<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION - DRAFT #D5A
Washington D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from -------------- to ----------------
Commission File Number 000-1095478
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
---------------------------------------------------
(Exact name of registrant as specified in its charter)
Bermuda 98-0155633
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
CLARENDON HOUSE, 2 CHURCH STREET
P.O. BOX HM 1022
HAMILTON HM DX, BERMUDA NOT APPLICABLE
----------------------- --------------
(Address of principal executive offices) (Zip code)
(441) 295-5950
--------------
(Registrant's telephone number including area code)
----------
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
-
As of November 3, 2000, 48,521,650 shares of Registrant's common shares, no par
value, were outstanding.
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
--------------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,437 $ 43,813
Short-term investments 71,960 92,094
Trade receivables, net of allowance of $3,634 and $ 634
at September 30, 2000 and June 30, 2000, respectively 22,365 21,293
Inventories 8,868 6,607
Prepaid expenses and other current assets 5,665 1,654
--------- ---------
Total current assets 151,295 165,461
Property and equipment, net 8,481 6,861
Intangibles, net 15,856 2,775
Other assets 2,942 556
--------- ---------
Total assets $ 178,574 $ 175,653
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,185 $ 6,965
Accrued expenses 4,299 3,566
Notes payable 1,350 486
Other current liabilities 734 306
--------- ---------
Total current liabilities 14,568 11,323
Other long-term liabilities 1,741 1,711
--------- ---------
Total liabilities 16,309 13,034
Shareholders' equity:
Common shares, $0.001 par value; 100,000,000 authorized;
issued and outstanding 48,477,712 and 46,748,965 shares
at September 30, 2000 and June 30, 2000, respectively 48 47
Additional paid-in-capital 321,683 313,764
Deferred stock compensation (4,819) (6,239)
Services receivable from shareholder (4,025) (4,384)
Subscriptions and amounts receivable from shareholders (416) (416)
Accumulated other comprehensive income 244 33
Accumulated deficit (150,450) (140,186)
--------- ---------
Total shareholders' equity 162,265 162,619
--------- ---------
Total liabilities and shareholders' equity $ 178,574 $ 175,653
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
2000 1999
----------- -----------
<S> <C> <C>
Net revenues $ 10,460 $ 5,377
Cost of revenues 5,924 3,973
-------- --------
Gross profit 4,536 1,404
Operating expenses:
Research and development 6,717 3,562
Selling, general and
administrative 7,479 2,088
Amortization of deferred stock
compensation * 1,293 3,324
In-process research/development 407 --
Amortization of goodwill and purchased
intangible assets 758 --
-------- --------
Total costs and expenses 16,654 8,974
-------- --------
Operating loss (12,118) (7,570)
Interest expense (45) (1,959)
Interest income 2,047 58
Other income/expense, net (139) 1
-------- --------
Net loss before income taxes (10,255) (9,470)
Income tax expense 9 --
-------- --------
Net loss (10,264) (9,470)
Dividend effect of beneficial conversion feature
to H-1 preferred shareholders -- 2,055
-------- --------
Net loss attributable to common
shareholders $(10,264) $(11,525)
======== ========
Basic and diluted loss per share $ (0.22) $ (2.10)
Weighted average common shares
used in computing loss per share 47,682 5,480
*AMORTIZATION OF DEFERRED
STOCK COMPENSATION:
Cost of revenues $ 164 $ 453
Research and development 730 1,468
Selling, general and administrative 399 1,403
-------- --------
Total $ 1,293 $ 3,324
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
2000 1999
------------- -----------------
<S> <C> <C>
Net cash used in operating activities $(10,035) $ (1,232)
-------- --------
Cash flows from investing activities:
Proceeds from sale of short-term investments 20,315 --
Purchase of property and equipment (2,363) (934)
Acquisition of businesses (8,022) --
Investment in licensed technology (522) (47)
-------- --------
Net cash provided by (used in) in investing activities 9,408 (981)
Cash flows from financing activities:
Principal payments on notes payable and capital leases (1,312) (135)
Proceeds from issuances of convertible preferred shares
and warrants -- 11,244
Proceeds from exercise of options 478 115
Other 55 135
-------- --------
Net cash provided (used) by financing activities (779) 11,359
-------- --------
Effect of exchange rate changes on cash and short term investments 30 (77)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,376) 9,069
Cash and cash equivalents at beginning of period 43,813 3,919
-------- --------
Cash and cash equivalents at end of the period $ 42,437 $ 12,988
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 45 $ 35
Non-cash investing and financing activities:
Common shares issued for acquisition of Microcellular $ 7,265 --
Conversion of convertible notes for preferred stock $ -- $ 8,754
Equipment invested in Blue Sky $ 1,034 --
Exchange of warrants in connection with joint sales agreement $ -- $ 4,121
Dividend effect of beneficial conversion feature to H1 Shareholders $ -- $ 2,055
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements are
unaudited, but in the opinion of management, reflect all adjustments (consisting
only of normal recurring adjustments) necessary to fairly state the Company's
consolidated financial position, results of operations, and cash flows as of and
for the dates and periods presented. The consolidated financial statements of
the Company are prepared in accordance with generally accepted accounting
principles as adopted in the United States for interim financial information,
the instructions to Form 10-Q and Article 10 of Regulation S-X.
These unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
footnotes included in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission on September 27, 2000. The results of
operations for the three month period ended September 30, 2000 are not
necessarily indicative of results for the entire fiscal year ending June 30,
2001.
2. COMPREHENSIVE LOSS
The components of the Company's total comprehensive loss were (in
thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
<TABLE>
<CAPTION>
2000 1999
------------- --------
<S> <C> <C>
Net loss attributable to common
shareholders $ (10,264) $ (9,470)
Foreign currency translation adjustment 174 (77)
Unrealized gain on investments 37 --
------------ ---------------
Total comprehensive loss $ (10,053) $ (9,547)
============ ===============
</TABLE>
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
---------------- ---------------
(unaudited)
<S> <C> <C>
Work in Process $ 7,781 $ 4,544
Finished goods 172 208
Consignment inventory 915 1,855
------------- -----------
$ 8,868 $ 6,607
============= ===========
</TABLE>
6
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
(CONTINUED)
4. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share is calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" and
SEC Staff Accounting Bulletin ("SAB") No. 98. The denominator used in the
computation of basic and diluted net loss per share is the weighted average
number of common shares outstanding for the respective period. All potentially
dilutive securities were excluded from the calculation of diluted net loss per
share, as the effect would be anti-dilutive. Diluted shares outstanding includes
the assumed conversion of preferred stock.
The computations of earnings per share are as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------- --------
<S> <C> <C>
Net loss attributable to common shareholders $(10,264) $(11,525)
Weighted average common shares outstanding 47,682 5,480
Basic and diluted loss per share $ (0.22) $ (2.10)
</TABLE>
5. CASH EQUIVALENTS
Cash equivalents include available-for-sale securities and
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
Cash Equivalents 2000 2000
-------------------- -----------------
(unaudited)
<S> <C> <C>
Cash......................... $ 1,783 $ 5,487
Money market funds........... 12,909 6,449
Commercial paper............. 27,745 31,877
------ ------
$ 42,437 $ 43,813
========== ==========
</TABLE>
7
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
(CONTINUED)
6. TRANSACTIONS WITH RELATED PARTIES, MAJOR CUSTOMERS AND CONCENTRATION
OF RISK
The Company engaged in business transactions with investors and major
customers resulting in the following revenue and trade receivables (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------- --------
Revenue
<S> <C> <C>
CampusLink............................................................ $ 2,706 --
Barakaat Telecommunications........................................... 1,938 --
Electronia............................................................ 1,576 --
Nortel Networks....................................................... 973 $ 942
Hutchison Telecommunications Group.................................... 351 257
HangZhou Topper Electric Corporation.................................. -- 2,068
ADC Telecommunications/Microcellular Systems, Ltd.(1)................. -- 1,122
</TABLE>
(1) Microcellular Systems, Ltd. (MSL) was created by a spin-off from ADC
Telecommunications in May 1999. MSL was acquired by interWAVE
Communications International, Ltd. in July 2000 (See note 9).
These customers accounted for the following percentages of revenues
comprising greater than 10% of revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- --------
Revenue
<S> <C> <C>
CampusLink............................................................ 26% --
Barakaat Telecommunications........................................... 19% --
Electronia............................................................. 15% --
Nortel Networks........................................................ 9% 18%
HangZhou Topper Electric Corporation................................... -- 38%
ADC Telecommunications/Microcellular Systems, Ltd.(1)...... -- 21%
</TABLE>
(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999. MSL was acquired by interWAVE
Communications International, Ltd. in July 2000 (See note 9).
Financial instruments, which potentially subject the Company to a
concentration of credit risk, principally consist of accounts receivable. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral on accounts receivable.
