<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
<TABLE>
<S> <C>
Date of Report (Date of earliest event reported) February 3, 2000 Commission File Number 000-27707
</TABLE>
AETHER SYSTEMS, INC.
(Exact name of registrant)
Delaware 52-2186634
(State of organization) (I.R.S. Employer Identification Number)
11460 Cronridge Drive
Owings Mills, Maryland 21117
(Address of principal executive offices and zip code)
(410) 654-6400
(Registrant's telephone Number)
================================================================================
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
a. The required financial statements of LocusOne are set forth
beginning at page 4 of this report.
b. The pro forma financial statements including LocusOne are set
forth beginning at page 18 of this report.
Exhibits
23.1 Consent of KPMG LLP
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
AETHER SYSTEMS, INC.
By: /s/ David C. Reymann
-----------------------
David C. Reymann
Chief Financial Officer
Dated: March 16, 2000
<PAGE> 4
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
<PAGE> 5
LOCUSONE COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1999
---- ----
<S> <C> <C>
ASSETS
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 assets 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
<PAGE> 6
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
<PAGE> 7
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
<PAGE> 8
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
=========== ===========
</TABLE>
- --------------
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
See accompanying notes to financial statements
<PAGE> 9
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 to total estimated
hours. Anticipated contract losses are recognized as soon as they become known
and estimable. Revenues from maintenance
<PAGE> 10
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
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. 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.
<PAGE> 11
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
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.
(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.
<PAGE> 12
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
(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>
<PAGE> 13
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
(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:
Conversion of Series A Convertible Redeemable Preferred Stock 1,000,000
Exercise of stock options pursuant to stock option plan 600,000
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.
<PAGE> 14
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
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.
(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, respectivley.
(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
<PAGE> 15
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
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 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:
<PAGE> 16
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
<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.
<PAGE> 17
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
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.
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- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER 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.
<PAGE> 18
LOCUSONE COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------------
WEIGHTED
AVERAGE
NUMBER AT REMAINING WEIGHTED NUMBER AT WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 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.
<PAGE> 19
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 acquisition of
Mobeo, Inc. completed on September 28, 1999, the acquisition of LocusOne
Communications, Inc. completed on February 3, 2000, and the acquisition of
Riverbed Technologies, Inc. completed on March 6, 2000, which are collectively
referred to in this "Unaudited Pro Forma Condensed Consolidated Financial
Information" section as the "Completed Transactions."
The pro forma condensed consolidated statement of operations for the year
ended December 31, 1999 has been prepared to give effect to the Mobeo, LocusOne
and Riverbed acquisitions as if they had occurred on January 1, 1999. The pro
forma condensed consolidated balance sheet as of December 31, 1999 gives effect
to the LocusOne and Riverbed acquisitions as if they had occurred on December
31, 1999. The acquisition of Mobeo, which occurred prior to December 31, 1999,
is already reflected in the Company's historical consolidated balance sheet as
of December 31, 1999.
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
and Riverbed. 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 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. 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 occurred on such dates or to project Aether's results of operations
or financial position for any future period.
