STOCK EXERCISE
OPTIONS PRICE PRICE
--------- ------ --------
<S> <C> <C> <C>
Options outstanding at December 31, 1997.................. -- -- --
Options granted........................................... 35 $3,250 $3,250
Options exercised......................................... -- --
Options canceled.......................................... -- -- --
--- ------ ------
Options outstanding at December 31, 1998.................. 35 $3,250 $3,250
--- ------ ------
Options granted........................................... 10 $3,250 $3,250
Options exercised......................................... -- --
Options canceled.......................................... -- -- --
--- ------ ------
Options outstanding at June 30, 1999 (unaudited).......... 45 $3,250 $3,250
=== ====== ======
</TABLE>
At December 31, 1998 and June 30, 1999 no options were exercisable. The
weighted-average fair value of options granted during the year ended December
31, 1998 and for the six months ended June 30, 1999 was $1,125 and $1,262
(unaudited) per share respectively, based on the Black-Scholes option pricing
model.
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma disclosures
of net loss as if the fair value method had been applied in measuring
compensation expense. Under the intrinsic value method of accounting for stock-
F-37
<PAGE> 126
MOBEO, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 1999 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED--(CONTINUED)
based compensation, when the exercise price of options granted to employees is
less than the fair value of the underlying stock on the date of grant,
compensation expense is to be recognized over the applicable vesting period. No
options granted through December 31, 1998 and June 30, 1999, respectively, were
less than fair value of the underlying stock. Had the fair value method been
applied, the Company's net loss at December 31, 1998 would have been increased
and the Company's net income at June 30, 1999 would have been decreased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Net loss as reported........................................ $(100,893) $19,677
Pro forma net loss.......................................... $(103,313) $18,275
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1998 and the six
months ended June 30, 1999: dividend yield of 0%, expected volatility of 0%,
risk-free interest rate of 5.07% and 5.53%, respectively and expected term of 9
years.
As of December 31, 1998 and June 30, 1999, the weighted average remaining
contractual life of the options is 9.7 and 9.9 years, respectively.
7. COMMITMENTS AND CONTINGENCIES
Data services and royalty arrangement
In January 1995, the Company entered into a multi-year distribution
agreement with a provider of financial information for transmission the
Company's customers. During 1998, the Company entered into two additional
multi-year agreements with new suppliers. Under these agreements, the Company
pays a monthly royalty to the data suppliers based on the number of wireless
units receiving data. Included in accounts payable at December 31, 1997 and 1998
and June 30, 1999, respectively, is $566,685, $200,000 and $68,923 (unaudited)
related to purchases of financial information for transmission to customers.
Paging services
In April 1994, the Company entered into a multi-year nonexclusive national
reseller agreement with a wireless messaging service provider. During 1998, the
Company entered into two additional multi-year nonexclusive national reseller
agreements with new suppliers. Under the terms of these agreements, the Company
is purchasing paging services from these providers for the purpose of marketing
and reselling such services to end users.
Vulnerabilities due to certain concentrations
The Company obtains all of its data from three sources and resells
primarily through one wireless messaging provider. Although there are a limited
number of data sources and messaging service providers, management believes that
they could obtain such services on terms comparable the Company's existing
agreements. A change in suppliers, however, could cause delays in service, which
would adversely affect the Company's financial position, results of operations
and cash flows.
F-38
<PAGE> 127
MOBEO, INC.
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 1999 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1999 IS UNAUDITED--(CONTINUED)
Leases
The Company leases office space in Bethesda, Maryland for its corporate
headquarters under an agreement which expires in December 1999. In addition, the
Company maintains facilities in New York, N.Y., under an agreement which expires
in 1999. The lease agreement for its corporate headquarters contains provisions
allowing free rent periods and periodic rate increases during the lease terms.
The Company recognizes rent expense under operating leases ratably over the
lease terms. As of December 31, 1997 and 1998 and June 30, 1999, the Company had
$13,000, $7,000 and $3,000 (unaudited), respectively, recorded as deferred rent
included in accrued expenses. Total rent expense was $238,783 and $239,936 for
the years ended December 31, 1997 and 1998, respectively, and $142,894
(unaudited) for the six months ended June 30, 1999.
In addition to office space, the Company leases an automobile under a 36
month operating lease, which expires in 1999.
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<S> <C>
1999.............................................. $201,695
</TABLE>
8. RELATED PARTY TRANSACTIONS
In 1996, the Company advanced $171,250 to certain employees and
shareholders under notes receivable arrangements. During 1997, the Company
advanced an additional $78,103 under these arrangements, and received $83,750 in
collections on the notes receivables. There is no planned settlement of the
notes receivable balance in the foreseeable future, therefore the Company has
classified the amounts as a component of stockholders' equity (deficit). Under
these arrangements, the Company provided an allowance for doubtful accounts of
$122,583 to reflect the net realizable value of the notes at December 31, 1997
and 1998, respectively.
9. SUBSEQUENT EVENTS (UNAUDITED)
On July 14, 1999, the Company executed a Promissory Note with one of its
employees for $20,000. The Promissory Note bears interest at 7%. Principal and
interest are due beginning on September 1, 2000 with the final payment due on
August 1, 2006.
On June 30, 1999, the Company accrued $154,000 for a pending legal claim
filed against the Company. This accrual relates to a dispute between the Company
and its former data transmitter vendor. The vendor maintains that the Company is
liable for late fee charges, exchange fees and lost pager fees that the Company
previously deducted from a royalty payment made to the vendor. The Company is
investigating the charges and believes the charges are without merit. No
assurance can be given, however, that this matter will be resolved in the
Company's favor.
F-39
<PAGE> 128
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
LocusOne Communications, Inc.:
We have audited the accompanying balance sheets of LocusOne Communications,
Inc. (the Company) as of December 31, 1998 and 1999, and the related statements
of operations, stockholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LocusOne Communications,
Inc. as of December 31, 1998 and 1999, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
McLean, Virginia
March 9, 2000
F-40
<PAGE> 129
LOCUSONE COMMUNICATIONS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 143,517 $ 16,125
Accounts receivable, net of allowance for doubtful
accounts of $4,150 and $25,000 as of December 31, 1998
and 1999, respectively................................. 265,019 256,423
Prepaid expenses and other current assets................. 8,214 6,573
----------- -----------
Total current asset............................... 416,750 279,121
Property and equipment, net................................. 63,361 197,821
----------- -----------
Total assets...................................... $ 480,111 $ 476,942
=========== ===========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 43,873 $ 79,975
Deferred revenues......................................... 184,401 108,140
Line of credit............................................ -- 863,000
Current portion of obligations under capital lease........ 95,756 --
----------- -----------
Total current liabilities......................... 324,030 1,051,115
Series A Convertible Redeemable Preferred Stock, no par
value, 1,000,000 shares authorized, 600,000 shares issued
and outstanding at December 31, 1998 and 1999 (liquidation
value of $2,170,000 and $2,250,000 at December 31, 1998
and 1999, respectively)................................... 2,170,000 2,250,000
Stockholders' equity (deficit):
Common stock, no par value, 10,000,000 shares authorized,
1,050,000 shares issued and outstanding as adjusted for
stock splits at December 31, 1998 and 1999............. 45,000 45,000
Accumulated deficit....................................... (2,058,919) (2,869,173)
----------- -----------
Total stockholders' equity (deficit).............. (2,013,919) (2,824,173)
----------- -----------
Commitments and contingencies
Total liabilities, convertible redeemable
preferred stock and stockholders' equity
(deficit)....................................... $ 480,111 $ 476,942
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-41
<PAGE> 130
LOCUSONE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
Software and related services revenue....................... $ 898,359 $ 1,575,332
Equipment sales............................................. 256,404 40,932
---------- -----------
Total revenue..................................... 1,154,763 1,616,264
Cost of software and related services revenue............... 656,686 790,261
Cost of equipment sales..................................... 172,235 22,942
---------- -----------
Total cost of revenue............................. 828,921 813,203
---------- -----------
Gross profit................................................ 325,842 803,061
Operating expenses:
Sales and marketing....................................... 109,189 542,073
Research and development.................................. -- 53,046
General and administrative................................ 371,814 821,890
Depreciation and amortization............................. 104,289 96,181
Stock option expense...................................... 110,468 299,561
---------- -----------
695,760 1,812,751
---------- -----------
Operating loss.................................... (369,918) (1,009,690)
Other income (expense):
Loss on disposal of equipment............................. (32,234) --
Interest income (expense), net............................ (4,071) (20,125)
---------- -----------
Loss before income taxes.................................... (406,223) (1,029,815)
Income taxes................................................ -- --
---------- -----------
Net loss.................................................... (406,223) (1,029,815)
Preferred stock dividend requirements....................... (80,000) (80,000)
---------- -----------
Net loss available to common stockholders................... $ (486,223) $(1,109,815)
========== ===========
</TABLE>
See accompanying notes to financial statements
F-42
<PAGE> 131
LOCUSONE COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
---------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997................... 10,500 $45,000 $(1,683,164) $(1,638,164)
Stock option expense......................... -- -- 110,468 110,468
Preferred stock dividend requirements........ -- -- (80,000) (80,000)
Net loss..................................... -- -- (406,223) (406,223)
---------- ------- ----------- -----------
Balance at December 31, 1998................... 10,500 $45,000 $(2,058,919) $(2,013,919)
100 to 1 stock split......................... 1,039,500 -- -- --
Stock option expense......................... -- -- 299,561 299,561
Preferred stock dividend requirements........ -- -- (80,000) (80,000)
Net loss..................................... -- -- (1,029,815) (1,029,815)
---------- ------- ----------- -----------
Balance at December 31, 1999................... 1,050,000 $45,000 $(2,869,173) $(2,824,173)
========== ======= =========== ===========
</TABLE>
See accompanying notes to financial statements
F-43
<PAGE> 132
LOCUSONE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(406,223) $(1,029,815)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts........................ 4,150 20,850
Depreciation and amortization.......................... 104,289 96,181
Loss on disposal of equipment.......................... 32,234 --
Stock option expense................................... 110,468 299,561
Changes in operating assets and liabilities:
Increase in accounts receivable...................... (262,237) (12,254)
Decrease in prepaids and other current assets........ 52,903 1,641
Increase in accounts payable......................... 25,400 36,102
Increase (decrease) in deferred revenue.............. 184,401 (76,261)
--------- -----------
Net cash used in operating activities....................... (154,615) (663,995)
--------- -----------
Cash flows from investing activities:
Purchases of property and equipment.................... (49,239) (230,641)
--------- -----------
Net cash used in investing activities....................... (49,239) (230,641)
--------- -----------
Cash flows from financing activities:
Proceeds from line of credit........................... -- 863,000
Principal repayments of obligations under capital
lease................................................. (118,186) (95,756)
--------- -----------
Net cash provided by (used in) financing activities......... (118,186) 767,244
Net decrease in cash and cash equivalents................... (322,040) (127,392)
Cash and cash equivalents, beginning of period.............. 465,557 143,517
--------- -----------
Cash and cash equivalents, end of period.................... $ 143,517 $ 16,125
========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 17,273 $ 21,228
========= ===========
---------------
Supplemental disclosures of non-cash investing and financing
activities:
During the year ended December 31, 1998 and 1999, the
Company accrued $80,000 and $80,000, respectively, of
dividends on its Series A Convertible Redeemable
Preferred Stock
</TABLE>
See accompanying notes to financial statements
F-44
<PAGE> 133
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF THE BUSINESS
LocusOne Communications, Inc. (the "Company"), a Virginia corporation, was
formed on August 17, 1995 and is based in Richmond, Virginia.