8
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
(CONTINUED)
The following table summarizes information relating to the Company's
significant customers with balances greater than 10% of gross trade receivables
as of:
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
--------------- ------------
(unaudited)
Trade Receivables:
<S> <C> <C>
Hutchison Telecommunications Group............................ 19% 24%
Nortel Networks............................................... 17% 26%
CampusLink.................................................... 12% --
HangZhou Topper Electric Corporation.......................... 10% 11%
Alcatel....................................................... 8% 11%
</TABLE>
7. COMMITMENTS
(a) OPERATING LEASE COMMITMENTS
The Company leases its facilities under non-cancelable operating leases. These
leases expire at various dates ranging from February 2001 to June 2005. Future
minimum lease payments as of September 30, 2000, are as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDING SEPTEMBER 30
<S> <C>
2001................................................. $4,256
2002................................................. 4,000
2003................................................. 2,462
2004................................................. 2,417
2005................................................. 865
-----------------
Total maximum lease payments............... 14,000
=================
</TABLE>
The Company's facilities in Redwood City were subleased during March, 2000 and
the payments of approximately $1.5 million received from the subleases will
cover our proportionate costs to the landlord under the existing lease. The
subleases will terminate at the same time that our lease ends on September 30,
2002.
(b) CONTRACT MANUFACTURERS
The Company generally commits to purchase products from its
contract manufacturers to be delivered within the most recent 60 days covered
by forecasts with cancellation fees. As of September 30, 2000, the Company
had committed to make purchases totaling $7.2 million from these
manufacturers in the next 60 days, compared to $3.2 million for the same
period of the preceding fiscal year. In addition, in specific instances, the
Company may agree to assume risk for limited quantities of specialized
components with lead times beyond this 60-day period.
9
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
(CONTINUED)
8. GEOGRAPHIC SEGMENT INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way management organizes the operating
segments within the Company for making operating decisions and assessing
financial performance. The Company's chief operating decision-maker is
considered to be the chief executive officer (CEO). The financial information
that the CEO reviews is identical to the information presented in the
accompanying statements of operations. Therefore, the Company has determined
that it operates in a single operating segment: manufacturing and sale of
compact mobile wireless network solutions.
Due to the nature of our business, shipments are frequently made to
a systems integrator located domestically or in a given country, only to be
repackaged and shipped to another country for actual installation. Geographic
revenue information for the quarters ended September 30, 2000 and 1999 is
based on our customers' location. Long-lived assets include property, plant
and equipment. Property, plant and equipment information is based on the
physical location of the asset at the end of each fiscal quarter.
Net revenues from unaffiliated customers by geographic region were
as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
United States............... $1,737 $1,122
Europe...................... 7,915 1,324
Asia........................ 808 2,931
--------- --------
$10,460 $5,377
========= ========
</TABLE>
Net long-lived assets by country were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------- --------
2000 2000
---- ----
<S> <C> <C>
United States............... $6,960 $6,008
Europe...................... 550 117
Asia........................ 971 736
--------- --------
$8,481 $6,861
========= ========
</TABLE>
10
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
(CONTINUED)
9. PURCHASE COMBINATIONS
The Company made two purchase acquisitions during the quarter. The
consolidated financial statements include the operating results of each business
from the date of acquisition.
The amounts allocated to in-process research and development expense
were determined through established valuation techniques in the high-technology
communications industry and were expensed upon acquisition because technological
feasibility had not been established and no future alternative uses existed.
Research and development costs to bring the products from the acquired companies
to technological feasibility are not expected to have a material impact on the
Company's future results of operations or financial condition. Amounts allocated
to goodwill and purchased intangible assets are amortized on a straight-line
basis over periods not exceeding four years. On July 3, 2000, the company
acquired some of the assets of 3C Limited, a Hong Kong based company involved in
the development of telecommunication switches. The purchase price consideration
included $4.1 million in cash and $2.0 million in deferred cash payments to be
paid to 3C's shareholders/employees contingent upon the continued employment of
key executives by interWAVE as of July 3, 2001 and July 3, 2002. The transaction
was accounted for using purchase accounting. Of the $4.1 million up front
purchase price, $3.8 million was assigned to purchased technology and other
intangibles and will be amortized on a straight-line basis over three years and
$52 thousand was allocated to net tangible assets. The excess purchase price
over the estimated fair value of the assets acquired and liabilities assumed has
been allocated to goodwill in the amount of $0.3 million and will be amortized
on a straight-line basis over three years. The $2.0 million in deferred cash
payments to 3C's shareholders will be accrued as compensation expense over the
next two years. The Company obtained an independent appraisal to derive the
purchase price allocation.
On July 28, 2000, the Company acquired all of the outstanding shares
of Microcellular Systems Limited, an Irish company, for a consideration of $14.8
million, comprised of $3.1 million in cash, $4.2 million in assumed liabilities
and acquisition costs, and 555,540 shares of interWAVE common, valued at
approximately $7.3 million, and $0.2 million of assumed unvested options.
