<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2000
REGISTRATION NO. 333-92967
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 4
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
BERMUDA 3663 NOT APPLICABLE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
CLARENDON HOUSE, 2 CHURCH STREET
P.O. BOX HM 1022
HAMILTON HM DX, BERMUDA
(441) 295-5950
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
THOMAS W. HUBBS
INTERWAVE COMMUNICATIONS, INC.
656 BAIR ISLAND ROAD, SUITE 108
REDWOOD CITY, CA 94063
(650) 482-2100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
<TABLE>
<S> <C>
COPIES TO:
ROBERT JACK, ESQ. NORA L. GIBSON, ESQ.
CHRISTOPHER D. MITCHELL, ESQ. PATRICK J. SHEA, ESQ.
SAMUEL S. NAM, ESQ. LINDSAY C. FREEMAN, ESQ.
JON P. LAYMAN, ESQ. JEANINE M. LARREA, ESQ.
JAMES JENSEN BROBECK, PHLEGER & HARRISON LLP
WILSON SONSINI GOODRICH & ROSATI ONE MARKET, SPEAR STREET TOWER
PROFESSIONAL CORPORATION SAN FRANCISCO, CA 94105
650 PAGE MILL ROAD (415) 442-0900
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE(2)
Common shares, par value $0.001 per
share................................ 9,775,000 shares $12.00 $117,300,000.00 $30,967.20
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933, as amended.
(2) $24,288 previously paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 27, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED
<PAGE>
PROSPECTUS
8,500,000 SHARES
[LOGO]
COMMON SHARES
$ PER SHARE
---------
We are selling 8,500,000 common shares. The underwriters named in this
prospectus may purchase up to 1,275,000 additional common shares from us to
cover over-allotments.
This is an initial public offering of our common shares. We currently expect
the initial public offering price to be between $10.00 and $12.00 per share. We
have applied to have our common shares included for quotation on the Nasdaq
National Market under the symbol "IWAV."
--------------
INVESTING IN OUR COMMON SHARES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------------- ----------------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to interWAVE (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about January ,
2000.
--------------
SALOMON SMITH BARNEY
BANC OF AMERICA SECURITIES LLC
SG COWEN
, 2000
<PAGE>
[Inside Front Cover and Inside Back Cover]
<TABLE>
<CAPTION>
<S> <C>
Top Caption: Wireless Applications Enabling Global Communications
Center: Diagram of a global map showing where we have live and trial
networks deployed. The symbol of a star represents live
networks deployed in Australia, Austria, California, Central
African Republic, China, Congo, France, Gambia, Greece, Hong
Kong, Italy, Japan, Kosovo, North Carolina, New Jersey,
Somalia, Taiwan, Tajikistan, Thailand, Washington and the
United Kingdom. The symbol of a yellow circle represents
trial networks deployed in Australia, California, China,
France, Germany, Sri Lanka, South Africa, Taiwan, and the
United Kingdom.
Inside Back Cover:
Title: interWAVE Provides Full Wireless Network Capabilities within
A Single Compact Enclosure
Top Left: Diagram of six buildings in a circle linked by a red line.
In the center of the circle is the caption "Wireless Office
Networks."
Top Right: Diagram of a community. Above the diagram is the caption
"Community Networks."
Center: Picture of our Network In A Box with one arrow pointing to
the Wireless Office Networks in the top left corner, another
arrow pointing to the Community Networks in the upper right
corner, and the last arrow pointing to the bottom caption
Public Telephone Network.
Bottom: In the bottom center there is a caption entitled "Public
Telephone Network."
</TABLE>
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Special Note Regarding Forward Looking Statements........... 19
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 38
Management.................................................. 55
Certain Transactions........................................ 66
Principal Shareholders...................................... 75
Description of Share Capital................................ 79
Certain Bermuda Law Considerations.......................... 81
Taxation.................................................... 82
Shares Eligible for Future Sale............................. 85
Underwriting................................................ 88
Legal Matters............................................... 90
Experts..................................................... 90
Where You Can Find More Information......................... 90
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
Until , 2000, all dealers that buy, sell or trade the common
shares, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
Consent under the Exchange Control Act, 1972 (and regulations thereunder)
has been obtained from the Bermuda Monetary Authority for the issue and transfer
of the common shares being offered pursuant to the offering. In addition, a copy
of this document has been delivered to the Registrar of Companies in Bermuda for
filing pursuant to the Companies Act, 1981 of Bermuda. In giving such consent
and in accepting this prospectus for filing, the Bermuda Monetary Authority and
the Registrar of Companies in Bermuda, respectively, accept no responsibility
for the financial soundness of any proposal or for the correctness of any of the
statements made or opinions expressed herein.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
SINCE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY AND
CONSIDER THE INFORMATION UNDER "RISK FACTORS" AND IN OUR FINANCIAL STATEMENTS
AND THE NOTES RELATING TO THESE FINANCIAL STATEMENTS, TOGETHER WITH THE
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS, BEFORE DECIDING WHETHER TO
INVEST IN OUR COMMON SHARES. OUR FISCAL YEAR ENDS ON THE FRIDAY NEAREST
JUNE 30. EXCEPT WHERE OTHERWISE NOTED, THE INFORMATION IN THIS PROSPECTUS IS
BASED UPON INFORMATION AS OF JANUARY 18, 2000.
OUR COMPANY
We provide compact 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 the following applications in a cost-effective manner:
- WIRELESS OFFICES. Our systems allow wireless users in organizations such
as large corporations, government entities and universities to maintain
contact with the organization's private telephone network whether the
users are in their offices, out of their offices or moving between
locations.
- COMMUNITY NETWORKS. Our systems enable wireless service providers to add
capacity in heavy usage areas and to provide telephone service in
previously unserved communities.
Our core product, WAVEXpress, delivers a comprehensive set of wireless
network capabilities which are based on the GSM standard. WAVEXpress systems can
serve as:
- a base station to receive and transmit voice and data signals over radio
frequencies;
- a switch to route voice and data signals to their correct destinations;
- a base station controller to manage voice and data signals between the
base station and the switch; or
- any combination of these functions depending on our system's hardware and
software configuration.
Our all-in-one solution, the Network In A Box, provides the capabilities of
a complete wireless network in an enclosure approximately the size of a personal
computer tower.
We market and sell our systems around the world utilizing a three-pronged
sales strategy which includes selling to communications equipment providers, to
systems integrators which integrate our systems with the products of other
companies and through our own direct sales force. Since 1997 we have sold over
1,000 units which have been installed in 17 countries worldwide. We have
established a strategic alliance with Nortel Networks, which accounted for 51%
of our revenues in 1999 and which, assuming the exercise of all warrants, owns
approximately 22.4% of our outstanding shares.
Despite our successes, we face many challenges and risks. For example, we
did not record any revenue from our first product sale until 1997 and we have
not achieved, and we may never achieve, profitability. In fact, we expect to
incur net losses in the future and these losses may be substantial. Accordingly,
you should carefully consider the information set forth in the "Risk Factors"
section of this prospectus.