The Company designs, develops, sells and supports fulfillment solutions
using wireless handheld internet connectivity. The Company operates in a highly
competitive environment subject to rapid technological change and emergence of
new technology. Although management believes its services are transferable to
emerging technologies, rapid changes in technology could have an adverse
financial impact on the Company.
The Company expects to expand its operations through continued capital
investment in new systems and services. The Company is not currently generating
sufficient cash flows from operations to support its current operating and
capital requirements. The Company has and will continue to be dependent upon its
shareholders and other financing sources to fund these requirements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
Revenues are derived from software licensing and the provision of related
services, including wireless integration consulting, maintenance and technical
support. Revenue is also derived from the sale of equipment utilized in the
Company's products.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition. Subsequently, in March 1998 and December 1998, the AICPA issued SOP
98-4 and SOP 98-9, respectively, which defer until the Company's fiscal year
beginning January 1, 2000, the application of several paragraphs and examples in
SOP 97-2 that limit the definition of vendor specific objective evidence
("VSOE") for determining fair value of various elements in a multiple element
arrangement. The provisions of SOP 97-2 have been applied to transactions
entered into for the year ended December 31, 1998 and 1999. Management of the
Company does not believe that the adoption of the remaining portions of SOP
97-2, which were deferred by SOP 98-4 and SOP 98-9, will have a material impact
on the Company's financial statements.
Revenues from software licensing and related wireless engineering
consulting services are recognized using the percentage of completion method in
accordance with SOP 97-2, since the Company's software requires significant
customization and modification. Revenue is recognized on the percentage of
completion method based on the hours incurred in relation total estimated hours.
Anticipated contract losses are recognized as soon as they become known and
estimable. Revenues from maintenance and technical support, which consists of
unspecified when-and-if-available product updates and customer telephone support
services, are recognized ratably over the term of the service period. Revenue
from equipment sales is recognized upon delivery of the equipment.
(b) Cost of Revenues
The cost of software license, wireless integration consulting, maintenance
and technical support revenues consists primarily of cash compensation and
related costs for engineering personnel and materials.
(c) Software Development Costs
Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed (the "Standard").
Under the Standard, capitalization of software development costs begins upon the
establishment of technological feasability, subject to net realizable value
considerations.
F-45
<PAGE> 134
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
To date, the period between achieving technological feasability and the general
availability of such software has been short; therefore, software development
costs qualifying for capitalization have been immaterial. Accordingly, the
Company has not capitalized any software development costs and has charged all
such costs to research and development expense. Research and development costs
are expensed as incurred.
(d) Cash and Cash Equivalents
Cash equivalents include all highly liquid investments purchased with
original maturities of three months or less. Cash equivalents consist of
approximately $127,000 and $0 in money market accounts at December 31, 1998 and
1999, respectively.
(e) Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents, accounts receivable, accounts payable and line of credit
approximate their fair values due to the short duration of the instruments.
(f) Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of accounts receivable. The Company extends
credit to its customers on an unsecured basis in the normal course of business
and maintains an allowance for potential losses when identified.
For the years ended December 31, 1998 and 1999, the Company derived
approximately 95 percent and 93 percent of its revenue from three and five
customers, respectively. Approximately 90 percent and 97 percent of the
Company's accounts receivable were due from these customers as of December 31,
1998 and 1999, respectively.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight line method over the estimated useful lives of the assets, which
range from three to seven years. The costs of leasehold improvements are
capitalized and amortized using the straight-line method over the shorter of the
lease term of the estimated useful life of the asset.
(h) Recovery of Long-Lived Assets
The Company's policy is to review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The Company recognizes an impairment loss when the sum
of the expected future undiscounted cash flows is less than the carrying amount
of the asset. The measurement of the impairment losses to be recognized is based
upon the difference between the fair value and the carrying amount of the
assets.
(i) Stock Compensation
The Company accounts for equity-based compensation arrangements in
accordance with the provisions of Accounting Principle Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations, and
complies with the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25, compensation expense is based upon the difference, if any, on the date
of grant, between the fair value of the Company's common stock and the exercise
price. All equity-based awards to non-employees are accounted for at their fair
value in accordance with SFAS No. 123.
F-46
<PAGE> 135
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(j) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $11,000 and $13,000 for the years ended December 31, 1998 and
December 31, 1999, respectively.
(k) Income Taxes
The Company recognizes income taxes using the asset and liability method,
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of a tax rate change on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(m) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new
standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. This statement, as amended, is effective
for all fiscal quarters beginning after June 15, 2000. The Company does not
expect SFAS No. 133 to have a material affect on its financial position or
results of operations.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
--------- ---------
<S> <C> <C>
Computer hardware........................................... $ 172,888 $ 385,357
Computer software........................................... 110,808 121,180
Furniture and fixtures...................................... 20,937 28,737
Leasehold improvements...................................... 1,565 1,565
--------- ---------
306,198 536,839
Less: Accumulated depreciation and amortization............. (242,837) (339,018)
--------- ---------
$ 63,361 $ 197,821
========= =========
</TABLE>
F-47
<PAGE> 136
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) LEASES
The Company was obligated under a capital lease for various computer and
telecommunications equipment that expired in 1999. The Company exercised its
option to purchase the equipment covered by the lease for approximately $9,000
in December 1999.
The Company is also obligated under non-cancelable operating leases for
office space that expire at various dates through 2002. Future minimum lease
payments under non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE
YEARS ENDING DECEMBER 31, PAYMENTS
------------------------- -------------
<S> <C>
2000........................................................ $36,000
2001........................................................ 30,000
2002........................................................ 5,000
-------
$71,000
-------
</TABLE>
Rent expense was approximately $54,000 and $44,000 under these lease
agreements for the years ended December 31, 1998 and 1999, respectively. In
February 2000, the Company entered into a new five-year lease for office space
with aggregate minimum lease payments of $542,000.
(5) CAPITALIZATION
The Company's Articles of Incorporation, as amended, authorizes the Company
to issue 10,000,000 shares of common stock with no par value. As of December 31,
1999, the Company had reserved shares of common stock for future issuance as
follows:
<TABLE>
<S> <C>
Conversion of Series A Convertible Redeemable Preferred
Stock..................................................... 1,000,000
Exercise of stock options pursuant to stock option plan..... 600,000
</TABLE>
On August 17, 1995, the Company was formed and initially capitalized when a
founder of the Company contributed $27,000 in exchange for 630,000 shares, as
adjusted for stock splits, of the Company's authorized common stock. In January
1996, a second founder contributed $18,000 for 420,000 shares, as adjusted for
stock splits, of the Company's authorized common stock. On November 14, 1996,
the Company effected a stock split of 63 to 1 of its common stock. In March
1999, the Company approved a 100 to 1 stock split of all classes of the
Company's authorized stock.
Additionally, the Company entered into a stock repurchase agreement with a
founder of the Company, whereby the Company was granted options to purchase up
to 210,000 shares of common stock at an exercise price of $1.00 per share from
the founder to cover the exercise of employee stock options. Options under this
stock purchase agreement expire December 31, 2008. In January 1999, the Company
entered into a stock repurchase agreement with both founders of the Company to
purchase up to an aggregate of 40,000 shares of common stock at an exercise
price of $1.00 per share, in addition to the 210,000 options previously
authorized. Options under these stock repurchase agreements expire December 31,
2009 and can be used only to cover the exercise of employee stock options.
(6) PREFERRED STOCK
On November 15, 1996, the Company completed a private placement for an
aggregate 600,000 shares of Series A Convertible Redeemable Preferred Stock
("Series A Preferred Stock") at $3.33 per share, as adjusted for the 100 to 1
stock split effected in March 1999. Total proceeds were approximately
$2,000,000.
F-48
<PAGE> 137
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(a) Voting Rights
The Series A Preferred Stockholders can vote with the holders of common
stock as a single class for the election of the Board of Directors. In addition,
the Series A Preferred Stockholders may elect one member of the Board of
Directors. Furthermore, as long as any shares of the Series A Preferred Stock is
outstanding, approval by at least two-third majority is required for: (1)
merging or consolidating with any other corporation; or (2) the sale or transfer
by the Company of substantially all of its assets. Finally, approval of at least
two-third majority of the Series A Preferred Stockholders is required for
altering any of the rights and privileges of the Series A Preferred Stock.
(b) Dividends
The Series A Preferred Stock accrues cumulative dividends at the rate of 4
percent per annum, whether or not the dividends are earned or declared by the
Board of Directors. Cumulative unpaid and undeclared dividends were $170,000 and
$250,000 at December 31, 1998 and 1999, respectively.
(c) Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each share of Series A
Preferred Stock then outstanding shall be entitled to receive an amount equal to
the original share price of $3.33 per share, plus all accrued and unpaid
cumulative dividends, whether or not declared. After the payment to the Series A
Preferred Stockholders of the full preferential amounts to which they are
entitled, the Series A Preferred Stockholders have no further claim to any of
the remaining assets of the Company.
(d) Redemption
Series A Preferred Stock is redeemable by the Company or the holder at any
time after five years from the initial issuance of the first share of Series A
Preferred Stock upon written notice. Redemption of the Series A Preferred Stock
by the Company must be for all of the shares of Series A Preferred Stock upon
payment in cash of all accrued and unpaid dividends plus the original share
price paid of $3.33 per share. If the redemption occurs at the request of the
holder, the Company has the option to pay the redemption price in three equal
annual installments beginning one year from the date of notice.
(e) Conversion
Series A Preferred Stock is convertible on a one-for-one basis into shares
of common stock at the option of the holder. Series A Preferred Stock is
automatically converted into common stock in the event of an initial public
offering in which the aggregate proceeds are not less than $10,000,000 and the
gross offering price is not less than $6.66 per share.