11
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
(CONTINUED)
Microcellular Systems Limited is a systems integrator and service provider
focused on worldwide microcellular GSM systems. The acquired business has
offices in Ireland, England, China, and California.
The acquisition was accounted for as a purchase. Under the purchase
method of accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values as of July 28, 2000.
The company obtained an independent appraisal to derive the purchase price
allocation.
Of the purchase price, $2.7 million was assigned to the value of
purchased technology and other intangible assets and will be amortized on a
straight-line basis over four years, $1.2 million was assigned to the value of
the Microcellular customer list and will be amortized over three years, $4.7
million was allocated to the net tangible assets, and $0.4 million was assigned
to in-process research and development which was expensed during the quarter.
The excess purchase price over the estimated fair value of the assets
acquired and liabilities assumed has been allocated to goodwill in the amount of
$5.8 million and will be amortized on a straight-line basis over four years. An
additional contingent consideration of up to $2.5 million will be paid to the
Microcellular shareholders during August of 2001 based on Microcellular-based
revenue performance between July 1, 2000, and June 30, 2001. Any such amount
paid to Microcellular's shareholders will be immediately assigned to goodwill
and will be amortized on a straight-line basis over the remaining life of the
goodwill period. A retention bonus of up to $0.9 million will be paid to certain
existing employees that are still employed by interWAVE as of July 20, 2001. An
additional retention bonus of $0.9 million will be paid to the same employees
that remain employed by interWAVE as of January 20, 2002. Both of these
retention bonuses will be amortized as expense.
10. BLUE SKY COMMUNICATIONS, INC. INVESTMENT AND LOAN
In the quarter ended September 30, 2000, we entered into a
three-year $15 million supply agreement with Blue Sky Communications, Inc.
("Blue Sky"), a U.S. based GSM wireless services provider. During the
quarter, we shipped $2 million of our products to Blue Sky under the supply
agreement. Due to the early stage of Blue Sky's business, and because of the
vendor financing agreement we made subsequent to the end of the quarter, we
recorded the shipment at our inventory value as an investment in Blue Sky,
rather than as revenue at our selling price.
Subsequent to the end of the quarter, we invested $4.7 million in
Blue Sky in exchange for Series A Preferred Stock of Blue Sky and a warrant
to purchase 587,500 shares of common stock of OPM Auction Company ("OPM"), an
affiliate of Blue Sky that owns GSM spectrum in the United States. We also
loaned Blue Sky $2 million in vendor financing, under a Secured Convertible
Promissory Note, at 10% interest for 18 months, in consideration for the $2
million shipment of our products during the September quarter. The Secured
Convertible Promissory Note may be converted at any time into Series A
Preferred Stock of Blue Sky.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements in this Form 10-Q which are not historical facts are
"forward-looking statements" that are subject to known and unknown risks and
uncertainties that could cause the results of interWAVE Communications
International, Ltd. to differ materially from management's current
expectations. These risks and uncertainties include, but are not limited to,
the risks relating to interWAVE's history of losses, the expectation of
future losses, reliance on a small number of customers, reliance on the
purchase commitments of large customers, complexity of products, difficulties
in introducing new or enhanced products, compliance with regulations and
evolving industry standards, long sales cycles, intense competition, sales to
China, management of global operations, the ability to retain and motivate
key employees, and the Risk Factors discussed in the initial public offering
prospectus dated January 28, 2000, the Annual Report on Form 10-K dated
September 27, 2000, and in the filings and reports made from time to time by
interWAVE with the Securities and Exchange Commission. We cannot assure you
that future results will be achieved, and actual results could differ
materially from expectations, forecasts and estimates. interWAVE assumes no
obligation to update any forward-looking statements, which speak only as of
their respective dates. Important factors that could cause actual results to
differ materially are discussed in the section "Risk Factors" included in our
prospectus dated January 28, 2000 and Form 10-K dated September 27, 2000. You
are encouraged to review such risk factors carefully.
OVERVIEW
interWAVE Communications International, Ltd. and subsidiaries (the
Company) provides compact mobile wireless communications systems using GSM, an
international standard for voice and data communications. We have pioneered what
we believe is the only commercially available system that provides all of the
infrastructure equipment and software necessary to support an entire wireless
network within a single, compact enclosure. We have designed our systems to
serve both wireless office networks and small community networks in a
cost-effective manner.