4
<PAGE>
OUR STRATEGY
Our goal is to be the premier global provider of cost-effective, compact
wireless systems in targeted segments of the GSM market. As key elements of our
strategy, we intend to:
- Provide wireless office systems that will replace traditional office
telephone equipment with wireless equipment
- Deliver wireless systems using the Internet Protocol, which is the
networking standard used to deliver voice and data over the Internet
- Further penetrate existing market opportunities
- Strengthen and expand relationships with communications equipment
providers
- Use technological leadership to provide competitive advantages for
wireless service providers
CORPORATE INFORMATION
We were incorporated in Bermuda on June 17, 1994. Our principal executive
office is located at Clarendon House, 2 Church Street, P.O. Box HM 1022,
Hamilton HM DX, Bermuda, and our telephone number is (441) 295-5950. Our
principal operating offices are located at 656 Bair Island Road, Redwood City,
California 94063, and our telephone number is (650) 482-2100. Our World Wide Web
address is www.iwv.com. Information on our web site does not constitute part of
this prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common shares offered........................ 8,500,000 shares
Common shares to be outstanding after
the offering............................... 44,370,878 shares
Use of proceeds.............................. To increase working capital, to fund both
capital investment and research and
development and for general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol....... IWAV
</TABLE>
------------------------
Unless otherwise indicated, all information in this prospectus, including
the outstanding share information above is based on the number of shares
outstanding as of January 18, 2000 and:
- gives effect to the exercise of a warrant for 2,000,000 preferred shares
and 188,410 common shares that the warrant holders have committed to
exercise on the effectiveness of this offering at exercise prices ranging
from $0.70 to $7.00 per share;
- gives effect to the conversion of all outstanding preferred shares into
29,006,193 common shares immediately prior to the completion of the
offering;
- excludes 7,286,594 common shares issuable upon exercise of warrants
outstanding at January 18, 2000 at an exercise price ranging from $0.70 to
$1.15 per share;
- excludes 5,317,191 common shares issuable upon the exercise of options
outstanding at January 18, 2000 at a weighted average exercise price of
$1.96 per share;
- excludes 1,818,867 common shares available for issuance under our 1999
option plan;
- excludes 300,000 common shares available for issuance under our 1999
employee share purchase plan; and
- assumes no exercise of the underwriters' over-allotment option.
------------------------
All dollar amounts in this prospectus are expressed in U.S. dollars, except
where we state otherwise.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth our summary financial data. You should read
this information together with our consolidated financial statements, the notes
to those statements beginning on page F-1 of this prospectus, the information
under "Selected Financial Data," "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The pro forma numbers in the table give effect to:
- proceeds from the sale of 3,526,663 Series I1 preferred shares which
closed in November and December 1999;
- the issuance of 602,256 common shares upon exercise of options under our
1994 stock plan between September 30, 1999 and January 18, 2000;
- the exercise of a warrant for 2,000,000 preferred shares and 188,410
common shares that the warrant holders have committed to exercise on the
effectiveness of this offering at exercise prices ranging from $0.70 to
$7.00 per share; and
- the conversion of all outstanding preferred shares into 29,006,193 common
shares immediately prior to the completion of the offering.
The capitalization on a pro forma as adjusted basis reflects the sale of
8,500,000 common shares offered by us at an assumed initial public offering
price of $11.00 per share after deducting the underwriting discount and
estimated offering expenses payable by us, and the receipt of net proceeds from
this offering.
Our consolidated financial statements were prepared in accordance with
generally accepted accounting principles in the United States. All dollar
amounts set forth below are stated in U.S. dollars. Our fiscal year ends on the
Friday nearest June 30, and our first fiscal quarter ends on the Friday nearest
September 30.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $ 1,841 $ 12,995 $ 17,293 $ 4,487 $ 5,377
Gross profit.................................. (1,776) 744 4,762 2,010 1,404
Loss from operations.......................... (29,245) (29,902) (22,106) (5,144) (7,570)
Net loss...................................... $(29,182) $(30,822) $(24,468) $(5,091) $(9,470)
Net loss attributable to common
shareholders................................ $(29,182) $(30,822) $(24,468) $(5,091) $(11,525)
======== ======== ======== ======= =======
Loss per share, basic and diluted............. $ (7.12) $ (6.68) $ (4.96) $ (1.05) $ (2.10)
======== ======== ======== ======= =======
Weighted average common shares outstanding.... 4,099 4,614 4,934 4,840 5,480
Pro forma net loss per share, basic and
diluted..................................... $ (0.76) $ (0.36)
======== =======
Shares used in computing pro forma net loss
per share, basic and diluted................ 32,345 32,345
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $12,988 $56,327 $141,932
Working capital........................................... 17,739 61,076 146,683
Total assets.............................................. 35,080 78,419 164,024
Long term debt, net of current portion.................... 261 261 261
Total shareholders' equity................................ 25,568 68,907 154,512
</TABLE>
7
<PAGE>
RISK FACTORS
INVESTING IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK. IF ANY OF THE
FOLLOWING RISKS OCCUR, THE MARKET PRICE OF OUR COMMON SHARES COULD DECLINE AND
YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE CANNOT BE SURE THAT WE CAN
SUCCESSFULLY EXECUTE OUR BUSINESS STRATEGY
We did not record revenue from our first product sale until May 1997. We
have a limited history of generating significant revenues. Many of our products
have only recently been introduced and many of our customers are testing our
products for incorporation into live networks. Therefore, you have limited
historical financial data and operating results with which to evaluate our
business and our prospects. You must consider our prospects in light of the
early stage of our business in a new and rapidly evolving market. Our limited
operating history may make it difficult for you to assess, based on historical
information, whether we can successfully execute our business strategy. If we
are unable to successfully execute our business strategy, we would likely not
achieve anticipated levels of revenue growth. In this event, we would be unable
to achieve profitability or build a sustainable business.
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR
SUSTAIN PROFITABILITY
As of September 30, 1999, we had an accumulated deficit of $121.2 million.
We incurred net losses of approximately $29.2 million, $30.8 million,
$24.5 million and $9.5 million in the fiscal years ended June 30, 1997, 1998 and
1999 and the three months ended September 30, 1999, 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.
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY
FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH MAY
CAUSE OUR SHARE PRICE TO DECLINE
Our quarterly operating results have fluctuated significantly in the past
and are likely to do so in the future. If our operating results do not meet the
expectations of securities analysts and investors, our share price is likely to
decline. The many factors that could cause our quarterly results to fluctuate
include:
- any delay in our introduction of new products or product enhancements;
- the size and timing of customer orders and our product shipments, which
have typically consisted of a relatively small number of units of wireless
network systems at the end of each quarter;
- the mix of products sold because our various products generate different
gross margins;
8
<PAGE>
- any delay in shipments caused by component shortages or other
manufacturing problems, extended product testing or regulatory issues;
- the timing of orders from and shipments to major customers, including
possible cancellation of orders and failure of major customers to meet
applicable minimum purchase commitments;
- the loss of a major customer;
- reductions in the selling prices of our products;
- cost pressures from shortages of skilled technical employees, increased
product development and engineering expenditures and other factors; and
- customer responses to announcements of new products and product
enhancements by competitors and the entry of new competitors into our
market.
Due to these and other factors, our results of operations could fluctuate
substantially in the future, and quarterly comparisons may not be reliable
indicators of future performance. In addition, because many of our expenses for
personnel, facilities and equipment are relatively fixed in nature, if revenues
fail to meet our expectations, we may not be able to reduce expenses
correspondingly. As a result, we would experience greater than expected net
losses. If we experience greater than expected net losses, our share price and
the value of your investment would likely decline.
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 two most recent fiscal years and the three months
ended September 30, 1999 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS
ENDED ENDED
JUNE 30, SEPTEMBER 30,
---------------------- --------------
1998 1999 1999
-------- -------- --------------
<S> <C> <C> <C>
Nortel Networks.................................... 18% 51% 18%
ADC Telecommunications/Microcellular Systems,
Ltd.............................................. 47 20 21
Hutchison Telecommunications Group................. 21 8 5
HangZhou Topper Electric Corporation............... -- 2 38
</TABLE>
Nortel Networks is one of our principal shareholders, and a Nortel Networks
employee is a member of our board of directors. ADC Telecommunications and
Hutchison Whampoa, the parent of Hutchison Telecommunications Group, through a
wholly-owned subsidiary, are shareholders of ours. Microcellular Systems, Ltd.
was created by a spin-off from ADC Telecommunications in May 1999.
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.
We expect that for the foreseeable future a significant portion of our net
revenues will be derived from sales to Nortel Networks and Alcatel. 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. 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
9
<PAGE>
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, including in the three months ending
September 30, 1999. We cannot assure you that these minimum commitments will be
met or that they will not be renegotiated downward in the future. Failure of
Nortel Networks or Alcatel to meet minimum purchase commitments could cause our
revenues and operating results to decline.