(7) LINE OF CREDIT
In October of 1999, the Company entered into a revolving line of credit up
to $1,000,000 with a financial institution. All outstanding principal and
accrued interest is due and payable on October 31, 2000. Interest accrues on the
unpaid principal at 0.25 percent plus the prime rate (8.75 percent at December
31, 1999) and is payable monthly. The line of credit is collateralized by
substantially all of the assets of the Company and contains certain financial
covenants.
During 1999, the Company borrowed approximately $863,000 under the line of
credit. The proceeds were used by the Company solely to finance working capital.
At December 31, 1999, there was approximately $137,000 available to the Company
under the line of credit. The outstanding balance on the
F-49
<PAGE> 138
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
line of credit was paid in full upon the sale of the Company to Aether Systems,
Inc. ("Aether") on February 3, 2000 (see note 10).
(8) INCOME TAXES
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented.
The tax effected amounts of temporary differences as of December 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward............................. $ 573,134 $ 877,509
Fixed assets................................................ 17,638 5,375
Stock compensation.......................................... 49,525 168,112
--------- -----------
Total deferred tax assets................................... 640,297 1,050,996
Valuation allowance......................................... (640,297) (1,050,996)
--------- -----------
Net deferred tax assets..................................... -- --
--------- -----------
Deferred tax liabilities:................................... -- --
--------- -----------
Net deferred taxes.......................................... $ -- $ --
--------- -----------
</TABLE>
The Company has net operating loss carryforwards as of December 31, 1999
available to offset future taxable income for federal and Virginia state income
tax purposes of approximately $2.3 million, which begin to expire in 2012. Due
to the net operating losses incurred to date, the Company has provided a full
valuation allowance against its net deferred tax assets.
(9) EMPLOYEE BENEFIT PLANS
Retirement Plan
As of January 1, 1999, the Company adopted a 401(k) Retirement Plan (the
"Plan") covering substantially all of its employees. Participants in the Plan
may elect to defer up to 15 percent of their compensation. The Company may make
discretionary or matching contributions under the Plan. In 1999, the Company
made no employer matching contributions or discretionary contributions to the
Plan.
Stock Option Plan
In 1996, the Company adopted a Stock Option Plan (the "Stock Plan")
providing for the issuance of options to acquire up to 560,000 shares of common
stock, as adjusted for stock splits.
During 1999, the Company approved an increase in the Stock Plan to allow
for the granting of up to 600,000 options. Options granted under the Stock Plan
generally expire after ten years and normally vest over a period of up to 4
years. All options outstanding under the Stock Plan vest immediately upon the
event of a change of control in the Company.
The Company applies APB 25 and related interpretations in accounting for
its stock options. The Company recorded total compensation expense of
approximately $110,000 and $300,000 in 1998 and 1999, respectively, for the
difference between the exercise price and the estimated fair market value of the
stock at the date of grant. Compensation expense is recognized ratably over the
vesting period of the options, which is generally four years.
F-50
<PAGE> 139
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 123 requires pro forma net income (loss) disclosures as if the
Company had accounted for its stock options under the fair value method
prescribed by that statement. Had the Company used the fair value method for
determining compensation expense, the Company's net loss would have increased by
$9,000 and $21,000 for 1998 and 1999, respectively.
The following table summarizes option activity for the year ended December
31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
OF SHARES (PER SHARE) OF SHARES (PER SHARE)
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 258,000 $0.12 490,000 $0.54
Options granted..................... 237,000 $1.00 111,500 $1.19
Options exercised................... -- -- -- --
------- ----- ------- -----
Options canceled.................... (5,000) $1.00 (2,000) $1.25
------- -------
Outstanding at end of year.......... 490,000 $0.54 599,500 $0.66
======= =======
Options exercisable at year-end..... 124,000 $0.09 246,500 $0.31
======= =======
Options available for future
grant............................. 500
=======
</TABLE>
The per share weighted-average value of options granted by the Company
during 1998 and 1999 was $3.78 and $14.44, respectively, on the date of grant
using the Black-Scholes option-pricing model. These amounts were calculated
using the following assumptions: expected option life of five years, volatility
of zero, risk-free interest rates of 5.5 to 6.0 percent and dividend yield of
zero percent.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE -------------------------------
NUMBER AT REMAINING WEIGHTED NUMBER AT WEIGHTED
NAME OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICE 1999 LIFE EXERCISE PRICE 1999 EXERCISE PRICE
-------------- -------------- ----------- -------------- -------------- --------------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.05 238,000 6.73 $0.05 178,500 $0.05
$1.00 277,000 8.46 $1.00 68,000 $1.00
$1.25 84,500 9.86 $1.25 -- --
-------- --------
599,500 7.97 $0.66 246,500 $0.31
======== ========
</TABLE>
(10) SUBSEQUENT EVENT
Sale of LocusOne
On February 3, 2000, the Company was acquired by Aether Systems, Inc.
("Aether"). In the transaction, all of the outstanding common stock and
preferred stock of the Company was purchased by Aether for a purchase price of
approximately $40 million. Approximately $19 million of the purchase price is
payable to the former stockholders of the Company in the form of non-interest
bearing notes payable due no later than December 31, 2000.
F-51
<PAGE> 140
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Riverbed Technologies, Inc.:
We have audited the accompanying balance sheets of Riverbed Technologies,
Inc. (the Company) as of December 31, 1998 and 1999, and the related statements
of operations, stockholders' equity (deficit), and cash flows for the period
from October 21, 1998 (date of inception) to December 31, 1998 and for the year
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Riverbed Technologies, Inc.
as of December 31, 1998 and 1999 and the results of its operations and its cash
flows for the period from October 21, 1998 (date of inception) to December 31,
1998 and for the year ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
McLean, Virginia
February 15, 2000
F-52
<PAGE> 141
RIVERBED TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 5,340,801
Short-term investments.................................... -- 3,936,542
Accounts receivable....................................... 21,883 619,071
Prepaids and other........................................ -- 428,855
-------- -----------
Total current assets.............................. 21,883 10,325,269
Property and equipment, net................................. 48,161 718,075
-------- -----------
Total assets...................................... $ 70,044 $11,043,344
======== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 46,789 $ 637,378
Accrued expenses.......................................... -- 497,135
Deferred revenues......................................... 3,000 68,510
Advance from stockholder.................................. 81,834 --
Note payable -- current portion........................... -- 120,578
-------- -----------
Total current liabilities................................. 131,623 1,323,601
-------- -----------
Long-term liabilities:
Note payable -- less current portion...................... -- 241,155
-------- -----------
Total liabilities................................. 131,623 1,564,756
-------- -----------
Series A preferred stock, convertible, $0.01 par value, zero
and 3,500,000 shares authorized, issued and outstanding at
December 31, 1998 and 1999, respectively (liquidation
value $3,829,863)......................................... -- 3,785,531
Series B preferred stock, convertible, $0.01 par value, zero
and 4,145,211 shares authorized, issued and outstanding at
December 31, 1998 and 1999, respectively (liquidation
value $12,053,001)........................................ -- 11,985,989
Stockholders' equity (deficit):
Common stock, $0.01 par value, 100,000 and 14,354,789
shares authorized at December 31, 1998 and 1999,
respectively; 100,000 and 2,887,793 shares issued and
outstanding at December 31, 1998 and 1999,
respectively........................................... 1,000 28,878
Additional paid-in-capital................................ (1,000) 561,033
Accumulated deficit....................................... (61,579) (6,882,843)
-------- -----------
Total stockholders' equity (deficit).............. (61,579) (6,292,932)
-------- -----------
Commitments and contingencies
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit).................. $ 70,044 $11,043,344
======== ===========
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 142
RIVERBED TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 21, 1998
(DATE OF INCEPTION) TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
---------------------- -----------------
<S> <C> <C>
Software license revenue................................. $ -- $ 757,899
Maintenance, consulting and support revenue.............. -- 169,186
-------- -----------
Total revenue.................................. -- 927,085
Cost of software revenue................................. -- 221,101
Cost of maintenance, consulting and support revenue...... -- 506,383
-------- -----------
Total cost of revenue.......................... -- 727,484
-------- -----------
Gross profit............................................. -- 199,601
Operating expenses:
Sales and marketing...................................... 38,115 2,865,470
Research and development................................. 10,091 2,050,778
General and administrative............................... 13,373 1,055,071
Stock option expense..................................... -- 1,200,294
-------- -----------
61,579 7,171,613
-------- -----------
Operating loss................................. (61,579) (6,972,012)
Interest income (expense), net........................... -- 150,748
-------- -----------
Loss before income taxes................................. (61,579) (6,821,264)
Income taxes............................................. -- --
-------- -----------
Net loss................................................. $(61,579) $(6,821,264)
Preferred stock dividend requirements.................... -- (628,376)
-------- -----------
Net loss available to common stockholders................ $(61,579) $(7,449,640)
======== ===========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 143
RIVERBED TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN- ACCUMULATED
SHARES PAR CAPITAL DEFICIT TOTAL
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at inception, October
21, 1998.................... -- $ -- $ -- $ -- $ --
Shares issued at
inception................ 100,000 1,000 (1,000) -- --
Net loss.................... -- -- -- (61,579) (61,579)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1998........................ 100,000 1,000 (1,000) (61,579) (61,579)
Stock split................. 1,722,917 17,229 (17,229) -- --
Issuance of common shares... 984,376 9,844 -- -- 9,844
Exercise stock options...... 80,500 805 7,344 -- 8,149
Stock option expense........ -- -- 1,200,294 -- 1,200,294
Preferred stock dividend
requirements............. -- -- (628,376) -- (628,376)
Net loss.................... -- -- -- (6,821,264) (6,821,264)
--------- ------- ---------- ----------- -----------
Balance at December 31,
1999........................ 2,887,793 $28,878 $ 561,033 $(6,882,843) $(6,292,932)
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 144
RIVERBED TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 21, 1998
(DATE OF INCEPTION) TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
---------------------- -----------------
<S> <C> <C>
Cash flow from operating activities:
Net loss............................................... $(61,579) $(6,821,264)
Adjustments to reconcile net loss to net cash used in
operating activities
Stock option expense................................ -- 1,200,294
Depreciation and amortization....................... -- 97,050
Changes in operating assets and liabilities:
Increase in accounts receivable................... (21,883) (597,188)
Increase in prepaids and other current assets..... -- (428,855)
Increase in accounts payable and accrued
expenses....................................... 46,789 1,087,724
Increase in deferred revenue...................... 3,000 65,510
-------- -----------
Net cash used in operating activities.................... (33,673) (5,396,729)
-------- -----------
Cash flows from investing activities:
Purchases of property and equipment................. (48,161) (766,964)
Purchase of short-term investments.................. -- (3,936,542)
-------- -----------
Net cash used in investing activities.................. (48,161) (4,703,506)
-------- -----------
Cash flows from financing activities:
Advance (repayment) from stockholder................ 81,834 (81,834)
Proceeds from the issuance of common stock and
exercise of stock options......................... -- 17,993
Proceeds from the issuance of preferred stock, net
of issuance costs................................. -- 15,143,144
Proceeds from line of credit........................ -- 250,000
Repayment on line of credit......................... -- (250,000)
Proceeds from note payable.......................... -- 361,733
-------- -----------
Net cash provided by financing activities................ 81,834 15,441,036
Net increase in cash and cash equivalents................ -- 5,340,801
Cash and cash equivalents, beginning of period........... -- --
-------- -----------
Cash and cash equivalents, end of period................. $ -- $ 5,340,801
======== ===========
Supplemental disclosure of cash flow information:
Interest............................................... $ -- $ 4,355
======== ===========
Income taxes........................................... $ -- $ --
======== ===========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 145
RIVERBED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
Riverbed Technologies, Inc. (the "Company"), a Delaware corporation, was
formed on October 21, 1998 and is based in Vienna, Virginia.