We are a leading provider of compact wireless communications systems
in the Global System for Mobile Communications, or GSM, market. We were
incorporated in June 1994 and recorded our first product sale in May 1997. Our
systems were initially deployed to add capacity and coverage to existing
systems, primarily in Asia. Deployments of community networks began in 1998,
primarily in China and Africa. Trials of our wireless office systems commenced
in 1999 in both Europe and Asia. Prior to May 1997, we had no sales and our
operations consisted primarily of various start-up activities, such as research
and development, recruiting personnel, conducting customer field trials and
raising capital.
We generated net revenues of $30.1 million in the fiscal year ended
June 30, 2000, and $10.5 million in the three months ended September 30,
2000. We incurred net losses of $30.5 million in fiscal 2000 and $10.3
million in the three months ended September 30, 2000. As of September 30,
2000, we had an accumulated deficit of $150.5 million.
We generate net revenues from sales of our systems and, in
connection with our direct sales activity, from installation, maintenance
contracts and support of those systems. Revenue derived from systems sales,
comprised of unit sales of our WAVEXpress base transceiver station and base
station controller, our WAVEXchange, our Network In A Box and our WAVEView
management system, constituted 96% of net revenues in fiscal 2000 and 95% in
the three months ended September 30, 2000.
13
<PAGE>
Currently, our revenues are generated through our direct sales force
as well as sales to communications equipment providers and system integrators
that may either sell our systems on a stand-alone basis or integrate them
with their systems. The components of sales by channel are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
---------------------- --------------------
<S> <C> <C>
Direct sales to wireless providers................................ 55% 16%
System integrators................................................ 27% 64%
Communication equipment providers................................. 18% 20%
</TABLE>
Net revenues outside the United States represented approximately 79%
and 83% of total net revenues for the three months ended September 30, 2000 and
1999, respectively. We believe that the majority of our products sold in the
United States are ultimately installed by the purchasers outside the United
States. We have derived and expect to continue to derive a majority of our
revenues from products installed outside the U.S. by both non-U.S. and U.S.
based communications equipment providers, systems integrators and wireless
service providers, subjecting our revenue stream to risks from economic
uncertainties, currency fluctuations, political instability and uncertain
cultural and regulatory environments.
Since our inception, we have used share option programs for key
employees as compensation to attract strong business and technical talent. We
have recorded compensation expense for our option grants. The expense is equal
to the excess of the fair market price on the date of grant or sale over the
option exercise price. Of the total deferred compensation, approximately $1.3
million and $3.3 million was amortized in the three months ended September 30,
2000 and 1999, respectively. The balance in deferred compensation of $4.8
million at September 30, 2000 is being amortized on an accelerated basis over
the vesting period of the applicable options, which is typically four years.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated our results
of operations expressed as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
<S> <C> <C>
2000 1999
-------- --------
Net revenues 100.0 % 100.0 %
Cost of revenues 56.6 73.9
---------- ---------
Gross Margin 43.4 26.1
---------- ---------
Operating Expenses:
Research and development 64.2 66.3
Selling, general and administrative 71.5 38.8
---------- ---------
Amortization of deferred stock compensation 12.4 61.8
---------- ---------
Amortization of acquisition intangibles 11.1 --
---------- ---------
Operating loss (115.9) (140.8)
Interest income 19.6 1.1
Interest and other expense (1.8) (36.4)
Dividend effect to preferred shareholders -- (38.2)
---------- ---------
Net loss attributable to common shareholders (98.1)% (214.3)%
========== =========
</TABLE>
14
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET REVENUES
Total revenues increased 94.5% from $5.3 million in the first quarter
of fiscal 2000 to $10.5 million in the first quarter of fiscal 2001. This
increase was due to increased sales to wireless service providers, which
increased from $.9 million in the first quarter of fiscal 2000 to $5.8 million
in the first quarter of fiscal 2001, increased sales to communications systems
providers which increased from $ 1.1 million to $1.9 million, and decreased
sales to systems integrators which decreased from $3.4 million to $2.8 million.
GROSS MARGIN
Gross margin increased to 43.4% in the first quarter of fiscal 2001
from 26.1% in the first quarter of fiscal 2000. The year-over-year improvement
resulted from a higher percentage of direct sales to wireless service providers,
as well as a higher-margin product mix and fixed-cost absorption due to higher
levels of revenue overall.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $3.2 million and 88.6% to
$6.7 million in the first quarter of fiscal 2001 from $3.6 million in the first
quarter of fiscal 2000. The increase in the first quarter of fiscal 2001 is
primarily due to an increase of $2.4 million in increased labor costs as the
result of an increase in personnel engaged in development activities, $0.2
million in increased travel costs and $0.4 million in increased facilities
related costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $5.4 million and
258.2% in the first quarter of fiscal 2001 to $7.5 million compared to $2.1
million for the same period in the prior fiscal year. The increase was primarily
due to a $3.1 million addition to allowance for doubtful accounts. Other
significant increases included $1.2 million in increased labor costs as the
result of increased personnel and consulting expenses, $0.3 million in increased
legal and professional fees, $0.2 million in additional travel expenses, $0.2
million in increased investor and public relations expenses, and $0.2 million in
non-cash amortization charges ascribed to warrants issued in September 1999 in
conjunction with a distribution agreement.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation decreased 61.1% to $1.3
million in the first quarter of fiscal 2001 from $3.3 million in the first
quarter of fiscal 2000. During the first quarter of fiscal 2001, options were
granted at fair market value, resulting in no additional deferred stock
compensation.