WE CURRENTLY DEPEND ON TWO CONTRACT MANUFACTURERS FOR MOST OF OUR PRODUCTS AND
PLAN TO USE ONLY A SINGLE CONTRACT MANUFACTURER IN THE FUTURE AND THIS
TRANSITION COULD CAUSE DISRUPTIONS IN OUR BUSINESS
We depend on two contract manufacturers for most of our products. We do not
have long-term supply contracts with our contract manufacturers, and they are
not obligated to supply us with products for any specific period, in any
specific quantity or at any specific price, except as may be provided in a
particular purchase order. None of our products are manufactured by more than
one supplier, and we do not expect this to change for the foreseeable future.
We plan to consolidate the manufacture of our products with one of our
existing contract manufacturers, PEMSTAR, Inc., by the middle of calendar year
2000. We may lose revenue and damage our customer relationships if we do not
manage this consolidation effectively.
There are risks associated with our dependence on contract manufacturers,
including the contract manufacturer's control of capacity allocation, labor
relations, production quality and other aspects of the manufacturing process. If
we are unable to obtain our products from manufacturers on schedule, revenues
from the sale of those products may be delayed or lost, and our reputation,
relationship with customers and our business could be harmed. In addition, in
the event that a contract manufacturer must be replaced, the disruption to our
business and the expense associated with obtaining and qualifying a new contract
manufacturer could be substantial. If problems with our contract manufacturers
cause us to miss customer delivery schedules or result in unforeseen product
quality problems, we may lose customers. As a result, our revenues and our
future growth prospects would likely decline.
BECAUSE SOME OF OUR KEY COMPONENTS COME FROM A SINGLE SOURCE, OR REQUIRE LONG
LEAD TIMES, WE COULD EXPERIENCE UNEXPECTED INTERRUPTIONS WHICH COULD CAUSE OUR
OPERATING RESULTS TO SUFFER
We believe that a number of our suppliers are sole sources for key
components. These key components are complex and difficult to manufacture and
require long lead times. In the event of a reduction or interruption of supply,
or a degradation in quality, as many as six months could be required before we
would begin receiving adequate supplies from other suppliers. Supply
interruptions could delay product shipments, causing our revenues and operating
results to decline.
WE DO NOT TYPICALLY HAVE A SALES BACKLOG AND THEREFORE MAY INCUR EXPENSES FOR
EXCESS INVENTORY OR BE UNABLE TO MEET CUSTOMER REQUIREMENTS
We do not have a significant backlog because our customers typically give us
firm purchase orders with short lead times before requested shipment. However,
our contract manufacturers require commitments from us so that they can allocate
capacity and be assured of having adequate components and supplies from third
parties. Failure by us to accurately estimate product demand could cause us to
incur expenses related to excess inventory or prohibit us from meeting customer
requirements.
10
<PAGE>
OUR PRODUCTS ARE COMPLEX AND MAY HAVE ERRORS OR DEFECTS THAT ARE DETECTED ONLY
AFTER DEPLOYMENT IN COMPLEX NETWORKS, WHICH MAY HARM OUR BUSINESS
Our products are highly complex and are designed to be deployed in complex
networks. Although our products are tested during manufacturing and prior to
deployment, they can only be fully tested when deployed in networks with
high-call volume. Consequently, our customers may discover errors after the
products have been fully deployed. If we are unable to fix errors or other
problems that may be identified in full deployment, we could experience:
- costs associated with the remediation of any problems;
- loss of or delay in revenues;
- loss of customers;
- failure to achieve market acceptance and loss of market share;
- diversion of deployment resources;
- increased service and warranty costs;
- legal actions by our customers; and
- increased insurance costs.
In addition, our products often are integrated with other network
components. There may be incompatibilities between these components and our
products that could significantly harm the service provider or its subscribers.
Product problems in the field could require us to incur costs to remedy the
problems and subject us to liability for damages caused by the problems. These
problems could also harm our reputation and competitive position in the
industry.
WE MAY EXPERIENCE DIFFICULTIES IN THE INTRODUCTION OF NEW OR ENHANCED PRODUCTS
THAT COULD RESULT IN SIGNIFICANT, UNEXPECTED EXPENSES OR DELAY THEIR LAUNCH,
WHICH WOULD HARM OUR BUSINESS
The development of new or enhanced products is a complex and uncertain
process. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development, introduction or
marketing of new products or product enhancements. We must also effectively
manage the transition from old products to new or enhanced products. In
particular, we are currently developing a system providing voice communication
over the Internet for commercial release in fiscal year 2000. We cannot assure
you that we will be able to develop, introduce or manage this or any other new
products or product enhancements in a timely manner or at all. Failure to
develop new products or product enhancements in a timely manner would
substantially decrease market acceptance and sales of our products.
FAILURE TO COMPLY WITH REGULATIONS AFFECTING THE TELECOMMUNICATIONS INDUSTRY
COULD SERIOUSLY HARM OUR BUSINESS AND RESULTS OF OPERATIONS
Our failure to comply with government regulations relating to the
telecommunications industry in countries where our products are deployed and
failure to comply with any changes to those regulations could seriously harm our
business and results of operations. We have not completed all activities
necessary to comply with existing regulations and requirements in some of the
countries in which we intend to sell our products. Compliance with the
regulations of numerous countries could be costly and require delays in
deployments.
11
<PAGE>
OUR FAILURE TO COMPLY WITH EVOLVING INDUSTRY STANDARDS COULD DELAY OUR
INTRODUCTION OF NEW PRODUCTS
An international consortium of standards bodies is working to establish the
specifications of a future wireless standard and its interoperability with
existing standards. Any failure of our products to comply could delay their
introduction and require costly and time consuming engineering changes. After
the future standard is adopted, any delays in our introduction of next
generation products could impair our ability to grow revenues in the future. As
a result, we may be unable to achieve or sustain profitability.
OUR MARKET OPPORTUNITY COULD BE SIGNIFICANTLY DIMINISHED IN THE EVENT THAT GSM
OR ANY SUBSEQUENT GSM-BASED STANDARDS DO NOT CONTINUE TO BE OR ARE NOT WIDELY
ADOPTED
Our products are designed to utilize only GSM, an international standard for
voice and data communications. There are other competing standards including
code division multiple access, or CDMA, and time division mutiple access, or
TDMA. We currently do not have plans to offer products that utilize these
standards. In the event that GSM or any GSM-based standards do not continue to
be or are not broadly adopted, our market opportunity could be significantly
limited, which would seriously harm our business.
WE HAVE A LONG SALES CYCLE, WHICH COULD CONTRIBUTE TO FLUCTUATIONS IN OUR
RESULTS OF OPERATIONS AND SHARE PRICE
Our sales cycle is typically long and unpredictable, making it difficult to
plan our business. The long sales cycle also requires us to invest resources in
a possible transaction that may not be recovered if we do not successfully
conclude the transaction. Factors that affect the length of our sales cycle
include:
- time required for testing and evaluation of our products before they are
deployed in a network;
- size of the deployment;
- complexity of the customer's network environment; and
- the degree of system configuration necessary to deploy our products.
In addition, the emerging and evolving nature of the market for the systems
we sell may lead prospective customers to postpone their purchasing decisions.
General concerns regarding year 2000 compliance may further delay purchase
decisions by prospective customers. Our long and unpredictable sales cycle can
result in delayed revenues, difficulty in matching revenues with expenses and
increased expenditures, which together may contribute to declines in our results
of operations and our share price.
INTENSE COMPETITION IN THE WIRELESS MARKET COULD PREVENT US FROM INCREASING OR
SUSTAINING REVENUES OR ACHIEVING OR SUSTAINING PROFITABILITY
The wireless market is rapidly evolving and highly competitive. We cannot
assure you that we will have the financial resources, technical expertise or
marketing, manufacturing, distribution and support capabilities to compete
successfully in the future. We expect that competition in each of our markets
will increase in the future.
In the wireless office network market, the primary competing standard for
our systems is the digital European cordless telephone standard known as DECT.
In the community network market, we compete against wireless local loop
networks, which are wireless communication systems that connect users to the
public telephone network using radio signals as a substitute for traditional
telephone connections.