<PAGE> 20
AETHER SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------------------
ADJUSTMENTS
HISTORICAL FOR COMPLETED PRO FORMA
AETHER TRANSACTIONS CONSOLIDATED
------------ -------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 78,541,792 $ (30,818,052) $ 47,723,740
Short-term investments.......................... 2,091,962 3,936,542 6,028,504
Trade accounts receivable, net.................. 1,002,845 875,494 1,878,339
Inventory, net.................................. 688,494 -- 688,494
Prepaid expenses and other current assets....... 4,994,965 435,428 5,430,393
------------ -------------- --------------
Total current assets.................... 87,320,058 (25,570,588) 61,749,470
Property and equipment, net....................... 2,795,920 915,896 3,711,816
Intangible assets, net............................ 12,209,442 1,166,185,585 1,178,395,027
Other assets...................................... 208,698 -- 208,698
------------ -------------- --------------
$102,534,118 $1,141,530,893 $1,244,065,011
============ ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 1,425,435 $ 717,353 $ 2,142,788
Accrued expenses................................ 1,619,947 497,135 2,117,082
Accrued employee compensation and benefits...... 971,110 -- 971,110
Deferred revenue................................ 175,193 176,650 351,843
Notes payable current portion................... 19,095,600 19,095,600
------------ -------------- --------------
Total current liabilities............... 4,191,685 20,486,738 24,678,423
Notes payable-less current portion................ -- 241,155 241,155
------------ -------------- --------------
4,191,685 20,727,893 24,919,578
Stockholders' equity
Preferred stock................................. -- -- --
Common stock.................................... 271,543 45,373 316,916
Additional paid-in-capital...................... 120,892,478 1,120,757,627 1,241,650,105
Accumulated deficit............................. (22,613,640) -- (22,613,640)
Notes receivable from shareholder............... (137,879) -- (137,879)
Unrealized loss on investments.................. (70,069) -- (70,069)
------------ -------------- --------------
Total stockholders' equity.............. 98,342,433 1,120,803,000 1,219,145,433
------------ -------------- --------------
$102,534,118 $1,141,530,893 $1,244,065,011
============ ============== ==============
</TABLE>
<PAGE> 21
AETHER SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
ADJUSTMENTS FOR COMPLETED TRANSACTIONS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------------------------------------------------------------
PRO FORMA PRO FORMA ADJUSTMENTS
HISTORICAL ACQUISITION HISTORICAL ACQUISITION FOR COMPLETED
LOCUSONE ADJUSTMENTS RIVERBED ADJUSTMENTS TRANSACTIONS
----------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 16,125 $(21,174,978)(A) $ 5,340,801 $ (15,000,000)(B) $ (30,818,052)
Short term investments... -- -- 3,936,542 -- 3,936,542
Trade accounts
receivable, net........ 256,423 -- 619,071 -- 875,494
Prepaid expenses and
other current assets... 6,573 -- 428,855 -- 435,428
----------- ------------ ----------- -------------- --------------
Total current
assets.......... 279,121 (21,174,978) 10,325,269 (15,000,000) (25,570,588)
Property and equipment,
net...................... 197,821 -- 718,075 915,896
Intangible assets, net..... -- 39,861,173(A) -- 1,126,324,412(B) 1,166,185,585
----------- ------------ ----------- -------------- --------------
$ 476,942 $ 18,686,195 $11,043,344 $1,111,324,412 $1,141,530,893
=========== ============ =========== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......... $ 79,975 $ -- $ 637,378 $ -- $ 717,353
Accrued expenses......... -- -- 497,135 -- 497,135
Line of credit........... 863,000 (863,000)(A) -- -- --
Deferred revenue......... 108,140 -- 68,510 -- 176,650
Notes payable -- current
portion................ -- 18,975,022(A) 120,578 -- 19,095,600
----------- ------------ ----------- -------------- --------------
Total current
liabilities..... 1,051,115 18,112,022 1,323,601 -- 20,486,738
Notes payable -- less
current portion.......... -- -- 241,155 -- 241,155
Redeemable preferred
stock.................... 2,250,000 (2,250,000)(A) 15,771,520 (15,771,520)(B) --
Stockholders' equity
(deficit):
Common stock............. 45,000 (45,000)(A) 28,878 16,495(B) 45,373
Additional
paid-in-capital........ -- -- 561,033 1,120,196,594(B) 1,120,757,627
Accumulated deficit...... (2,869,173) 2,869,173(A) (6,882,843) 6,882,843(B) --
----------- ------------ ----------- -------------- --------------
Total stockholders' equity
(deficit)................ (2,824,173) 2,824,173 (6,292,932) 1,127,095,932 1,120,803,000
----------- ------------ ----------- -------------- --------------
$ 476,942 $ 18,686,195 $11,043,344 $1,111,324,412 $1,141,530,893
=========== ============ =========== ============== ==============
</TABLE>
- ---------------
(A) The LocusOne acquisition is to be accounted for as a purchase pursuant to
Accounting Principles Board Opinion No. 16. Under such purchase accounting
principles, LocusOne's assets acquired and liabilities assumed are required
to be adjusted to their estimated fair values at the date of acquisition.