AMORTIZATION OF GOODWILL AND PURCHASED INTANGIBLE ASSETS
Amortization of goodwill and purchased intangible assets was $0.8
million for the first quarter of fiscal 2001. The Company did not make any
acquisition in fiscal 2000 and therefore did not incur any expenses related to
acquisitions. The amortization of goodwill and other purchased intangible assets
relates to the Company's acquisitions during the first fiscal quarter of 2001.
(See note 9 to the consolidated financial statements).
15
<PAGE>
IN-PROCESS RESEARCH AND DEVELOPMENT
We expensed $0.4 million to in-process research and development in the
first quarter of fiscal 2001 which was a result of the recently completed
acquisition of Microcellular Systems, Limited (See Note 9 to the consolidated
financial statements). The Company did not incur any expenses for in-process
research and development in the first quarter of fiscal 2000.
INTEREST INCOME
We had interest income in the fiscal quarter ended September 30, 2000
of $2.0 million compared to $0.1 million for the first fiscal quarter of 2000.
The increase in interest income is attributable to the investment of proceeds
from the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $10.0 million for the first
three months of fiscal 2001, and $1.2 million for the same period during fiscal
2000. Net cash used in operating activities increased in the first three months
of fiscal 2001 due primarily to a $4.0 million increase in prepaid expenses and
other assets in fiscal 2001, a $2.3 million increase in inventories, a $1.2
million decrease in accounts payable and a $1.1 million increase in trade
receivables, net.
Net cash provided by investing activities was $9.4 million for the
first three months of fiscal 2001 and net cash used in investing activities
was $1.0 million for the same period in the prior year resulting in an
increase of $10.4 million. The cash provided in fiscal 2001 resulted from the
sale of $20.3 million in short-term investment securities in order to fund
$8.0 million to acquire Microcellular and 3C Limited as well as an increase
in the purchase of property and equipment of $2.4 million. The purchase of
Microcellular Systems for cash and shares was due to management's desire to
obtain resources working directly with wireless service providers and to gain
access to selected customers, as well as to develop expertise and specialized
applications for our products. The purchase of selected assets from 3C
Limited was due to management's desire to establish engineering expertise for
community network systems closer to the customers in the Asia-Pacific region.
Net cash used in financing activities was $0.8 million for the
first three months of fiscal 2001 and net cash provided by financing
activities was $11.4 million for the same period during fiscal 2000 resulting
in a $12.2 million change. In the first three months of fiscal 2000, our
financing activities primarily consisted of the issuance of 1.7 million
preferred shares for $11.2 million of net proceeds. An increase of $1.3
million in principal payments on notes payable and capital leases represented
most of the remaining change during the first 3 months of fiscal 2001.
Although we had no material commitments for capital expenditures as of
September 30, 2000, management anticipates continuing increases in our capital
expenditures and working capital requirements consistent with our anticipated
growth in operations. Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we allocate to the
continuing development of new products, marketing and selling of our products
and other factors. We currently anticipate that we will continue to experience
growth in our operating expenses for the foreseeable future and that operating
expenses will be a material use of our cash resources.
16
<PAGE>
RISK FACTORS
Set forth below and elsewhere in this Form 10-Q and in the other
documents that we file with the Securities and Exchange Commission, including
the prospectus dated January 28, 2000 and the Annual Report on Form 10-K
dated September 27, 2000, are risks and uncertainties that could cause actual
results to differ materially from the results contemplated by the
forward-looking statements contained in this quarterly report.
INVESTING IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK. IF ANY OF THE
RISKS OCCUR, THE MARKET PRICE OF OUR COMMON SHARES COULD DECLINE AND YOU
COULD LOSE ALL OR PART OF YOUR INVESTMENT.
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR
SUSTAIN PROFITABILITY.