12
<PAGE>
We currently compete against communications equipment providers such as
Ericsson, Lucent, Motorola, Nokia and Siemens in the GSM, CDMA, TDMA, DECT and
wireless local loop markets. In some market applications, we also compete with
our customers Alcatel and Nortel Networks. All of the major communications
equipment providers have broad product lines that include at least partial
solutions that address our target markets.
In addition, we are seeking to sell our products in emerging markets, many
of which have less reliable traditional telephone infrastructures than developed
countries. If these countries improve the reliability and service of their
traditional telephone networks, the demand for our products in these markets
could be harmed and our future revenue growth could decline.
Many of our competitors and potential competitors have substantially greater
name recognition and technical, financial and sales and marketing resources than
we have. Such competitors may undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to developing new products than we can. Trends toward increased consolidation in
the telecommunications industry may increase the size and resources of some of
our current competitors and could affect some of our current relationships.
Increased competition is likely to result in price reductions, shorter
product life cycles, reduced gross margins, longer sales cycles and loss of
market share, any of which would seriously harm our business. We cannot assure
you that we will be able to compete successfully against current or future
competitors. Competitive pressures we face may cause our revenues or growth to
decline and may therefore seriously harm our business and results of operations.
IF WE ARE UNABLE TO MANAGE OUR GLOBAL OPERATIONS EFFECTIVELY, OUR BUSINESS WOULD
BE SERIOUSLY HARMED
Substantially all of our revenue to date has been derived from systems
intended for installation outside of the United States. In addition to the
regulatory issues discussed previously, our operations are subject to the
following risks and uncertainties:
- legal uncertainties regarding liability, tariffs and other trade barriers;
- greater difficulty in accounts receivable collection and longer collection
periods;
- costs of staffing and managing operations in several countries;
- difficulties in protecting intellectual property rights;
- changes in currency exchange rates which may make our U.S.
dollar-denominated products less competitive in global markets;
- the impact of recessions in global economies; and
- political and economic instability.
We expect to establish manufacturing operations in China during calendar
year 2000 which may subject us to all of the risks listed above, particularly
the difficulty of protecting intellectual property rights.
WE HAVE EXPERIENCED AN INCREASE IN SALES TO COMPANIES IN THE PEOPLES REPUBLIC OF
CHINA, AND FUTURE SALES IN CHINA WILL BE SUBJECT TO ECONOMIC AND POLITICAL RISKS
In the three months ended September 30, 1999, sales to HangZhou Topper
Electric, which is located in the Peoples Republic of China, accounted for 38%
of our revenues. China may represent a significant future market opportunity for
interWAVE due to its economic growth and the relative
13
<PAGE>
inadequacy of its traditional telephone network. Sales in China pose significant
additional risks, which include:
- potential inability to enforce contracts or take other legal action,
including actions to protect intellectual property rights;
- difficulty in collecting revenues and risks related to fluctuations in
currency exchange rates, particularly when sales are denominated in the
local currency rather than in U.S. dollars;
- changes in U.S. foreign trade policy towards China which may restrict our
ability to export products to or make sales in China, and similar changes
in China's policy regarding the U.S.; and
- changes in government regulation affecting companies doing business in
China, either through export sales or local manufacturing operations.
In the event our revenue levels from sales to China increase, we will become
increasingly subject to these risks. The occurrence of any of these risks would
harm our revenues from China and could in turn cause our revenues or growth to
decline and harm our business and results of operations.
IF WE FAIL TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE FUTURE
GROWTH, OUR BUSINESS COULD BE SERIOUSLY HARMED
We plan to continue to expand our operations significantly to pursue
existing and potential market opportunities. This growth places significant
demands on our management and our operational resources. In order to manage
growth effectively, we must implement and improve our operational systems,
procedures and controls on a timely basis. In addition, we expect that we will
need to expand our principal U.S. facilities in the next six to 12 months and
may be required to move our offices to a different location. A move could be
disruptive to our operations and could delay production or development
activities.
IF WE ARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL, WE MIGHT NOT BE ABLE TO
OPERATE OUR BUSINESS SUCCESSFULLY
Our business is highly dependent on our ability to attract, retain and
motivate qualified technical and management personnel. Competition is intense
for qualified personnel in our industry and in Northern California, where most
of our engineering personnel are located, and we may not be successful in
attracting and retaining these personnel. We do not have non-compete agreements
with any of our key employees. We currently do not maintain key person life
insurance on any of our key executives. Our success also depends upon the
continuing contributions of our key management and our research, product
development, sales and marketing and manufacturing personnel. Many of these
would be difficult to replace, in particular Dr. Priscilla Lu, our Chief
Executive Officer and Chairman of the Board, Ian Sugarbroad, our President and
Chief Operating Officer and Thomas Hubbs, our Executive Vice President and Chief
Financial Officer.
OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY BE INSUFFICIENT TO PROTECT
OUR COMPETITIVE POSITION
We cannot assure you that the protection offered by our U.S. patents will be
sufficient or that any of our pending U.S. or foreign patent applications will
result in the issuance of patents. In addition, competitors in the United States
and other countries, many of whom have substantially greater resources, may
apply for and obtain patents that will prevent or interfere with our ability to
make and sell our products in the U.S. and/or abroad. Unauthorized parties may
attempt to design around our patents, copy or otherwise obtain and use our
products. We cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in countries where the laws may
not
14
<PAGE>
protect our proprietary rights as fully as in the United States. Failure to
protect our proprietary rights could harm our competitive position and therefore
cause our revenues and operating results to decline.
On June 28, 1999, we filed a complaint against JetCell Corporation in the
United States District Court for the Northern District of California alleging
misappropriation of trade secrets and patent infringement. JetCell has filed a
series of counterclaims against us, which include allegations of unfair trade
practices, unfair competition, defamation, patent misuse and patent invalidity.
We are unable to predict the outcome of this litigation and do not expect it to
be resolved in the near future. The legal proceedings may be distracting to our
management and expensive and the outcome could be adverse to us. If the outcome
is adverse to us, we could experience more competition or could be required to
license our technology, either of which could harm our business and financial
results. See "Legal Proceedings."
CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES AND RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS IN
PARTICULAR MARKETS
From time to time, third parties may assert patent, copyright, trademark and
other intellectual property rights to technologies that are important to our
business. Any claims could result in costly litigation, divert the efforts of
our technical and management personnel, cause product shipment delays, require
us to enter into royalty or licensing agreements or prevent us from making or
selling certain products. Any of these could seriously harm our operating
results. Royalty or licensing agreements, if available, may not be available on
commercially reasonable terms, if at all. In addition, in some of our sales
agreements, we agree to indemnify our customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or copyrights of
third parties. Costs associated with these indemnification obligations could be
significant and could cause our operating results and stock price to decline.
WE MAY NOT BE ABLE TO LICENSE NECESSARY THIRD-PARTY TECHNOLOGY OR IT MAY BE
EXPENSIVE TO DO SO
From time to time, we may be required to license technology from third
parties to develop new products or product enhancements. We have licensed
software for use in our products from Lucent Technologies, TCSI Inc., Trillium
Digital Systems Inc., and Wind River Associates. We cannot assure you that
third-party licenses will be available to us on commercially reasonable terms,
if at all. The inability to obtain any third-party license required to develop
new products and product enhancements could require us to obtain substitute
technology of lower quality or performance standards or at greater cost which
could seriously harm our competitive position, revenues and growth prospects.
There are a number of general GSM patents held by different companies which
may impact our technology. If any of our products infringe on any of these
patents and we are unable to negotiate license agreements, then we may be
required to redesign a portion of our product line.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW AND COMPETE EFFECTIVELY, RESULTING IN SUBSTANTIAL HARM TO OUR
BUSINESS AND RESULTS OF OPERATIONS
We may require additional funding, which may not be available on terms which
are favorable to us. Currently, we do not have a credit facility or any lines of
credit. If we issue equity securities, existing shareholders may experience
dilution or the new equity securities may have rights, preferences and
privileges senior to those of existing shareholders. If additional funds are
raised through the issuance of debt securities, such securities would have
rights, preferences and privileges senior to holders of common shares. If we
cannot raise funds on terms favorable to us, we may not be able to develop or
enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements. See "Use of Proceeds,"
"Dilution" and "Management's Discussion and
15
<PAGE>
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for more information on our capital requirements.