The Company designs, develops, sells and supports synchronization and
management software that enables handheld devices to be used as a natural
extension of the enterprise and systems enabling people to use wireless handheld
devices for data communications and transactions. The Company operates in a
highly competitive environment subject to rapid technological change and
emergence of new technology. Although management believes its services are
transferable to emerging technologies, rapid changes in technology could have an
adverse financial impact on the Company.
The Company expects to expand its operations through continued capital
investment in new systems and services. The Company is not currently generating
sufficient cash flows from operations to support its current operating and
capital requirements. The Company has and will continue to be dependent upon its
stockholders and other financing sources to fund these requirements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
Revenues are generated from licensing software and providing services,
including maintenance and technical support, training and consulting.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition. Subsequently, in March 1998 and December 1998, the AICPA issued SOP
98-4 and SOP 98-9, respectively, which defer until the Company's fiscal year
beginning January 1, 2000, the application of several paragraphs and examples in
SOP 97-2 that limit the definition of vendor specific objective evidence
("VSOE") for determining fair value of various elements in a multiple element
arrangement. The provisions of SOP 97-2 have been applied to transactions
entered into from the inception (October 21, 1998) of the Company. Management of
the Company does not believe that the adoption of the remaining portions of SOP
97-2, which were deferred by SOP 98-4 and SOP 98-9, will have a material impact
on the Company's financial statements.
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 fee is considered probable.
Services revenue consists of maintenance and technical support, training
and consulting. Revenues from maintenance and technical support, which consists
of unspecified when-and-if-available product updates and customer telephone
support services, are recognized ratably over the term of the service period.
Other services revenues are recognized as the related services is provided.
(b) Cost of Revenues
The cost of software license revenues consists primarily of third party
royalties. The cost of maintenance, consulting and support revenue consists
primarily of personnel-related costs.
(c) Software Development Costs
Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed (the "Standard").
Under the Standard, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. To
F-57
<PAGE> 146
RIVERBED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
date, the period between achieving technological feasibility and the general
availability of such software has been short; therefore, software development
costs qualifying for capitalization have been immaterial. Accordingly, the
Company has not capitalized any software development costs and has charged all
such costs to research and development expense. Research and development costs
are expensed as incurred.
(d) Advertising Expense
Advertising costs are expensed as incurred. Advertising expense was $0 and
$343,000 for the period from October 21, 1998 (date of inception) to December
31, 1998 and for the year ended December 31, 1999, respectively.
(e) Income Taxes
The Company recognizes income taxes using the asset and liability method,
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of a tax rate change on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
(f) Cash and Cash Equivalents
Cash equivalents include all highly liquid investments with original
maturities of three months or less. Cash equivalents include approximately
$3,508,000 in money market accounts as of December 31, 1999.
(g) Short-term Investments
Short-term investments consist of highly liquid investments with original
maturities greater than three months and less than one year. Short-term
investments consisted of U.S. Treasury securities. Short-term investments are
recorded at their amortized cost which approximates fair value as of December
31, 1999.
(h) Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist of accounts receivable. The Company extends credit to its customers on
an unsecured basis in the normal course of business.
For the year ended December 31, 1999, the Company derived approximately 60
percent of its revenue from three customers. As of December 31, 1999,
approximately 88 percent of the accounts receivable balance was due from four
customers.
(i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-58
<PAGE> 147
RIVERBED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(j) Fair Value of Financial Instruments
The carrying of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
notes payable approximate their fair value because of the short duration of the
instruments.
(k) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
range from three to five years. The costs of leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful life of the asset.
(l) Recovery of Long-Lived Assets
The Company's policy is to review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The Company recognizes an impairment loss when the sum
of the expected future undiscounted cash flows is less than the carrying amount
of the asset. The measurement of the impairment losses to be recognized is based
upon the difference between the fair value and the carrying amount of the
assets.
(m) Stock Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." Under
APB No. 25, compensation cost, if any, is recognized over the respective vesting
period based on the difference, on the date of grant, between the fair value of
the Company's common stock and the exercise price. All stock-based awards to
non-employees are accounted for at their fair value in accordance with SFAS No.
123.
(n) Other Comprehensive Loss
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes changes in equity of business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. Other comprehensive income refers to revenue, expenses, gains and
losses that under generally accepted accounting principles are included in
comprehensive income, but excluded from net income. The Company has had no
transactions of this nature since its inception.
(o) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new
standard establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement, as amended, is effective
for all fiscal quarters beginning after June 15, 2000. The Company does not
expect SFAS No. 133 to have a material affect on its financial position or
results of operations.
F-59
<PAGE> 148
RIVERBED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) CAPITALIZATION
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 14,354,789 shares of common stock. As of December 31, 1999, the
Company had reserved shares of common stock for future issuance as follows:
<TABLE>
<S> <C>
Conversion of Series A Preferred Stock...................... 3,500,000
Conversion of Series B Preferred Stock...................... 4,145,412
Exercise of stock options pursuant to stock option plan..... 2,484,376
</TABLE>
On October 21, 1998, the Company was formed and initially capitalized when
Noblestar Systems Corporation ("NobleStar") contributed certain intangible
assets in exchange for all 100,000 shares of the Company's authorized common
stock. On January 16, 1999, the Company effected a stock split of 18.22917 to 1
of its common stock. On January 20, 1999, the Company granted 984,376 shares of
common stock to two of its founders. In connection with this grant the Company
recorded stock option expense of approximately $778,000.
(4) PREFERRED STOCK
In January 1999, the Company issued 3,500,000 shares of Series A Preferred
Stock ("Series A") at a price of $1.00 per share. Total proceeds, net of
offering expenses, were approximately $3,442,000.
In October 1999, the Company issued 4,145,211 shares of Series B Preferred
Stock ("Series B") at a price of $2.84 per share. Total proceeds, net of
offering expenses, were approximately $11,701,000.
(a) Voting Rights and Protective Provisions
The Series A and B stockholders may vote with the common stock as a single
class on all actions to be taken by the stockholders. The Series A and B
stockholders each are entitled to elect one member of the Board of Directors
provided that at least 10 percent of authorized preferred stock of each class is
then outstanding. Furthermore, as long as 10 percent of each class of preferred
stock is outstanding, approval by at least two-thirds of holders of then
outstanding shares of Series A and B is required for: (i) changing rights,
preferences or privileges of each class; and (ii) issuing any equity security
having a preference or parity with each class with respect to voting, dividends,
liquidation or redemption. Finally, as long as 10 percent of each class of
preferred stock of each class is outstanding, approval by at least fifty percent
of the holders of then outstanding shares of Series and A and B is required for:
(i) the sale of the Company or substantially all of its assets; (ii) increasing
the authorized number of shares of preferred stock or common stock; (iii)
amending the Company's charter or bylaws; (iv) materially changing the Company's
business; (v) approving an annual budget and executive compensation plan,
including expenses greater than $100,000; or (vi) increasing the number of
directors of the Company.
(b) Dividends
Series A and B stock accrues cumulative dividends at rate of 10 percent per
annum, whether or not the dividends are declared by the Board of Directors.
Unpaid and undeclared dividends on Series A and Series B was approximately
$330,000 and $280,000, respectively, as of December 31, 1999.
(c) Liquidation
In the event of any liquidation, dissolution, or winding up of the
Corporation, either voluntary or involuntary, the holders of Series A and B
stock shall be entitled to receive an amount equal to the original share price
paid plus any unpaid cumulative dividends, whether or not declared. The Series A
and
F-60
<PAGE> 149
RIVERBED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B stockholders may also participate on an equal basis with the common stock in
any remaining assets after accumulated dividend are paid.
(d) Redemption
Series A and B stock are redeemable after October 2003 upon notice to the
Company by at least 50 percent of the holders of the then outstanding stock. The
redemption price shall equal the liquidation amount and is payable in three
annual installments beginning on the redemption date.
(e) Conversion
Series A and B stock is convertible on a one-for-one basis into shares of
common stock at the option of the holder. Series A and B stock is automatically
converted into common stock in the event of an initial public offering in which
the aggregate proceeds are not less than $15,000,000 and the Company's pre-
offering valuation is at least $150,000,000.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Computer hardware........................................... $48,161 $638,594
Computer software........................................... -- 158,375
Furniture and fixtures...................................... -- 18,156
------- --------
48,161 815,125
Less: Accumulated depreciation.............................. -- 97,050
------- --------
$48,161 $718,075
======= ========
</TABLE>
(6) LINE OF CREDIT AND NOTES PAYABLE
In August 1999, the Company entered into a two-tranche credit facility with
a bank for a maximum available credit of $2,000,000. The assets and intellectual
properties of the Company collateralize the facility.
The first tranche is an equipment note payable not to exceed $500,000, of
which, approximately $362,000 was payable at December 31, 1999. Amounts
available under the equipment note payable are limited to the advance purchase
of certain equipment through June 30, 2000. At December 31, 1999, there was
approximately $138,000 available to the Company under the equipment financing.
Principal is payable in thirty-six equal installments plus interest commencing
in January 2000. Any amounts drawn down between January and June 2000, and the
related interest, are due in thirty-six equal installments commencing in July
2000. Interest accrues on the unpaid principal at 1.625% above the bank's prime
rate (10.125% at December 31, 1999).
The second tranche is a revolving line of credit not to exceed $1,500,000.
Amounts available under the revolving line of credit are limited by certain
asset based formulas and at December 31, 1999, there was approximately $836,000
available to the Company. All outstanding principal and interest is due on
January 31, 2001, the termination date of the revolving line of credit. Interest
accrues on the unpaid principal at 1.25% above the bank's prime rate (9.75% at
December 31, 1999) and is payable monthly.