The difference between the purchase cost and the fair value of LocusOne's
net tangible and identifiable intangible assets is goodwill.
<PAGE> 22
The purchase price for LocusOne is as follows:
<TABLE>
<S> <C>
Cash consideration...................................... $21,024,978
Notes payable........................................... 18,975,022
Estimated costs and expenses............................ 150,000
-----------
Total purchase price.......................... $40,150,000
===========
</TABLE>
Aether made a payment of $20,000,000 at closing. In addition, Aether
repaid outstanding indebtedness and certain legal fees of LocusOne
totalling approximately $1,000,000. The remaining amount is payable in
the form of two non-interest bearing notes payable. One note totaling
$5.4 million is payable at the time of closing of this offering and
the remaining $13.6 million is payable at December 31, 2000.
The allocation of the purchase price to the fair value of the assets
acquired and liabilities assumed is preliminary and will be finalized
following completion of a full valuation of the acquired assets and
liabilities of LocusOne. The preliminary allocation of the purchase
price is as follows:
<TABLE>
<S> <C>
Current assets.......................................... $ 279,121
Fixed assets............................................ 197,821
Current liabilities..................................... (188,115)
Goodwill................................................ 39,861,173
-----------
Total purchase cost........................... $40,150,000
===========
</TABLE>
The above purchase price allocation is preliminary and may change upon
final determination of the fair value of assets and liabilities
acquired. The Company has not specifically identified amounts to
assign to intangibles other than goodwill; changes in the amounts
allocated to such assets could result in changes to the amount of
goodwill recorded, and such changes could be material. A preliminary
amortization period for goodwill of five years has been used for
purposes of the pro forma financial information.
(B) The Riverbed acquisition is to be accounted for as a purchase pursuant to
Accounting Principles Board Opinion No. 16. Under such purchase accounting
principles, Riverbed's assets acquired and liabilities assumed are required
to be adjusted to their estimated fair values at the date of acquisition.
The difference between the purchase cost and the fair value of Riverbed's
net tangible and identifiable intangible assets is goodwill.
The purchase price for Riverbed is as follows:
<TABLE>
<S> <C>
Issuance of Aether stock............................. $ 951,756,000
Issuance of replacement options...................... 169,047,000
Estimated costs and expenses......................... 15,000,000
--------------
Total purchase price....................... $1,135,803,000
==============
</TABLE>
Aether issued approximately 4,537,000 shares of its common stock for all of
the outstanding common and preferred stock of Riverbed. The Company has valued
the common stock based on the market price of Aether's common stock over the
period two days before and two days after the acquisition was agreed to and
announced, in accordance with FASB Emerging Issues Task Force Issue 95-19.
Aether has also reserved approximately 863,000 common shares for issuance upon
exercise of replacement options issued to Riverbed employees. The value of these
options was calculated using the Black-Sholes option pricing model with the
following assumptions: expected dividend yield 0 percent, risk-free interest
rate of 6.7 percent, expected life of 5 years and volatility of 70 percent.
<PAGE> 23
The allocation of the purchase price to the fair value of the assets
acquired and liabilities assumed is preliminary and will be finalized following
completion of a full valuation of the assets and liabilities of Riverbed. The
preliminary allocation of the purchase price is as follows:
<TABLE>
<S> <C>
Current assets....................................... $ 10,325,269
Fixed assets......................................... 718,075
Current liabilities.................................. (1,323,601)
Long-term liabilities................................ (241,155)
Goodwill............................................. 1,126,324,412
--------------
Total purchase cost........................ $1,135,803,000
==============
</TABLE>
The above purchase price allocation is preliminary and may change upon
final determination of the fair value of assets and liabilities acquired. The
Company has not specifically identified amounts to assign to intangibles other
than goodwill; changes in the amounts allocated to such assets could result in
changes to the amount of goodwill recorded, and such changes could be material.