IF WE, OUR SUPPLIERS OR OUR CUSTOMERS FAIL TO BE YEAR 2000 COMPLIANT, OUR
BUSINESS COULD BE SEVERELY DISRUPTED
The risk that software or hardware may inaccurately process dates beginning
in the year 2000 and beyond presents several potential problems for our
business. In particular, we are subject to the following:
- costs associated with the failure of our products to be year 2000
compliant, including potential warranty or other claims from our
customers, which may result in significant expenses to us;
- shutdowns or slowdowns of our business as a result of a failure of our
internal management systems, which could disrupt our business operations;
- interruption of product or component supplies or a reduction in product
quality as a result of the failure of systems used by our contract
manufacturers or suppliers; and
- reductions or deferrals in sales activities as a result of year 2000
compliance problems of our customers.
Our products may contain undetected errors or defects associated with year
2000 date functions. Known or unknown errors or defects in our products could
result in delay or loss of revenue, diversion of development resources, damage
to our reputation, product liability claims or increased service and warranty
costs, any of which could significantly harm our business and operating results.
Some industry analysts have predicted significant litigation regarding year 2000
compliance issues. It is uncertain whether or to what extent we may be affected
by any litigation.
If we, our contract manufacturers, suppliers or customers fail to identify
and correct any year 2000 problems or unanticipated or unremedied year 2000
problems arise, these failures or problems could result in an interruption in or
a failure of our normal business activities and operations. If a year 2000
problem related to a contract manufacturer or supplier occurs, it may be
difficult to determine which suppliers' products have caused the problem. These
failures could interrupt our operations and damage our relationships with our
customers. Due to the general uncertainty inherent in the year 2000 problem, we
are unable to determine at this time whether any external year 2000 failures
will harm us.
Any failure by us, our contract manufacturers or any of our suppliers to be
year 2000 compliant could seriously interrupt our manufacturing process, thereby
substantially reducing our revenues.
We believe our year 2000 worst case scenario would be the failure of a sole
or limited source supplier to be year 2000 compliant. Our failure or the failure
of one of these suppliers to be year 2000 compliant could seriously interrupt
our manufacturing process, thereby substantially reducing our revenues. To date,
we have not experienced any material disruption in our operations as a result of
year 2000 problems, nor have we incurred any unplanned expenses to address year
2000 concerns.
CONTROL BY OUR EXISTING SHAREHOLDERS COULD DISCOURAGE THE POTENTIAL ACQUISITION
OF OUR BUSINESS
Upon completion of this offering, our executive officers, directors and 5%
or greater shareholders and their affiliates will own 30,985,124 shares or
approximately 69.8% of our outstanding common shares assuming the exercise of
all warrants and options held by them. Acting together, these shareholders would
be able to control all matters requiring approval by shareholders, including the
election of directors. This concentration of ownership could have the effect of
delaying or preventing a change in control of our business or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
could prevent our shareholders from realizing a premium over the market price
for their common shares.
16
<PAGE>
OUR BYE-LAWS MAY DISCOURAGE POTENTIAL ACQUISITIONS OF OUR BUSINESS
Some of our bye-laws and Bermuda law may discourage, delay or prevent a
merger or acquisition that shareholders may consider favorable. This may reduce
the market price of our common shares. A summary of these provisions is included
in "Description of Share Capital--Antitakeover Effects of Some Provisions of
Memorandum of Association and Bye-laws."
OUR BYE-LAWS PROVIDE FOR WAIVER OF CLAIMS BY SHAREHOLDERS AND INDEMNIFY
DIRECTORS AND OFFICERS
Our bye-laws provide for a broad indemnification of actions of directors and
officers. Under the bye-laws, the shareholders agree to waive claims against
directors and officers for their actions in the performance of their duties,
except for acts of fraud or dishonesty. These waivers will not apply to claims
arising under the United States federal securities laws and will not apply to
the extent that they conflict with provisions of the laws of Bermuda or with the
fiduciary duties of our directors and officers.
OUR OPERATIONS BASED IN BERMUDA MAY BE SUBJECT TO UNITED STATES TAXATION, WHICH
COULD SIGNIFICANTLY HARM OUR BUSINESS AND OPERATING RESULTS
Except for our United States subsidiary, we do not consider ourselves to be
engaged in a trade or business in the United States. Our United States
subsidiary is subject to United States taxation on its worldwide income, and
dividends from our United States subsidiary are subject to United States
witholding tax. We and our non-U.S. subsidiaries would, however, be subject to
United States federal income tax on income related to the conduct of a trade or
business in the U.S. If we were determined to be subject to United States
taxation, our financial results would be significantly harmed. We cannot assure
you that the Internal Revenue Service will not contend that our Bermuda-based
operations are engaged in a United States trade or business and, therefore, are
subject to United States income taxation. See "Taxation" for more information on
the tax consequences of operating outside the United States.
A SUBSTANTIAL NUMBER OF OUR COMMON SHARES WILL BECOME AVAILABLE FOR SALE IN THE
PUBLIC MARKET SIMULTANEOUSLY, WHICH COULD CAUSE THE MARKET PRICE OF OUR SHARES
TO DECLINE
Sales of substantial amounts of our common shares in the public market
following this offering or the awareness that a large number of shares is
available for sale could cause the market price of our common shares to decline.
Upon the expiration of lock-up agreements restricting the sale of shares by our
current shareholders, 28,725,805 of our common shares will become eligible for
immediate sale. Prior to such expiration date, Salomon Smith Barney may, in its
sole discretion and at any time, release all or any portion of the securities
subject to lock-up agreements. Sales of our common shares held by existing
shareholders could cause the market price of our stock to decline.
WE MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT IMPROVE OUR
OPERATING RESULTS OR MARKET VALUE
We will have considerable discretion to use the net proceeds of this
offering for our business, and you will not have the opportunity as part of your
investment decision to assess whether the proceeds are being used appropriately.
The net proceeds may be used for corporate purposes that do not improve our
operating results or our market value. Pending application of the net proceeds,
they may be placed in investments that do not produce income or that lose value.
See "Use of Proceeds" for more information on our application of the net
proceeds.
17
<PAGE>
INVESTORS IN THIS OFFERING WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION
IN THE BOOK VALUE OF THEIR INVESTMENT
The per share book value of the common shares, adjusted to reflect the net
proceeds we receive from this offering, will be substantially below the price
paid by new investors in this offering. Investors in this offering will
therefore incur immediate and substantial dilution of $7.58 per share (at an
assumed initial public offering price of $11.00). See "Dilution."
BECAUSE WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS ON OUR COMMON SHARES, HOLDERS
OF OUR COMMON SHARES WILL NOT BE ABLE TO RECEIVE A RETURN ON THEIR SHARES UNLESS
THEY SELL THEM
We have never paid or declared any cash dividends on our common shares or
other securities and intend to retain any future earnings to finance the
development and expansion of our business. We do not anticipate paying any cash
dividends on our common shares in the foreseeable future. Unless we pay
dividends, our shareholders will not be able to receive a return on their shares
unless they sell them.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON SHARES, AND OUR SHARE PRICE MAY
DECLINE AFTER THIS OFFERING
The initial public offering price may not be indicative of the price that
will prevail in the open market after this offering. An active trading market
for our common shares may not develop or be sustained after this offering. The
market price of our common shares is likely to be highly volatile and could be
subject to wide fluctuations in response to various factors, some of which are
beyond our control, including:
- changes in financial estimates of our operating results by securities
analysts;
- fluctuations in the valuation of companies perceived by investors to be
comparable to us; and
- share market price and volume fluctuations attributable to inconsistent
trading volume levels of our shares.