As of September 30, 2000, we had an accumulated deficit of $150.5
million. We incurred net losses of approximately $30.5 million and $10.3 million
in the fiscal year ended June 30, 2000 and the three months ended September 30,
2000, respectively. We expect to continue to incur net losses and these losses
may be substantial. Furthermore, we expect to generate significant negative cash
flow in the future. We will need to generate substantially higher revenues to
achieve and sustain profitability and positive cash flow. Our ability to
generate future revenues and achieve profitability will depend on a number of
factors, many of which are beyond our control. These factors include:
- the rate of market acceptance of compact mobile wireless
systems;
- our ability to compete successfully against much larger GSM
communications equipment providers; and
- our ability to continue to expand our customer base.
Due to these factors, as well as other factors described in this risk
factors section, we may be unable to achieve or maintain profitability. If we
are unable to achieve or maintain profitability, we will be unable to build a
sustainable business. In this event, our share price and the value of your
investment would likely decline.
17
<PAGE>
WE RELY ON A SMALL NUMBER OF CUSTOMERS FOR MOST OF OUR REVENUES, AND A DECREASE
IN REVENUES FROM THESE CUSTOMERS COULD SERIOUSLY HARM OUR BUSINESS.
A small number of customers have accounted for a significant portion of
our revenues to date. Net revenues from significant customers as a percentage of
our total net revenues in the three months ended September 30, 2000 and
September 30, 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
(UNAUDITED)
<S> <C> <C>
CampusLink......................................................... 26% --
Barakaat Telecommunications Co..................................... 19% --
Electronia......................................................... 15% --
Nortel Networks.................................................... 9% 18%
HangZhou Topper Electric Corporation............................... -- 38%
ADC Telecommunications/Microcellular Systems, Ltd. (1)............. -- 21%
</TABLE>
(1) Microcellular Systems, Ltd. was created by a spin-off from
ADC Telecommunications in May 1999.
Nortel Networks is one of our principal shareholders. ADC
Telecommunications is a shareholder of ours. Microcellular Systems, Ltd. was
created by a spin-off from ADC Telecommunications in May 1999, and was acquired
by interWAVE in July 2000. See "Note 9 to the consolidated financial
statements."
We expect that the majority of our revenues will continue to depend on
sales to a small number of customers. If any key customers experience a downturn
in their business or shift their purchases to our competitors, our revenues and
operating results would decline.
If our revenues, including those expected from Nortel Networks and
Alcatel under our purchase and distribution agreements, are lower than expected,
we may not be able to quickly reduce expenses because many of our expenses are
fixed in the near term.
WE HAVE MINIMUM PURCHASE COMMITMENTS FROM NORTEL NETWORKS AND ALCATEL, AND IF
THEY FAIL TO MEET THESE COMMITMENTS, THIS FAILURE COULD HARM OUR BUSINESS AND
OPERATING RESULTS.
Nortel Networks and Alcatel have minimum purchase commitments under
their respective agreements. We rely in part on these commitments in forecasting
production quantities each quarter. We have also committed to Nortel Networks
and Alcatel that we will maintain quality, delivery, performance and design
standards for our systems. As a result, we bear the risk of carrying excess
inventory if Nortel Networks and Alcatel fail to meet their commitments or if we
fail to meet ours. From time to time, we have failed to deliver certain product
features by specific milestone dates and, as a result, we have renegotiated
downward minimum quarterly commitments with Nortel Networks. Nortel Networks did
not meet the renegotiated commitments for four of the five quarters ended
September 30, 2000, Alcatel did not meet the purchase commitments for the
quarter ended September 30, 2000. We cannot assure you that future minimum
commitments will be met or that they will not be renegotiated downward in the
future. Continued failure of Nortel Networks or Alcatel to meet minimum purchase
commitments could cause our revenues and operating results to decline.
Furthermore, because Nortel Networks' commitments are larger than
Alcatel's, Nortel Networks' failure to meet commitments would harm our operating
results to a greater extent than Alcatel's failure to do so. Failure of these
companies to meet these commitments could also cause our stock price to decline
as a result of a revenue shortfall or greater than anticipated operating losses.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE
Our financial market risk includes risks associated with international
operations and related foreign currencies. We anticipate that international
sales will continue to account for a significant portion of our consolidated
revenue. Our international sales are in U.S. dollars and therefore are not
subject to foreign currency exchange risk. Expenses of our international
operations are denominated in each country's local currency and therefore are
subject to foreign currency exchange risk. Through September 30, 2000, we have
not experienced any significant negative impact on our operations as a result of
fluctuations in foreign currency exchange rates. We do not engage in any hedging
activity in connection with our international business or foreign currency risk.