A preliminary amortization period for goodwill of three years has been used for
purposes of the pro forma financial information. However, the results of the
full valuation may indicate that a portion of the purchase price should be
allocated to in-process research and development. Such amounts, if any, will be
expensed immediately following the date of acquisition. In addition, to the
extent that the full valuation indicates that a portion of the purchase price
should be allocated to identifiable intangible assets other than goodwill, the
Company may be required to record a deferred tax liability, as such intangible
assets would have no basis for tax reporting purposes.
<PAGE> 24
AETHER SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------
ADJUSTMENTS
HISTORICAL FOR COMPLETED PRO FORMA
AETHER TRANSACTIONS CONSOLIDATED
------------ ------------- -------------
<S> <C> <C> <C>
Subscriber revenue............................... $ 3,731,792 $ 7,467,834 $ 11,199,626
Engineering services revenue..................... 2,594,476 -- 2,594,476
Software and related services revenue............ -- 2,443,349 2,443,349
------------ ------------- -------------
Total revenue............................... 6,326,268 9,911,183 16,237,451
Cost of subscriber revenue....................... 2,109,807 2,529,296 4,639,103
Cost of engineering services revenue............. 1,366,426 -- 1,366,426
Cost of software and related services revenue.... -- 1,540,687 1,540,687
------------ ------------- -------------
Total cost of revenue....................... 3,476,233 4,069,983 7,546,216
------------ ------------- -------------
Gross profit........................... 2,850,035 5,841,200 8,691,235
------------ ------------- -------------
Operating expenses:
Research and development....................... 2,613,726 2,867,490 5,481,216
General and administrative..................... 5,891,504 3,015,595 8,907,099
Selling and marketing.......................... 2,095,074 4,736,035 6,831,109
Depreciation and amortization.................. 1,089,013 385,261,778 386,350,791
Option and warrant expense..................... 19,198,209 11,711,792 30,910,001
------------ ------------- -------------
30,887,526 407,592,690 438,480,216
------------ ------------- -------------
Operating loss......................... (28,037,491) (401,751,490) (429,788,981)
Other income (expense):
Interest income (expense), net................. (60,282) 168,342 108,060
Equity in losses of investments................ (2,425,000) -- (2,425,000)
Realized loss on sale of short-term
investments................................. (168,721) -- (168,721)
------------ ------------- -------------
Net loss.................................... $(30,691,494) $(401,583,148) $(432,274,642)
============ ============= =============
Pro forma net loss per share -- basic and
diluted........................................ $ (16.79)
=============
Pro forma weighted average shares used in per
share computations -- basic and diluted........ 25,744,511
=============
</TABLE>
<PAGE> 25
AETHER SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS FOR COMPLETED TRANSACTIONS
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 1, 1999 YEAR ENDED
THROUGH SEPTEMBER 28, 1999 DECEMBER 31, 1999
--------------------------- -------------------------------------------------------------
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL ACQUISITION HISTORICAL ACQUISITION HISTORICAL ACQUISITION
MOBEO(A) ADJUSTMENTS LOCUS ONE ADJUSTMENTS RIVERBED ADJUSTMENTS
----------- ------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Subscriber revenue....... $7,467,834 $ -- $ -- $ -- $ $
Software and related
services revenue....... -- -- 1,616,264 -- 927,085 (100,000)(H)
---------- ----------- ----------- ------------ ----------- -------------
Total revenue........ 7,467,834 -- 1,616,264 -- 927,085 (100,000)
---------- ----------- ----------- ------------ ----------- -------------
Cost of subscriber
revenue................ 2,529,296 -- -- -- -- --
Cost of software and
related
services revenue....... -- -- 813,203 -- 727,484 --
---------- ----------- ----------- ------------ ----------- -------------
Total cost of
revenue............ 2,529,296 -- 813,203 -- 727,484 --
---------- ----------- ----------- ------------ ----------- -------------
Gross profit......... 4,938,538 -- 803,061 -- 199,601
---------- ----------- ----------- ------------ ----------- -------------
Operating expenses:
Research and
development.......... 763,666 -- 53,046 -- 2,050,778 --
General and
administrative....... 1,994,525 (855,891)(C) 821,890 -- 1,055,071 --
Selling and
marketing............ 2,069,413 (740,921)(C) 542,073 -- 2,865,470 --
Depreciation and
amortization......... 82,915 1,667,511(B) 96,181 7,973,700(E) -- 375,441,471(I)
Option and warrant
expense.............. -- 1,225,875(D) 299,561 8,986,062 1,200,294
---------- ----------- ----------- ------------ ----------- -------------
4,910,519 1,296,574 1,812,751 16,959,762 7,171,613 375,441,471
---------- ----------- ----------- ------------ ----------- -------------
Operating income
(loss)............. 28,019 (1,296,574) (1,009,690) (16,959,762) (6,972,012) (375,441,471)
Other income (expense):
Interest income
(expense), net....... 17,594 -- (20,125) 20,125(G) 150,748 --
---------- ----------- ----------- ------------ ----------- -------------
Net income (loss).... $ 45,613 $(1,296,574) $(1,029,815) $(16,939,637) $(6,821,264) $(375,541,471)
========== =========== =========== ============ =========== =============
<CAPTION>
ADJUSTMENTS
FOR
COMPLETED
TRANSACTIONS
-------------
<S> <C>
Subscriber revenue....... $ 7,467,834
Software and related
services revenue....... 2,443,349
-------------
Total revenue........ 9,911,183
-------------
Cost of subscriber
revenue................ 2,529,296
Cost of software and
related
services revenue....... 1,540,687
-------------
Total cost of
revenue............ 4,069,983
-------------
Gross profit......... 5,841,200
-------------
Operating expenses:
Research and
development.......... 2,867,490
General and
administrative....... 3,015,595
Selling and
marketing............ 4,736,035
Depreciation and
amortization......... 385,261,778
Option and warrant
expense.............. 11,711,792
-------------
407,592,690
-------------
Operating income
(loss)............. (401,751,490)
Other income (expense):
Interest income
(expense), net....... 168,342
-------------
Net income (loss).... $(401,583,148)
=============
</TABLE>
- ---------------
(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 intangible assets, including goodwill, over a
five-year period. The estimated amount of amortization of intangible assets
is based on a preliminary allocation of the purchase price and may change
upon final determination, and such change could be material.
(F) Reflects the amortization of the intrinsic value of options granted to
employees of LocusOne over the three-year vesting period.
(G) Reflects the elimination of interest expense, as LocusOne's outstanding debt
was repaid by Aether as part of the acquisition.
(H) 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.
(I) Reflects the amortization of intangible assets, including goodwill, over a
three-year period. The purchase price allocation is preliminary and may
change upon final determination of the fair value of assets and liabilities
acquired. The Company has not specifically identified amounts to assign to
intangibles other than goodwill; changes in the amounts allocated to such
assets could result in changes to the amount of goodwill recorded, and such
changes could be material. A preliminary amortization period for goodwill
of three years has been used for purposes of the pro forma financial
information. However, the results of the full valuation may indicate that a
portion of the purchase price should be allocated to in-process research
and development. Such amounts, if any, will be expensed immediately
following the date of acquisition. In addition, to the extent that the full
valuation indicates that a portion of the purchase price should be
allocated to identifiable intangible assets other than goodwill, the
Company may be required to record a deferred tax liability, as such
intangible assets would have no basis for tax reporting purposes. This may
result in recording additional goodwill amortization and a deferred tax
benefit.
<PAGE> 26
Consent of Independent Auditors Exhibit 23.1
The Board of Directors
Locusone Communications, Inc:
We consent to the incorporation by reference in the registration statement (No.
333-91369) on Form S-8 of Aether Systems, Inc. of our report dated March 9,
2000, with respect to the balance sheets of Locusone Communications, Inc. as
of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended, which
report appears in the Form 8-K/A of Aether Systems, Inc. dated March 16, 2000.
KPMG LLP
McLean, Virginia
March 16, 2000