Furthermore, the stock markets have experienced extreme price and volume
fluctuations that have affected and continue to affect the market prices of
equity securities of many technology companies. These fluctuations often have
been unrelated or disproportionate to the operating performance of those
companies. Market fluctuations as well as general economic, political and market
conditions such as recessions, interest rate changes or international currency
fluctuations, may negatively impact the market price of our common shares.
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking information.
This forward-looking information is subject to risks and uncertainties including
the factors listed under "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue," or the negative of these terms or other comparable terminology.
These statements are only predictions and may be inaccurate. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
19
<PAGE>
USE OF PROCEEDS
Based on an assumed initial public offering price of $11.00 per share, our
net proceeds from the sale of the 8.5 million common shares that we are offering
will be approximately $85.6 million after deducting the underwriting discount
and estimated expenses payable by us in connection with this offering. If the
underwriters exercise their over allotment option in full, our net proceeds will
be approximately $98.6 million.
The principal purposes of this offering are to increase our working capital,
to fund both capital investment and research and development and other general
corporate purposes. See "Management Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." Pending
any use of the net proceeds for the above purposes, we intend to invest the
funds in short-term, interest-bearing, investment grade securities. Other than
estimated capital expenditures of approximately $4.5 million in fiscal 2000 and
increased facility rent of approximately $1.0 million per year commencing
January 1, 2000, we have not identified specific uses for the net proceeds from
this offering. We will invest a portion of the proceeds to accelerate research
and development relating to our products based on the Internet Protocol and our
development of new products utilizing the future wireless standard. The amounts
we actually expend in these areas may vary significantly and will depend on a
number of factors, including our future revenues. Accordingly, management will
retain broad discretion in the allocation of the net proceeds of this offering.
You will not have the opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the proceeds.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital shares. We
currently expect to retain any future earnings for developing and expanding our
business, and therefore we do not currently expect to pay cash dividends in the
foreseeable future.
20
<PAGE>
CAPITALIZATION
The following table set forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to:
- the sale of 3,526,663 Series I1 preferred shares which closed in
November and December 1999;
- the issuance of 602,256 common shares upon exercise of options under
our 1994 stock plan between September 30, 1999 and January 18, 2000;
- the exercise of warrants for 2,000,000 preferred shares and 188,410
common shares that the warrant holders have committed to exercise on
the effectiveness of this offering at exercise prices ranging from
$0.70 to $7.00 per share; and
- the conversion of all outstanding preferred shares into 29,006,193
common shares immediately prior to the completion of the offering;
- on a pro forma as adjusted basis, after giving effect to the sale of
8,500,000 common shares offered by us at an assumed initial public
offering price of $11.00 per share after deducting the underwriting
discount and estimated offering expenses payable by us, and the receipt of
net proceeds from this offering.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 12,988 $ 56,327 $ 141,932
Current portion of long-term debt........................... 680 680 680
Long-term debt, net of current portion...................... 261 261 261
Convertible preferred shares, $0.83 par value:
Authorized 56,500,000 shares; issued and outstanding
23,479,530 shares (actual); no shares (pro forma and as
adjusted)............................................... 19,488 -- --
Common shares, $0.001 par value:
Authorized 100,000,000 shares; issued and outstanding
6,074,019 shares (actual); 35,870,878 shares (pro
forma); 44,370,878 shares (as adjusted)................. 6 36 44
Additional paid-in capital.................................. 145,316 208,113 293,710
Deferred compensation....................................... (12,090) (12,090) (12,090)
Services receivable from shareholder........................ (5,542) (5,542) (5,542)
Note receivable from shareholder............................ (416) (416) (416)
Accumulated other comprehensive income...................... 51 51 51
Accumulated deficit......................................... (121,245) (121,245) (121,245)
--------- --------- ---------
Total shareholders' equity.................................. 25,568 68,907 154,512
--------- --------- ---------
Total capitalization........................................ $ 25,829 $ 69,168 $ 154,773
========= ========= =========
</TABLE>
Common shares exclude:
- 5,317,191 common shares issuable upon the exercise of options outstanding
at January 18, 2000 at a weighted average exercise price of $1.96 per
share;
- 7,286,594 common shares issuable upon exercise of warrants outstanding at
January 18, 2000 at an exercise price ranging from $0.70 to $7.00 per
share;
- 1,818,867 common shares available for issuance under our 1999 option plan;
and
- 300,000 common shares available for issuance under our 1999 employee share
purchase plan.
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $66.2 million or approximately $1.85 per share. Pro forma net
tangible book value per share represents pro forma tangible assets less total
liabilities, divided by our pro forma number of outstanding common shares after
giving effect to, on a pro forma basis:
- the sale of 3,526,663 Series I1 preferred shares which closed in November
and December 1999;
- the issuance of 602,256 common shares upon exercise of options under our
1994 stock plan between September 30, 1999 and January 18, 2000;
- the exercise of a warrant for 2,000,000 preferred shares and 188,410
common shares that the warrant holders have committed to exercise on the
effectiveness of this offering at exercise prices ranging from $0.70 to
$7.00 per share; and
- the conversion of all outstanding preferred shares into 29,006,193 common
shares immediately prior to the completion of the offering.
Without taking into account any changes in such pro forma net tangible book
value per share after September 30, 1999, other than to give effect to the sale
of the common shares in this offering at an assumed initial public offering
price of $11.00 per share after deducting the underwriting discount and
estimated expenses payable by us and the receipt of the net proceeds of such
sale, the pro forma net tangible book value as of September 30, 1999 would have
been approximately $151.8 million or approximately $3.42 per share. This
represents an immediate increase in pro forma net tangible book value per share
of $1.57 to existing shareholders and an immediate dilution of $7.58 per share
to new investors. The following table sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share at
September 30, 1999...................................... $1.85
Increase in pro forma net tangible book value per share
attributable to new investors........................... 1.57
-----
Pro forma net tangible book value per share after the
offering.................................................. 3.42
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 7.58
======
</TABLE>
The following table summarizes on a pro forma basis as of September 30, 1999
the differences between the number of common shares purchased from us, the total
consideration paid and the average price per share paid by existing shareholders
and by the new investors in the offering, before deducting the underwriting
discounts and commissions and estimated offering expenses payable by us, at an
assumed initial public offering price of $11.00 per share.
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE PAID
--------------------- ----------------------- ----------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders..................... 35,870,878 81% $161,750,000 63% $ 4.51
New investors............................. 8,500,000 19% 93,500,000 37% 11.00
---------- ---- ------------ ----
Total................................... 44,370,878 100% $255,250,000 100%
========== ==== ============ ====
</TABLE>
22
<PAGE>
The foregoing discussion and table includes the exercise of a warrant for
2,000,000 preferred shares and 188,410 common shares that the warrant holder has
committed to exercise and the closing of the sale of Series I1 preferred shares
and excludes:
- 5,317,191 common shares issuable upon the exercise of options outstanding
at January 18, 2000 at a weighted average exercise price of $1.96 per
share;
- 7,286,594 common shares issuable upon exercise of warrants outstanding at
January 18, 2000 at exercise prices ranging from $0.70 to $1.15 per share;
- 1,818,867 common shares available for issuance under our 1999 option plan;
and
- 300,000 common shares available for issuance under our 1999 employee share
purchase plan.
If all options and warrants outstanding at January 18, 2000 were exercised,
the pro forma net tangible book value per share immediately after completion of
the offering would be $2.54, which represents an immediate dilution in net
tangible book value per share of $6.46 to purchasers of common shares in the
offering. See "Management--Employee Benefit Plans" and the notes to our
consolidated financial statements for more information on our option plans.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, including the related
notes found elsewhere in this prospectus. The statement of operations data for
the fiscal years ended June 30, 1997, 1998 and 1999 and the balance sheet data
as of June 30, 1998 and 1999 are derived from the audited consolidated financial
statements of interWAVE included elsewhere in this prospectus, which have been
audited by KPMG LLP, independent auditors. The statement of operations data for
the fiscal years ended June 30, 1995 and 1996 and the balance sheet data as of
June 30, 1995, 1996 and 1997 are derived from unaudited consolidated financial
statements not included in this prospectus. The statement of operations data for
the periods ended September 30, 1998 and 1999 and the balance sheet data as of
September 30, 1999 are unaudited.