Finally, as of December 31, 1999, an irrevocable standby letter of credit
for $100,000 was established in lieu of a deposit on the lease for the Company's
headquarters.
F-61
<PAGE> 150
RIVERBED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS
Retirement Plan
As of March 1, 1999, the Company adopted a 401(k) Retirement Plan (the
"Plan") covering substantially all its employees. Participants in the Plan may
elect to defer up to 15% of their compensation. The Company may make a
discretionary matching contribution. In 1999, the Company matched 50% of
employee contributions up to 6% of compensation. The amount recorded as expense
for the year ended December 31, 1999 was approximately $25,000.
Stock Option Plan
During 1999, the Board of Directors adopted the 1999 Stock Option Plan
("the Stock Plan"). The Company has reserved up to 2,484,376 shares for issuance
under the Stock Plan. All of the Company's employees, officers, directors,
consultants and advisors are eligible to be granted options under the Stock
Plan. The exercise price and duration of the option are determined by the Board
at the date of grant. The options generally vest ratably over a period of 4
years, and generally expire in 10 years.
The following table summarizes option activity for the year ended December
31, 1999. No options were granted in 1998.
<TABLE>
<CAPTION>
1999
---------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at beginning of year............................ -- $ --
Granted..................................................... 1,823,641 0.60
Exercised................................................... (80,500) 0.10
Cancelled................................................... (113,996) 0.10
--------- -----
Outstanding at year end..................................... 1,629,145 0.65
========= =====
Options exercisable at year end............................. 324,252 0.35
========= =====
Options available for future grant.......................... 660,735
=========
</TABLE>
The per share weighted-average fair value of the options granted during
1999 was $1.90. The fair value of each option grant is estimated on the date of
grant, using the Black-Scholes options-pricing model with the following
assumptions: expected option life of 5 years, volatility of zero, risk-free
interest rate of 6.0% and dividend yield of zero percent.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AS OF AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
-------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.10 396,545 2.85 $0.10 216,336 $0.10
$0.30 284,100 3.60 $0.30 -- --
$0.85 854,000 3.83 $0.85 107,916 0.85
$2.27 94,500 3.88 $2.27 -- --
--------- -------
1,629,145 3.48 $0.65 324,252 $0.35
========= =======
</TABLE>
F-62
<PAGE> 151
RIVERBED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. The Company recorded compensation expense of
approximately $422,000 relating to options granted in the year ended December
31, 1999, equal to the difference between the estimated fair market value of the
Company's common stock on the grant date and the exercise price of the options.
The expense will be recognized ratably over the vesting period of the options,
which is generally four years.
SFAS No. 123 requires pro forma net income (loss) disclosures as if the
Company had accounted for its stock options granted under the fair value method
prescribed by that statement. Had the Company used the fair value methodology
for determining compensation expense, the following table presents the pro forma
net income (loss) that would have been recorded by the Company for the options
granted during the year ended December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999,
---------------------
<S> <C> <C>
Net loss............................................ As reported $(6,821,264)
Proforma $(6,863,264)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
(8) INCOME TAXES
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. As of December
31, 1999, the Company had net operating loss carryforwards available to offset
future taxable income of approximately $5,755,000 which expire in 2019. The
actual income tax benefit differed from the income tax benefit which would be
computed based upon the statutory federal tax rates as a result of recording a
valuation allowance.
The tax effected amounts of temporary differences as of December 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ -- $ 2,359,000
Start-up costs............................................ 25,000 19,000
Accrued vacation.......................................... -- 10,000
----------- -----------
Total deferred tax assets................................. 25,000 2,388,000
Valuation allowance....................................... (25,000) (2,340,000)
----------- -----------
Net deferred tax assets................................... -- 48,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization............................. -- 48,000
----------- -----------
Total deferred tax liabilities............................ -- 48,000
----------- -----------
Net deferred taxes........................................ $ -- $ --
=========== ===========
</TABLE>
(9) LEASES
In December 1999, the Company entered into a long-term, non-cancelable
operating lease for its headquarters. The Company also leases other facilities
and certain office equipment under short-term, non-
F-63
<PAGE> 152
RIVERBED TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
cancelable operating leases. Future minimum lease payments under non-cancelable
operating leases are as follows:
<TABLE>
<CAPTION>
MINIMUM
LEASE
YEARS ENDING DECEMBER 31, PAYMENTS
------------------------- ----------
<S> <C>
2000...................................................... $ 563,000
2001...................................................... 572,000
2002...................................................... 587,000
2003...................................................... 52,000
----------
$1,774,000
==========
</TABLE>
Rent expense under operating leases was approximately $400 and $107,000,
for the period from October 21, 1998 (date of inception) to December 31, 1998
and the year ended December 31, 1999, respectively.
(10) RELATED PARTY TRANSACTIONS
In 1998, the Company's operations were funded through non-interest bearing
advances made by Noblestar. As of December 31, 1998, approximately $82,000 was
due to Noblestar for such advances. These amounts were repaid in 1999.
(11) SUBSEQUENT EVENT
On February 9, 2000, the Company entered into a definitive merger agreement
to be acquired by Aether Systems, Inc. for approximately 4,537,000 shares of
Aether's common stock, plus the issuance of options to acquire approximately
863,000 shares of Aether's common stock for replacement of existing options
issued to the Company's employees. The acquisition is subject to regulatory and
stockholder approval.
F-64
<PAGE> 153
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated financial information has
been prepared by Aether's management and gives effect to the acquisitions of
Mobeo, Inc. completed on September 29, 1999, LocusOne Communications, Inc.
completed on February 3, 2000, Riverbed Technologies, Inc. completed on March 6,
2000, NetSearch, LLC completed on April 20, 2000, IFX Group Plc completed on
April 6, 2000 and the related formation of Sila Communications completed on May
5, 2000, the investment in VeriStar Corporation on July 12, 2000, and the
investment in ePhones, Inc. on July 31, 2000, which are collectively referred to
in this "Unaudited Pro Forma Condensed Consolidated Financial Information"
section as the "Completed Transactions", and the pending investments in
ParkStone Medical Information Systems, Inc. and MindSurf, Inc. which are
referred to in this "Unaudited Condensed Consolidated Pro Forma Financial
Information" section as the "Pending Transactions".
The unaudited pro forma condensed consolidated statement of operations for
the six months ended June 30, 2000 has been prepared to give effect to the
LocusOne, Riverbed, NetSearch, and IFX acquisitions and the formation of Sila as
if they had occurred on January 1, 1999. The unaudited pro forma condensed
consolidated balance sheet as of June 30, 2000 gives effect to the VeriStar,
ePhones, and ParkStone investments as if they had occurred on June 30, 2000. The
acquisitions of LocusOne, Riverbed, NetSearch, and IFX and the formation of
Sila, which occurred prior to June 30, 2000, are already reflected in the
Company's historical consolidated balance sheet as of June 30, 2000.
The pro forma adjustments, which are based upon available information and
certain assumptions that Aether believes are reasonable in the circumstances,
are applied to the historical financial statements of Aether, Mobeo, LocusOne,
Riverbed, NetSearch, IFX and Sila. The acquisitions are accounted for under the
purchase method of accounting. Aether's allocation of the purchase price is
based upon the estimated fair value of assets acquired and liabilities assumed
in accordance with Accounting Principles Board Opinion No. 16. The purchase
price allocations reflected in the accompanying unaudited pro forma condensed
consolidated financial statements are preliminary and may be different from the
final allocation of the purchase price and any such differences may be material.
The accompanying unaudited pro forma condensed consolidated financial
information should be read in conjunction with the historical financial
statements and the notes thereto for Aether, Mobeo, LocusOne, and Riverbed which
are included elsewhere in this prospectus. The unaudited pro forma condensed
consolidated financial information are provided for informational purposes only
and do not purport to represent what Aether's financial position or results of
operations would actually have been had the acquisitions and investments
occurred on such dates or to project Aether's results of operations or financial
position for any future period.
F-65
<PAGE> 154
AETHER SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-----------------------------------------------------------------------------
AETHER AS ADJUSTMENTS
ADJUSTMENTS FOR ADJUSTED FOR FOR
HISTORICAL COMPLETED COMPLETED PENDING PRO FORMA
AETHER TRANSACTIONS TRANSACTIONS TRANSACTIONS CONSOLIDATED
---------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............ $1,193,450 (13,600)(A) $1,179,850 (45,000)(B) $1,134,850
Restricted cash...................... 46,698 46,698 46,698
Short-term investments............... 2,383 2,383 2,383
Trade accounts receivable, net....... 7,515 7,515 7,515
Inventory, net....................... 2,188 2,188 2,188
Prepaid expenses and other current
assets............................. 10,181 10,181 10,181
---------- ------- ---------- -------- ----------
Total current assets........... 1,262,415 (13,600) 1,248,815 (45,000) 1,203,815
Property and equipment, net............ 13,698 13,698 13,698
Investments............................ 140,182 13,600(A) 153,782 45,000(B) 198,782
Intangible assets, net................. 1,277,012 1,277,012 1,277,012
Other assets........................... 9,935 9,935 9,935
---------- ------- ---------- -------- ----------
$2,703,242 -- $2,703,242 -- $2,703,242
========== ======= ========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable..................... $ 4,561 $ 4,561 $ 4,561
Accrued expenses..................... 20,740 20,740 20,740
Accrued employee compensation and
benefits........................... 2,629 2,629 2,629
Accrued interest on notes payable.... 5,072 5,072 5,072
Deferred revenue..................... 2,832 2,832 2,832
Notes payable........................ 13,911 13,911 13,911
---------- ------- ---------- -------- ----------
Total current liabilities...... 49,745 -- 49,745 -- 49,745
Long term liabilities -- convertible
subordinated notes payable and other
notes payable........................ 310,500 310,500 310,500
Deferred tax liability................. 11,221 11,221 11,221
Minority interest in net assets of a
subsidiary........................... 65,304 65,304 65,304
Stockholders' Equity
Preferred stock...................... -- -- --
Common stock......................... 381 381 381
Additional paid-in-capital........... 2,352,944 2,352,944 2,352,944
Retained earnings (deficit).......... (145,799) (145,799) (145,799)
Notes receivable from shareholder.... -- -- --
Unrealized loss on investment........ 58,946 58,946 58,946
---------- ------- ---------- -------- ----------
Total stockholders' equity..... 2,266,472 -- 2,266,472 -- 2,266,472
---------- ------- ---------- -------- ----------
$2,703,242 -- $2,703,242 -- $2,703,242
========== ======= ========== ======== ==========
</TABLE>
---------------
(A) Reflects the investment of $5.6 million in cash in VeriStar Corporation
(VeriStar), and the investment of $8 million in cash in ePhones Inc.