INTEREST RATES
We invest our cash in financial instruments, including commercial
paper, and repurchase agreements, and in money market funds. These investments
are denominated in U.S. dollars. Cash balances in foreign currencies overseas
are operating balances and are only invested in short term deposits of the local
operating bank.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their market value adversely impacted because of a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations because of changes in interest rates. We may suffer losses in
principal if forced to sell securities, which have seen a decline in market
value because of changes in interest rates. We are primarily vulnerable to
changes in short-term U.S. prime interest rates.
19
<PAGE>
Short-term investments consist of maturities greater than 90 days but
less than one year; long-term investments consist of securities with maturities
greater than one year. Our investments are made in accordance with an investment
policy approved by the Board of Directors.
CUSTOMER FINANCING
The telecommunications industry is very capital intensive. Wireless
service providers are using their own financial resources to acquire cellular
spectrum from national governments. As a result, the service providers often
look to their network equipment suppliers for vendor financing. In order to
maintain a competitive edge, suppliers often offer extended payment terms,
and on occasion lines of credit that cover not only equipment financing needs
but also working capital needs of the wireless service providers. We are more
frequently being asked to provide these kinds of financing terms to our
customers.
In the quarter ended September 30, 2000, we entered into a
three-year $15 million supply agreement with Blue Sky Communications, a U.S.
based GSM wireless service provider. Subsequent to the end of the quarter, we
agreed to provide up to $4 million in 18 month equipment financing for the
first $4 million in equipment shipments. During the quarter, we shipped $2
million of our products to Blue Sky. Due to the early stage of Blue Sky's
business and because the equipment financing is convertible into Series A
Preferred Stock of Blue Sky, we recorded this shipment at inventory value as
an investment in Blue Sky, rather than as revenue. Subsequent to the end of
the quarter, Blue Sky received an oral commitment for an additional
$10 million in equity capital from its parent company, and we purchased
$4.7 million worth of shares of Series A Preferred Stock of Blue Sky.
We anticipate other situations where some form of equity or debt
financing will be required for us to acquire preferred supplier arrangements
with selected customers. There can be no assurance that the financing risks
we take will be successful, or that we will recover our investment in these
wireless service providers.
20
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings
On June 28, 1999, we filed a complaint against JetCell Inc. which
was acquired by Cisco Systems, Inc., in May 2000, in the United States
District Court for the Northern District of California, interWAVE
Communications International Ltd., v. Cisco Systems, Inc., alleging
misappropriation of trade secrets and infringement of United States Patent
Nos. 5,734,979 and 5,818,824. Two of the founders of JetCell are former
employees of interWAVE. The complaint seeks injunctive relief and damages. On
July 19, 1999, JetCell filed an answer to the complaint and counterclaims
against us. The answer denied the allegations made in the complaint and the
counterclaims included allegations against us of unfair trade practices,
unfair competition, defamation, patent misuse and patent invalidity. The
answer and counterclaims seek injunctive relief, damages, invalidation of our
patents and a dismissal of the complaint. On August 9, 1999, we filed an
answer to JetCell's counterclaims denying the allegations made in the
counterclaims. We are unable to predict the outcome of the litigation and do
not expect it to be resolved in the near future. However, if we are unable to
settle these proceedings in a satisfactory manner, the legal proceedings may
be time consuming and expensive and the outcome could be adverse to us. An
adverse outcome could have a material adverse affect on our financial
position. If the outcome is adverse to us, we would also experience more
competition in our markets and may be required to license technology required
for our products, either of which could harm our business and financial
results. An adverse outcome could have a material adverse affect on our
business and results of operations.
We may from time to time become a party to various legal proceedings
arising in the ordinary course of our business. However, other than as described
above, we are not currently involved in any material legal proceedings.
ITEM 2. Changes in Securities and Use of Proceeds
(a) Recent Sales of Unregistered Securities.
None.
(b) Use of Proceeds
Net proceeds from the initial public offering totaled approximately
$116.3 million. Of this amount approximately $2.0 million has been used in
current operations.
We intend to use the proceeds of the offering primarily for additional
working capital and other general corporate purposes, including increased
research and development, sales and marketing, and general and administrative
expenditures.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
21
<PAGE>
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the quarter ended
September 30, 2000. Information regarding the items reported is as follows:
Date Item Reported
---- -------------
July 18, 2000 The Company announced that it completed the acquisition of
some of the assets of 3C Limited of Hong Kong.
August 11, 2000 The Company announced that it completed the acquisition of
Microcellular Systems Limited of Tralee, Ireland.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized,
November 13, 2000 interWAVE Communications International, Ltd.
By /s/ Thomas W. Hubbs
-------------------------------
Thomas W. Hubbs
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