Our consolidated financial statements are prepared in accordance with U.S.
GAAP. All dollar amounts are expressed in U.S. dollars. Our fiscal year ends on
the Friday nearest June 30.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................. $ -- $ -- $ 1,841 $ 12,995 $ 17,293 $ 4,487 $ 5,377
Cost of revenues.............................. -- -- 3,617 12,251 12,531 2,477 3,973
------- -------- -------- -------- -------- ------- -------
Gross profit.................................. -- -- (1,776) 744 4,762 2,010 1,404
------- -------- -------- -------- -------- ------- -------
Operating expenses:
Research and development.................... 3,415 11,268 14,169 15,300 14,174 3,872 3,562
Selling, general and administrative......... 1,065 4,818 6,923 7,742 7,440 1,759 2,088
Amortization of deferred stock
compensation.............................. 908 4,422 6,377 7,604 5,254 1,523 3,324
------- -------- -------- -------- -------- ------- -------
Total operating expenses...................... 5,388 20,508 27,469 30,646 26,868 7,154 8,974
------- -------- -------- -------- -------- ------- -------
Loss from operations.......................... (5,388) (20,508) (29,245) (29,902) (22,106) (5,144) (7,570)
Interest expense.............................. (9) (66) (479) (1,115) (2,403) (49) (1,959)
Other income.................................. 103 620 653 415 154 102 59
------- -------- -------- -------- -------- ------- -------
Net loss before income taxes.................. (5,294) (19,954) (29,071) (30,602) (24,355) (5,091) (9,470)
Income tax expense............................ -- -- 111 220 113 -- --
------- -------- -------- -------- -------- ------- -------
Net loss...................................... $(5,294) $(19,954) $(29,182) $(30,822) $(24,468) $(5,091) $(9,470)
------- -------- -------- -------- -------- ------- -------
Dividend effect of beneficial conversion
feature to H-1 preferred shareholders....... -- -- -- -- -- -- (2,055)
Net loss attributable to common
shareholders................................ (5,294) (19,954) (29,182) (30,822) (24,468) (5,091) (11,525)
======= ======== ======== ======== ======== ======= =======
Basic and diluted net loss per share.......... $ (1.55) $ (5.36) $ (7.12) $ (6.68) $ (4.96) $ (1.05) $ (2.10)
======= ======== ======== ======== ======== ======= =======
Weighted average common shares outstanding
basic and diluted........................... 3,422 3,720 4,099 4,614 4,934 4,840 5,480
======= ======== ======== ======== ======== ======= =======
Basic and diluted pro forma net loss per share
(unaudited)................................. $ (0.76) $ (0.36)
======== =======
Shares used in computing pro forma net loss
per share, basic and diluted (unaudited).... 32,345 32,345
======== =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------------------------------- -------------
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $11,206 $25,768 $14,862 $ 7,340 $ 3,919 $12,988
Working capital........................................... 10,476 23,519 14,785 10,770 1,608 17,739
Total assets.............................................. 12,992 34,779 34,986 29,613 26,568 35,080
Long-term debt, net of current portion.................... 134 6,364 1,288 1,074 486 261
Total shareholders' equity................................ 12,037 24,046 21,447 18,453 8,800 25,568
</TABLE>
The pro forma financial data presented above reflects the exercise of
outstanding warrants to purchase 2,000,000 preferred shares and 188,410 common
shares that the warrant holder has committed to exercise on the effectiveness of
the offering, issuance of 602,256 common shares upon exercise of options between
September 30, 1999 and January 18, 2000, and the conversion upon the closing of
the offering of all outstanding preferred shares into 29,006,193 common shares.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OUR FISCAL YEAR ENDS ON THE FRIDAY NEAREST JUNE 30.
OVERVIEW
We provide compact wireless communications systems for the 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 $1.8 million in 1997,
$13.0 million in 1998, $17.3 million in 1999 and $5.4 million in the three
months ended September 30, 1999. We incurred net losses of $29.2 million in
1997, $30.8 million in 1998, $24.5 million in 1999 and $9.5 million in the three
months ended September 30, 1999. As of September 30, 1999, we had an accumulated
deficit of $121.2 million.
We operate in a single business segment. 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
station and base station controller, our WAVEXchange, our Network In A Box and
our WAVEView management system, constituted 96% of net revenues in 1997, 92% of
net revenues in 1998 and 88% of net revenues in 1999. Revenue is recognized when
all of the following have occurred: the system has been shipped, title and risk
of loss have passed to the customer, we have the right to invoice the customer,
collection of the receivable is probable and we have fulfilled all contractual
obligations to the customer. Revenue from installation is recognized as the
services are performed to the extent of direct installation costs incurred, and
the excess is deferred and recognized over the estimated life of the product,
while revenue from extended warranty coverage and customer support is recognized
ratably over the period of the service contract. Trial sales directly to
wireless service providers are not recognized as revenue until the trial is
completed. Trials of our systems conducted by communications equipment providers
and systems integrators are typically shipped from inventory held by those
parties and do not result in incremental revenue to us.
Currently, our revenues are generated by 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 and by our direct sales
force. In fiscal year 1999, sales to communications equipment providers
represented 61% of total revenues, sales to systems integrators accounted for
23% of total revenues and direct sales to wireless service providers represented
16% of total revenues.
We have entered into purchase and distribution agreements with Nortel
Networks and Alcatel. These multi-year agreements specify quarterly minimum
purchase commitments by these communications equipment providers. Nortel
Networks' quarterly purchase commitments began in June 1998 and increase
quarterly through December 2000. Alcatel's quarterly purchase commitments
commence in June 2000 and extend through December 2001. Both agreements also
obligate us to meet certain product development milestones and provide for a
reduction in Nortel Networks' and Alcatel's purchase commitments if we do not
meet our development milestones. In April 1999, we agreed to reduce Nortel
Networks' remaining quarterly commitments because we were unable to meet certain
product feature specifications provided for in the agreement. We do not rely
solely on these purchase commitments to forecast our production requirements or
anticipated sales to these customers. Rather, we also rely on our internal sales
forecasts and our ongoing discussions with these customers, including their
formal purchase orders, as guidance for planning our production and our revenue
25
<PAGE>
outlook. However, we do rely in part on these minimum purchase commitments in
forecasting production quantities. Because of the relatively fixed nature of
many of our expenses, including personnel and facilities costs, we cannot
immediately adjust expenses in response to a decline in revenues. Therefore,
failure of these customers to achieve their quarterly purchase commitments could
cause a decline in our operating results. See "Certain Transactions--Series G
Preferred Financing, Purchase and Distribution Agreement," and "Certain
Transactions--Series I1 Preferred Share Financing, Purchase and Distribution
Agreement."
Net revenues outside the United States represented approximately 83%, 49%,
30% and 27% of total net revenues in fiscal years 1997, 1998, 1999 and for the
three months ended September 30, 1999, respectively. 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. All of our
revenues are in U.S. dollars, which reduces our exposure to fluctuations in
revenues attributable to changes in currency exchange rates. In addition, we
face risks inherent in conducting global business. These risks include extended
collection time for receivables, reduced ability to enforce obligations and
reduced protection for our intellectual property.
We recorded revenue from our first product sale in May 1997. We have a
limited history of generating significant revenues, and many of our products
have only recently been introduced. We have incurred substantial operating
losses since our inception and we expect to incur net losses in the future which
may be substantial. Most of our expenses are fixed in the near term, and we may
not be able to quickly reduce spending if our revenue is lower than anticipated.
Therefore, net losses in a given quarter could be greater than expected. You
have limited historical financial data and operating results with which to
evaluate our business and our prospects. As a result, you must consider our
prospects in light of the early stage of our business in a new and rapidly
evolving market. For additional information on factors that may affect our
future results of operations, please see "Risk Factors."