(ePhones). These investments will be accounted for under the cost method of
accounting.
(B) Reflects the pending investment of $15 million in cash in ParkStone Medical
Information Systems, Inc. (Parkstone) and the pending investment of $30
million in cash in MindSurf (MindSurf). The Company plans to account for its
investment in Parkstone under the cost method of accounting and for its
investment in MindSurf under the equity method of accounting.
F-66
<PAGE> 155
AETHER SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------
ADJUSTMENTS FOR
HISTORICAL COMPLETED PRO FORMA
AETHER TRANSACTIONS CONSOLIDATED
---------- --------------- ------------
<S> <C> <C> <C>
Subscriber revenue...................................... $ 9,674 5,096 $ 14,770
Engineering services revenue............................ 3,040 -- 3,040
Software revenue and related services................... 3,442 254 3,696
--------- ------- ---------
Total revenue...................................... 16,156 5,350 21,506
--------- ------- ---------
Cost of subscriber revenue.............................. 5,469 2,377 7,846
Cost of engineering services revenue.................... 1,640 -- 1,640
Cost of software revenue and related services........... 1,542 276 1,818
--------- ------- ---------
Total cost of revenue.............................. 8,651 2,653 11,304
--------- ------- ---------
Gross profit..................................... 7,505 2,697 10,202
--------- ------- ---------
Operating Expenses:
Research and development.............................. 7,921 881 8,802
General and administrative............................ 15,269 2,371 17,640
Selling and marketing................................. 21,809 2,220 24,029
Depreciation and amortization......................... 84,451 51,176 135,627
Option and warrant expense............................ 6,050 1,157 7,207
--------- ------- ---------
135,500 57,805 193,305
--------- ------- ---------
Operating Loss:.................................. (127,995) (55,108) (183,103)
Other Income (expense):
Interest income (expense), net........................ 16,976 50 17,026
Minority interest..................................... 1,662 3,628 5,290
Equity in losses of investments....................... (13,828) -- (13,828)
--------- ------- ---------
Loss before income tax provision................... (123,185) (51,430) (174,615)
Income tax benefit.................................... -- 575 575
--------- ------- ---------
Net loss.............................................. $(123,185) (50,855) $(174,040)
========= ======= =========
Pro forma net loss per share -- basic and diluted....... (4.92)
=========
Pro forma weighted average shares used in per share
computations -- basic and diluted..................... 35,369
=========
</TABLE>
F-67
<PAGE> 156
AETHER SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS FOR COMPLETED TRANSACTIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
------------------------------------------------------------------------------------------
PERIOD FROM JANUARY 1, 2000 PERIOD FROM JANUARY 1, 2000 PERIOD FROM JANUARY 1, 2000
THROUGH FEBRUARY 2, 2000 THROUGH MARCH 5, 2000 THROUGH APRIL 5, 2000
---------------------------- ---------------------------- ----------------------------
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL ACQUISITION HISTORICAL ACQUISITION HISTORICAL ACQUISITION
LOCUSONE (A) ADJUSTMENTS RIVERBED (B) ADJUSTMENTS SILA/IFX (C) ADJUSTMENTS
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Subscriber revenue................ $ -- -- 4,693
Software revenue and related
services........................ 84 170 --
----- ------ ------ ------- ----- ------
Total revenue................. 84 170 4,693
----- ------ ------ ------- ----- ------
Cost of subscriber revenue........ -- -- 2,266
Cost of software revenue and
related services................ 79 197 --
----- ------ ------ ------- ----- ------
Total cost of revenue......... 79 197 2,266
----- ------ ------ ------- ----- ------
Gross profit.............. 5 (27) 2,427
----- ------ ------ ------- ----- ------
Operating Expenses:
Research and development........ 11 797 73
General and administrative...... 122 929 866
Selling and marketing........... 26 1,271 884
Depreciation and amortization... 8 730(E) 53 40,284(E) 37 8,397(E)
Option and warrant expense...... 50 811(F) 149 --
----- ------ ------ ------- ----- ------
217 1,541 3,199 40,284 1,860 8,397
----- ------ ------ ------- ----- ------
Operating income
(loss):................. (212) (1,541) (3,226) (40,284) 567 (8,397)
Other Income (expense):
Interest income (expense),
net........................... (7) 7(H) 50 --
Minority interest............... -- -- -- 3,628(I)
----- ------ ------ ------- ----- ------
(Loss) income before income
tax provision............... (219) (1,541) (3,176) (40,284) 567 (4,769)
Income tax benefit.............. -- -- (227) 802(J)
----- ------ ------ ------- ----- ------
Net (loss) income............... $(219) (1,541) (3,176) (40,284) 340 (3,967)
===== ====== ====== ======= ===== ======
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
------------------------------------------
PERIOD FROM JANUARY 1, 2000
THROUGH APRIL 19, 2000
--------------------------- AETHER AS
PRO FORMA ADJUSTED FOR
HISTORICAL ACQUISITION COMPLETED
NETSEARCH (D) ADJUSTMENTS TRANSACTIONS
------------- ----------- ------------
<S> <C> <C> <C>
Subscriber revenue................ 403 $ 5,096
Software revenue and related
services........................ -- 254
---- ------ --------
Total revenue................. 403 5,350
---- ------ --------
Cost of subscriber revenue........ 111 2,377
Cost of software revenue and
related services................ -- 276
---- ------ --------
Total cost of revenue......... 111 2,653
---- ------ --------
Gross profit.............. 292 2,697
---- ------ --------
Operating Expenses:
Research and development........ -- 881
General and administrative...... 454 2,371
Selling and marketing........... 39 2,220
Depreciation and amortization... 6 1,661(E) 51,176
Option and warrant expense...... -- 147(G) 1,157
---- ------ --------
499 1,808 57,805
---- ------ --------
Operating income
(loss):................. (207) (1,808) (55,108)
Other Income (expense):
Interest income (expense),
net........................... -- 50
Minority interest............... -- 3,628
---- ------ --------
(Loss) income before income
tax provision............... (207) (1,808) (51,430)
Income tax benefit.............. -- 575
---- ------ --------
Net (loss) income............... (207) (1,808) $(50,855)
==== ====== ========
</TABLE>
---------------
(A) Reflects the historical results of LocusOne for the period from January 1,
2000 to February 2, 2000. The results of LocusOne from February 3, 2000 to
June 30, 2000 are included in Aether's historical results for the six months
ended June 30, 2000.
(B) Reflects the historical results of Riverbed for the period from January 1,
2000 to March 5, 2000. The results of Riverbed from March 6, 2000 to June
30, 2000 are included in Aether's historical results for the six months
ended June 30, 2000.
(C) Reflects the historical results of IFX Group Plc, for the period from
January 1, 2000 to April 5, 2000 and the historical results of Future Pagers
Ltd. For the period from January 1, 2000 to May 6, 2000. The results of IFX
from April 5, 2000 to June 30, 2000 and the results of Futures Pagers from
May 7, 2000 to June 30, 2000 are included in Aether's historical results for
the six months ended June 30, 2000.
(D) Reflects the historical results of NetSearch for the period from January 1,
2000 to April 19, 2000. The results of NetSearch from April 20, 2000 to June
30, 2000 are included in Aether's historical results for the six months
ended June 30, 2000.
(E) Reflects the amortization of intangible assets, including goodwill, over
three to seven year periods.
(F) Reflects amortization of the intrinsic value of options granted to employees
of LocusOne over the three year vesting period.
(G) Reflects amortization of the intrinsic value of options granted to employees
of NetSearch over the four year vesting period.
(H) Reflects the elimination of interest expense, as LocusOne's outstanding debt
was repaid by Aether as part of the acquisition.
(I) Reflects the allocation of 40 percent of Sila's proforma net loss to the
minority interest.
(J) Reflects the recording of a deferred tax benefit related to the amortization
of identifiable intangibles.
F-68
<PAGE> 157
AETHER SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
ADJUSTMENTS
HISTORICAL FOR COMPLETED PRO FORMA
AETHER TRANSACTIONS CONSOLIDATED
---------- ------------- ------------
<S> <C> <C> <C>
Subscriber revenue........................................ $ 3,732 22,988 $ 26,720
Engineering services revenue.............................. 2,594 -- 2,594
Software revenue and related services..................... -- 2,443 2,443
-------- -------- ---------
Total revenue........................................ 6,326 25,431 31,757
Cost of subscriber revenue................................ 2,110 10,189 12,299
Cost of engineering services revenue...................... 1,366 -- 1,366
Cost of software revenue and related services............. -- 1,540 1,540
-------- -------- ---------
Total cost of revenue................................ 3,476 11,729 15,205
-------- -------- ---------
Gross profit......................................... 2,850 13,702 16,552
-------- -------- ---------
Operating expenses:
Research and development................................ 2,614 3,711 6,325
General and administrative.............................. 5,891 5,819 11,710
Selling and marketing................................... 2,095 8,042 10,137
Depreciation and amortization........................... 1,089 267,250 268,339
Option and warrant expense.............................. 19,198 12,403 31,601
-------- -------- ---------
30,887 297,225 328,112
-------- -------- ---------
Operating loss....................................... (28,037) (283,523) (311,560)
Other income (expense):
Minority interest....................................... -- 10,378 10,378
Interest income (expense), net.......................... (60) 186 126
Equity in losses of investments......................... (2,425) -- (2,425)
Realized loss on sale of short-term investments......... (169) -- (169)
-------- -------- ---------
Loss before income tax provision........................ (30,691) (272,959) (303,650)
Income tax benefit...................................... -- 908 908
-------- -------- ---------
Net loss............................................. $(30,691) (272,051) $(302,742)
======== ======== =========
Pro forma net loss per share -- basic and diluted......... $ (11.76)
=========
Pro forma weighted average shares used in per share
computations -- basic and diluted....................... 25,745
=========
</TABLE>
F-69
<PAGE> 158
AETHER SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS FOR COMPLETED TRANSACTIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1, 1999 YEAR ENDED YEAR ENDED
THROUGH SEPTEMBER 28, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999
---------------------------- ------------------------ ------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA PRO FORMA
MOBEO ACQUISITION LOCUS ACQUISITION HISTORICAL ACQUISITION
(A) ADJUSTMENTS ONE ADJUSTMENTS RIVERBED ADJUSTMENTS
------------ ------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Subscriber revenue...... $ 7,468 -- --
Software and related
services.............. -- 1,616 927 (100)(G)
-------- ------- ------- -------- ------- ---------
Total revenue....... 7,468 -- 1,616 -- 927 (100)
-------- ------- ------- -------- ------- ---------
Cost of subscriber
revenue............... 2,529 -- --
Cost of software and
related services...... -- 813 727
-------- ------- ------- -------- ------- ---------
Total cost of
revenue........... 2,529 -- 813 -- 727 --
-------- ------- ------- -------- ------- ---------
Gross profit........ 4,939 803 200 (100)
-------- ------- ------- -------- ------- ---------
Operating Expenses:
Research and
development......... 764 53 2,051
General and
administrative...... 1,995 (856)(C) 822 1,055
Selling and
marketing........... 2,069 (741)(C) 542 2,866
Depreciation and
amortization........ 83 1,668(B) 96 8,054(B) -- 225,592(B)
Option and warrant
expense............. -- 1,226(D) 300 8,946(E) 1,200
-------- ------- ------- -------- ------- ---------
4,911 1,297 1,813 17,000 7,172 227,692
-------- ------- ------- -------- ------- ---------
Operating income
(loss):........... 28 (1,297) (1,010) (17,000) (6,972) (227,792)
Other Income (expense):
Minority Interest..... -- -- --
Interest income
(expense), net...... 18 (20) 20(F) 151
-------- ------- ------- -------- ------- ---------
Loss income before
income tax
benefit........... 46 (1,297) (1,030) (16,980) (6,821) (227,792)
Income tax benefit.... -- -- --
-------- ------- ------- -------- ------- ---------
Net (loss) income..... $ 46 (1,297) (1,030) (16,980) (6,821) (227,792)
======== ======= ======= ======== ======= =========
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
------------------------ ------------------------
PRO FORMA HISTORICAL PRO FORMA ADJUSTMENTS
HISTORICAL ACQUISITION NET ACQUISITION FOR COMPLETED
SILA/IFX ADJUSTMENTS SEARCH ADJUSTMENTS TRANSACTIONS
---------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Subscriber revenue...... 15,226 294 $ 22,988
Software and related
services.............. -- -- 2,443
------- -------- ------ ------- ---------
Total revenue....... 15,226 -- 294 -- 25,431
------- -------- ------ ------- ---------
Cost of subscriber
revenue............... 7,521 139 10,189
Cost of software and
related services...... -- -- 1,540
------- -------- ------ ------- ---------
Total cost of
revenue........... 7,521 -- 139 -- 11,729
------- -------- ------ ------- ---------
Gross profit........ 7,705 -- 155 -- 13,702
------- -------- ------ ------- ---------
Operating Expenses:
Research and
development......... 179 664 3,711
General and
administrative...... 2,803 -- 5,819
Selling and
marketing........... 2,864 442 8,042
Depreciation and
amortization........ 119 23,344(B) 14 8,280(B) 267,250
Option and warrant
expense............. 731(H) 12,403
------- -------- ------ ------- ---------
5,965 23,404 1,120 9,011 297,225
------- -------- ------ ------- ---------
Operating income
(loss):........... 1,740 (23,404) (965) (9,011) (283,523)
Other Income (expense):
Minority Interest..... -- 10,378(J) -- 10,378
Interest income
(expense), net...... 17 186
------- -------- ------ ------- ---------
Loss income before
income tax
benefit........... 1,740 (13,026) (948) (9,011) (272,959)
Income tax benefit.... (696) 1,604(I) -- 908
------- -------- ------ ------- ---------
Net (loss) income..... 1,044 (11,422) (948) (9,011) $(272,051)
======= ======== ====== ======= =========
</TABLE>
F-70
<PAGE> 159
(A) Reflects the historical results of Mobeo for the period from January 1,
1999 to September 28, 1999. The results of Mobeo from September 29, 1999 to
December 31, 1999 are included in Aether's historical results for the year
ended December 31, 1999.
(B) Reflects the amortization of intangible assets, including goodwill, over
three to seven year periods.
(C) Reflects the elimination of compensation expense associated with certain
management employees of Mobeo who ceased employment following the
acquisition and who were not replaced.
(D) Reflects the amortization of the estimated fair value of options granted to
two former owners of Mobeo for consulting services over the two-year life
of the consulting arrangement. Also reflects amortization of the intrinsic
value of options granted to employees of Mobeo over the vesting period.
(E) Reflects the amortization of the intrinsic value of options granted to
employees of LocusOne over the three-year vesting period.
(F) Reflects the elimination of interest expense, as LocusOne's outstanding
debt was repaid by Aether as part of the acquisition.
(G) Reflects the elimination of software revenue related to a sale by Riverbed
to the Company. The cost of such sale has not been eliminated, as the
amounts are insignificant.
(H) Reflects the amortization of the intrinsic value of options granted to
employees of NetSearch over the four-year vesting period.
(I) Reflects the recording of a deferred tax benefit related to the
amortization of identifiable intangibles.
(J) Reflects the allocation of 40 percent of Sila's proforma net loss to the
minority interest.
F-71
<PAGE> 160
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
3,500,000 SHARES
[AETHER LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
U.S. BANCORP PIPER JAFFRAY
FRIEDMAN BILLINGS RAMSEY
, 2000
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<PAGE> 161
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by Aether Systems, Inc. ("Aether" or "Aether
Systems") in connection with the distribution of the securities being
registered, other than underwriting discounts and commission, are as follows:
<TABLE>
<CAPTION>
TOTAL
AMOUNT(1)
---------
<S> <C>
Securities and Exchange Commission Registration Fee......... $138,000
NASD Filing Fee............................................. --
Nasdaq National Market Listing Fee.......................... --
Accounting Fees and Expenses................................ 150,000
Blue Sky Fees and Expenses.................................. 15,000
Legal Fees and Expenses..................................... 150,000
Transfer Agent and Registrar Fees and Expenses.............. 30,000
Printing and Engraving Expenses............................. 200,000
Miscellaneous Fees and Expenses............................. 17,000
--------
Total............................................. $700,000
========
</TABLE>
---------------
(1) All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporate law of the State of Delaware,
Aether Systems has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Aether Systems'
bylaws (Exhibit 3.2 hereto) also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Delaware law.
Aether's certificate of incorporation (Exhibits 3.1 and 3.3 hereto)
provides that the liability of its directors for monetary damages shall be
eliminated to the fullest extent permissible under Delaware law. Pursuant to
Delaware law, this includes elimination of liability for monetary damages for
breach of the directors' fiduciary duty of care to Aether and its stockholders.
These provisions do not eliminate the directors' duty of care and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to Aether, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
Aether has entered into agreements with its directors and certain of its
executive officers that require Aether to indemnify such persons against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person may
be made a party by reason of the fact that such person is or was a director or
officer of Aether or any of its affiliated enterprises, provided such person
acted in good father and in a manner such person reasonably believed to be in or
not opposed to the best interests of Aether and, with respect to any criminal
proceeding, had no reasonable cause to
II-1
<PAGE> 162
believe his or her conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
Aether has a policy of directors' and officers' liability insurance that
insures Aether's directors and officers against the cost of defense, settlement
or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of Aether and its
officers and directors for certain liabilities arising under the Securities Act
or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception, Aether Systems, Inc. or its predecessors, Aether
Systems LLC or Aether Technologies International, L.L.C. ("Aether") has issued
and sold unregistered securities in the transactions described below.
Immediately prior to our initial public offering, we converted into a Delaware
corporation at which time each holder of units in our limited liability company
was converted into two and one-half shares of our common stock and each option
or warrant for one unit was converted into an option or warrant for two and
one-half shares of our common stock. The discussion below gives only the number
of shares into which units were converted.
1) In January 1996, NexGen Technologies, L.L.C. contributed assets in the
wireless data field to Aether in exchange for 7,500,000 shares and
Transettlements, Inc. contributed $1,000,000 in cash in exchange for 2,500,000
shares. On May 21, 1996, Transettlements contributed an additional $500,000 in
exchange for an additional 1,250,000 shares.
2) In February 1997, a subsidiary of Telcom Ventures, L.L.C. acquired
725,000 shares from Transettlements and contributed $1,000,000 to Aether in
exchange for 1,562,500 shares. In December 1997, Telcom Ventures and its
subsidiary contributed an additional $690,369 to Aether in exchange for an
additional 575,307.5 shares.
3) In January 1998, Pyramid Ventures, Inc., a subsidiary of Bankers Trust
Corporation, acquired 833,332.5 shares at $1.20 per share and 1,004,902.5 shares
at $1.49 per share for total proceeds to Aether LLC of approximately $2.5
million.
In June 1998, Telcom Ventures and Pyramid each loaned us $250,000. The
notes accrued interest at 8% per year and were due on demand with a stated
maturity date of the earlier of December 31, 1998 or the closing of an
anticipated private placement of units. The notes were convertible into units at
the option of the holder at the rate of $250,000 divided by the per unit price
to be paid in the anticipated private placements. In connection with the
issuance of these notes, we also issued 14,140 warrants with an exercise price
of $0.01 per unit to each of Telcom Ventures and Pyramid. Pyramid converted its
$250,000 loan plus accrued interest in August 1998 into 142,950 shares at a per
share price of $1.77 and exercised its warrant and acquired 14,140 shares. In
August 1998, we repaid the amount owed Telcom Ventures, including $2,520 in
interest. Telcom Ventures exercised its warrant and received 14,140 shares in
August 1999.
4) In August 1998, Reuters MarketClip Holdings Sarl received 2,828,055
shares in exchange for $4,735,020 in cash and forgiveness of $530,980 Aether
owed Reuters for hardware and other inventory, offset by $266,000 Reuters owed
us under a license agreement we previously entered into with Reuters relating to
sales of MarketClip, and related fees.
5) In October 1998, 3Com Corporation contributed $6,000,000, in exchange
for 2,500,000 shares. At the same time Aether issued 3Com a conditional warrant
to purchase 893,665 shares exercisable at $0.01 per unit if the milestones
described below are achieved before October 29, 2001. 3Com achieved the first
milestone entitling it to exercise 143,665 shares as a result of having
completed a joint sales and marketing plan. 3Com may exercise an additional
375,000 shares when Aether receives revenue of $6 million in engineering
services revenue from business opportunities introduced by 3Com. 3Com may
exercise an additional 375,000 shares if Aether attains 6,000 wireless service
subscribers as a result of business
II-2
<PAGE> 163
opportunities introduced to us by 3Com. 3Com has not attained either of these
last two milestones and has not exercised any of its warrants.
6) Aether from time to time has granted options or warrants to acquire
units to employees and members of the managing board. The following table sets
forth certain information regarding such grants:
<TABLE>
<CAPTION>
RANGE OF
NO. OF SHARES EXERCISE PRICES
------------- ---------------
<S> <C>
1996 693,438 $0.40
1997 306,562 $0.40
1998 604,688 $1.49-$1.77
1999 2,763,856 $1.77-$79.75
</TABLE>
7) In August 1999, Aether issued 100,000 shares pursuant to Mr. Ein's
exercise of an option for shares at an exercise price of $.40 per share. On
September 8, 1999, Mr. Beese exercised an option for 75,000 shares at an
exercise price of $.40 per share.
8) On September 28, 1999, we issued to Merrill Lynch Capital Corporation in
connection with a credit facility warrants to purchase up to 2,419,690 shares of
our common stock for no consideration. These warrants expired when we repaid
allotments owing under the credit facility from the proceeds of in our initial
public offering.
9) On September 28, 1999, we issued options for 488,605 shares in
connection with Aether's acquisition of Mobeo, Inc. The exercise price of
options for (1) 312,500 shares is $6.00 per share, (2) 116,105 shares is $4.80
per share, and (3) 60,000 shares is $2.40 per share.
10) On March 6, 2000, we acquired Riverbed Technologies, Inc. for 4,537,281
shares of our common stock in exchange for all of the issued and outstanding
capital stock of Riverbed and reserved an additional 862,480 shares of our
common stock for issuance upon exercise of options previously issued to Riverbed
employees.
The sale and issuance of securities in the transactions described above
were exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act or Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering, where the purchasers
were sophisticated investors who represented their intention to acquire
securities for investment only and not with a view to distribution and received
or had access to adequate information about the Aether. Some of the options
identified in sub-items 6 and 10 were exempt from registration pursuant to Rule
701 under the Securities Act.
No underwriters were employed in any of the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
The exhibit index is incorporated by reference.
Financial Statement Schedules
Schedule II
Schedules other than those listed above have been omitted since they are
not required or are not applicable or the required information is shown in the
financial statements or related notes. Columns omitted from schedules filed have
been omitted since the information is not applicable.
II-3
<PAGE> 164
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 165
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Owings Mills, State of
Maryland on the 25(th) day of August, 2000.
Aether Systems, Inc.
By: /s/ DAVID S. OROS
----------------------------------
David S. Oros
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS, that each person whose signature appears below
constitutes and appoints David S. Oros and David C. Reymann, and each of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and sign and registration statement
for the same offering covered by the Registration Statement that is to be
effective upon filing pursuant to Rule 462 promulgated under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID S. OROS Chairman and Chief Executive August 25, 2000
----------------------------------------------------- Officer
David S. Oros
/s/ DAVID C. REYMANN Chief Financial Officer (Principal August 25, 2000
----------------------------------------------------- Financial and Accounting Officer)
David C. Reymann
/s/ J. CARTER BEESE, JR. Director August 25, 2000
-----------------------------------------------------
J. Carter Beese, Jr.
/s/ FRANK A. BONSAL, JR. Director August 25, 2000
-----------------------------------------------------
Frank A. Bonsal, Jr.
Director August , 2000
-----------------------------------------------------
Mark D. Ein
/s/ E. WAYNE JACKSON III Director and Managing August 25, 2000
----------------------------------------------------- Director, Aether Capital
E. Wayne Jackson III
Director August , 2000
-----------------------------------------------------
Rahul C. Prakash
</TABLE>
II-5
<PAGE> 166
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JANICE M. ROBERTS Director August 25, 2000
-----------------------------------------------------
Janice M. Roberts
Director August , 2000
-----------------------------------------------------
Dr. Rajendra Singh
/s/ GEORGE STAMAS Director August 25, 2000
-----------------------------------------------------
George Stamas
/s/ ROBIN T. VASAN Director August 25, 2000
-----------------------------------------------------
Robin T. Vasan
/s/ DEVIN N. WENIG Director August 25, 2000
-----------------------------------------------------
Devin N. Wenig
/s/ THOMAS E. WHEELER Director August 25, 2000
-----------------------------------------------------
Thomas E. Wheeler
</TABLE>
II-6
<PAGE> 167
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
Allowance for doubtful accounts.................. $ -- $ -- $ -- $ --
Allowance for inventory obsolescence............. -- -- -- --
1998
Allowance for doubtful accounts.................. -- 157,000 -- 157,000
Allowance for inventory obsolescence............. -- 170,000 -- 170,000
1999
Allowance for doubtful accounts.................. 157,000 (60,000) 41,000 56,000
Allowance for inventory obsolescence............. 170,000 (55,000) -- 115,000
</TABLE>
<PAGE> 168
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT AND DESCRIPTION
------- ------------------------
<C> <S>
+++1.1 -- Form of U.S. Purchase Agreement for U.S. Offering of
Common Stock
*2.1 -- Agreement of Merger, dated as of October 18, 1999,
between Aether Systems LLC, and Aether Systems, Inc.
*2.2 -- Stock Purchase Agreement by and among Aether Technologies
International, L.L.C., Mobeo, Inc. and Peter Kibler,
Winston Barrett and Edward Spear dated as of August 19,
1999.
**2.3 -- Stock Purchase Agreement by and among Aether Systems,
Inc., LocusOne Communications, Inc. and the stockholders
named therein dated as of January 25, 2000
+2.4 -- Agreement and Plan of Merger dated as of February 9, 2000
by and among Aether Systems, Inc., RT Acquisition, Inc.
and Riverbed Technologies, Inc.
++2.5 -- LLC Interest Purchase Agreement made effective as of
April 18, 2000 by and among Aether Systems, Inc., Net
Search LLC and the members of Net Search, LLC and
Augustine N. Esposito
++2.6 -- Share Purchase Agreement relating to IFX Group Limited
+++2.7 -- Agreement and Plan of Merger by and among Aether Systems,
Inc. and Cerulean Technology, Inc.
*3.1 -- Amended and Restated Certificate of Incorporation of
Aether Systems, Inc.
*3.2 -- Bylaws of Aether Systems, Inc.
3.3 -- As Amended Certificate of Incorporation
*4.1 -- Specimen Certificate for Aether Systems Common Stock
+4.2 -- Form of Indenture for Convertible Debt
+++5.1 -- Opinion of Wilmer, Cutler & Pickering as to the legality
of the shares of Common Stock and convertible notes and
conversion shares being registered
*10.1 -- Amended and Restated License, Marketing and Distribution
Agreement between Reuters America, Inc. and Aether
Technologies International, L.L.C. dated August 11, 1998.
*10.2 -- Contract Between Morgan Stanley Dean Witter Online
Direct, Inc. and Aether Technologies International,
L.L.C. dated August 5, 1999.
*10.3 -- Options Price Reporting Authority Vendor Agreement
between Aether Technologies and the American Stock
Exchange, Inc. dated June 3, 1997.
*10.4 -- Agreement between Aether Technologies International,
L.L.C. and New York Stock Exchange dated July 19, 1999.
*10.5 -- Vendor Agreement by and between Aether Technologies
International, L.L.C. and the Nasdaq Stock Market, Inc.
dated October 4, 1996.
*10.6 -- Dow Jones Indexes Enterprise Distribution Agreement dated
April 23, 1999.
*10.7 -- Employment Agreement between Aether Technologies
International, L.L.C. and David Oros dated July 7, 1999.
*10.8 -- Employment Agreement between Aether Technologies
International, L.L.C. and David Reymann dated May 18,
1999.
*10.9 -- Series A Preferred Stock Purchase Agreement dated as of
August 9, 1999.
*10.10 -- Investors' Rights Agreement by and among AirWeb
Corporation and each of the holder of the Series A
Preferred Stock listed in Schedule A and Patrick McVeigh,
Barak Berkowitz, Michael Bolbec and Andrew Simms dated
August 9, 1999.
*10.11 -- Right of First Refusal and Co-Sale Agreement by and among
AirWeb Corporation, Inc., and those holders of the Common
Stock identified in Schedule A and B dated August 9,
1999.
*10.12 -- Voting Agreement by and among the holders of Common Stock
set forth in Schedule A and Purchase of the Series A
Preferred Stock dated August 9, 1999.
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT AND DESCRIPTION
------- ------------------------
<C> <S>
*10.13 -- Aether-OmniSky Side Letter regarding development and
resale services dated August 9, 1999.
*10.14 -- Software License Agreement by and between Aether
Technologies International, L.L.C. and AirWeb Corporation
dated August 9, 1999.
*10.15 -- AirWeb Corporation Warrant to Purchase 3,000,000 Shares
of Series A Preferred Stock dated August 9, 1999.
*10.16 -- Strategic License Agreement between Aether Technologies
International, L.L.C. and Riverbed Technologies, Inc.
dated as of June 15, 1999.
*10.17 -- Consulting Agreement between Aether Technologies, L.L.C.
and Orbcomm Global, L.P. dated as of October 26, 1998.
*10.18 -- Credit Agreement dated as of September 28, 1999 among
Merrill Lynch & Co. and the leaders named therein.
*10.19 -- Aether Systems, Inc. 1999 Equity Incentive Plan effective
as of October 1, 1999
*10.20 -- Aether Systems, Inc. Senior Bonus Plan effective as of
September 29, 1999
*10.21 -- Amended and Restated Registration Rights Agreement dated
as of February 2000
*10.22 -- Form of Subscription Agreement between Aether Systems,
Inc. and National Discount Brokers
+10.23 -- Series B Preferred Stock Purchase Agreement dated as of
January 18, 2000
+10.24 -- Master Agreement between Aether Systems, Inc. and Charles
Schwab & Co., Inc., dated as of December 23, 1999
+10.25 -- Inciscent, Inc. Series A Stock Purchase Agreement
+10.26 -- Agreement between National Discount Brokers Corporation
and Aether Systems, Inc., dated as of November 4, 1999
+10.27 -- Development Agreement between Response Services, LLC and
Aether Systems, Inc. dated as of January 12, 2000
*10.28 -- Formation of Sila Communications Ltd.
11.1 -- Statement regarding computation of per share earnings.
21.1 -- Subsidiaries of Aether Systems
23.1 -- Consent of KPMG LLP for Aether Systems, Inc.
23.2 -- Consent of PricewaterhouseCoopers LLP
+++23.3 -- Consent of Wilmer, Cutler & Pickering, included in
Exhibit 5.1
23.4 -- Consent of the Forrester Research
23.5 -- Consent of International Data Corporation
23.6 -- Consent of KPMG LLP for LocusOne Communications, Inc.
23.7 -- Consent of KPMG LLP for Riverbed Technologies, Inc.
24.1 -- Power of Attorney, included on the signature page hereof
</TABLE>
---------------
* Incorporated by reference to the Registration Statement as amended (File
No. 333-85697) on Form S-1 filed with the Commission on October 20, 1999.
** Incorporated by reference to the Form 8-K filed with the Commission on
February 15, 2000.
+ Incorporated by reference to the Registration Statement as amended (File
No. 333-30852) or Form S-1 filed with the Commission on February 22,
2000.
++ Incorporated by reference to the Form 10-Q filed with the Commission on
August 14, 2000.
+++ To be filed by amendment.