Communications equipment providers, system integrators and wireless service
providers typically perform numerous tests and extensively evaluate products
before incorporating them into their networks. The time required for testing,
evaluation and design of our systems into the service provider's network
typically ranges from six to twelve months. During the trial period we sell a
limited number of units. The successful completion of the trial phase often
results in another sale of additional units intended for deployment in
commercial service. Our business could be adversely affected if a significant
customer reduces or delays orders during our sales cycle or chooses not to
deploy networks incorporating our systems.
Cost of revenues consists of material costs, direct labor costs, warranty
costs, royalties, overhead related to manufacturing our products, amortization
of intangible assets, and customer support costs.
In general, our gross margins will be affected by the following factors and,
therefore, we are unable to predict what these margins will be in the future:
- demand for our products and services;
- new product introductions, both by us and our competitors;
- changes in our pricing policies and those of our competitors;
- the mix of products sold;
- the sales channels through which our products are sold; and
- the purchase volume discounts we are able to obtain from our contract
manufacturers.
26
<PAGE>
We currently obtain all of our primary components and subassemblies for our
products from two independent contract manufacturers. Accordingly, a significant
portion of our cost of revenues consists of payments to these suppliers. The
remainder of our cost of revenues is related to our in-house manufacturing
operations, which consist primarily of quality control, final assembly, testing
and product integration. In conjunction with the consolidation of our
manufacturing operations with a single contract manufacturer, we expect to
outsource the final assembly, testing, and product integration activity by the
middle of calendar year 2000.
Research and development expenses consist primarily of compensation and
related costs for research and development personnel and expenses for testing
facilities and equipment. All research and development costs are expensed as
they are incurred. We expect to continue to make substantial investments in
research and development and anticipate that these expenses will continue to
increase in absolute dollars.
Selling, general and administrative expenses consist primarily of
compensation and related costs for sales and sales support personnel, marketing
personnel, financial, accounting, human resource and general management
personnel, sales commissions, marketing programs, legal and professional
services, travel expenses, bad debt expenses and other general corporate
expenses. We expect to incur substantial expenditures related to sales and
marketing activities, the recruitment of additional sales and marketing
personnel and the expansion of our domestic and international distribution
channels. We expect selling, general and administrative expenses to increase in
absolute dollars due to the addition of sales and marketing personnel and due to
the additional costs related to the anticipated growth of our business and
operation as a public company.
We are planning to consolidate our manufacturing activities with a single
contract manufacturer. Accordingly, our dependence on this manufacturer will
increase. Problems encountered during the consolidation or future problems
relating to the manufacturer's inability to meet our quality and delivery
specifications could harm our operating results.
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 $6.4 million,
$7.6 million, $5.3 million and $3.3 million was amortized in fiscal years 1997,
1998, 1999 and the three months ended September 30, 1999, respectively. The
balance in deferred compensation of $12.1 million at September 30, 1999 is being
amortized on an accelerated basis over the vesting period of the applicable
options, which is typically four years.
Our products operate on the GSM standard. GSM competes with other digital
standards, including code division multiple access, or CDMA, and time division
multiple access, or TDMA. GSM also competes with analog standards. In the event
that TDMA or CDMA become the dominant digital wireless communication standard in
geographic markets we are seeking to address, the acceptance of our products and
our revenues and operating results would be harmed.
Our industry is intensely competitive, and many of our competitors are major
telecommunications equipment providers with resources that are significantly
greater than ours. In addition to competitive pressures, we will also likely
encounter declining sales prices and profit margins over time as products
mature.
27
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
data for the periods indicated as a percentage of net revenues.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30,
------------------------------------ ----------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
As a Percentage of Net
Revenues:
Net revenues.............. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues.......... 196.5 94.3 72.5 55.2 73.9
-------- -------- -------- ------ ------
Gross margin.............. (96.5) 5.7 27.5 44.8 26.1
Operating expenses:
Research and development.. 769.6 117.7 82.0 86.3 66.2
Selling, general and
administrative.......... 376.0 59.6 43.0 39.2 38.8
Amortization of deferred
stock compensation...... 346.4 58.5 30.4 33.9 61.8
-------- -------- -------- ------ ------
Total operating expenses.... 1,492.1 235.8 155.4 159.4 166.9
-------- -------- -------- ------ ------
Loss from operations...... (1,588.5) (230.1) (127.8) (114.6) (140.8)
Interest expense.......... (26.0) (8.6) (13.9) (1.1) (36.4)
Other income (loss) net... 35.5 3.2 0.9 2.3 1.1
-------- -------- -------- ------ ------
Loss before income
taxes................... (1,579.1) (235.5) (140.8) (113.5) (176.1)
Income tax expense........ (6.0) (1.7) (0.7) -- --
-------- -------- -------- ------ ------
Net loss.................. (1,585.1)% (237.2)% (141.5)% (113.5)% (176.1)%
======== ======== ======== ====== ======
</TABLE>
Sales to major customers are as follows (in thousands):
<TABLE>
<CAPTION>
NET REVENUES
-----------------------------------------------------
THREE MONTHS
FISCAL YEARS ENDED
ENDED JUNE 30, SEPTEMBER 30,
------------------------------ --------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nortel Networks............... $ -- $2,392 $8,797 $2,379 $ 942
ADC Telecommunications/
Microcellular Systems,
Ltd......................... 279 6,099 3,449 1,405 1,122
Hutchison Telecommunications
Group....................... 1,251 2,754 1,409 200 257
Total Access Communications... 8 1,750 505 -- 500
HangZhou Topper Electric
Corporation................. -- -- 400 -- 2,068
Alcatel....................... -- -- 1,217 503 88
<CAPTION>
% OF TOTAL NET REVENUES
--------------------------------------------------------
THREE MONTHS
FISCAL YEARS ENDED
ENDED JUNE 30, SEPTEMBER 30,
------------------------------- ----------------------
1997 1998 1999 1998 1999
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nortel Networks............... --% 18% 51% 53% 18%
ADC Telecommunications/
Microcellular Systems,
Ltd......................... 15 47 20 31 21
Hutchison Telecommunications
Group....................... 68 21 8 4 5
Total Access Communications... -- 13 3 -- 9
HangZhou Topper Electric
Corporation................. -- -- 2 -- 38
Alcatel....................... -- -- 7 11 2
</TABLE>
The percentage of net revenues on a fiscal year basis comprised by sales to
Nortel Networks may decline due in part to the broadening of our customer base.
Nortel Networks is a principal shareholder of ours and an employee of Nortel
Networks serves on our board of directors. ADC Telecommunications, Alcatel and
Holodeck Limited, an affiliate of Hutchison Telecommunications Group and a
wholly-owned subsidiary of Hutchison Whampoa, are shareholders of ours.
Microcellular Systems was created by a spin-off from ADC Telecommunications. Due
in part to general
28
<PAGE>
improvements in economic conditions in several key Asian markets, we may
experience increased sales in Asia in future periods.
We have also begun negotiations for a purchase/resale agreement with Intasys
Corporation, one of our shareholders. Intasys plans to market our products in
Canada. As of September 30, 1999, we had recorded $3.6 million in services
receivable from this shareholder as a result of our issuance to Intasys of a
warrant to purchase 615,000 common shares at $1.00 per share. This warrant
expires on the effectiveness of our initial public offering. See Note 9 to the
Consolidated Financial Statements.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
NET REVENUES
Net revenues increased 20% or $0.9 million from $4.5 million for the three
months ended September 30, 1998 to $5.4 million for the three months ended
September 30, 1999. This increase was due to continued increases in the number
of active customers and the continued deployment of our systems. Four customers
accounted for all of our net revenues in the three months ended September 1998
while 11 customers accounted for all of our net revenues in the three months
ended September 1999. Sales to Nortel Networks and ADC Telecommunications
accounted for 53% and 31%, respectively, of net revenues in the three months
ended September 30, 1998, while sales to HangZhou Topper Electric Corporation
and Microcellular Systems in the United Kingdom accounted for 38% and 21%,
respectively, of net revenues in the three months ended September 30, 1999.
COST OF REVENUES
Cost of net revenues increased 60% or $1.5 million during the three months
ended September 30, 1999 compared with the three months ended September 30,
1998. As a percentage of net revenues, cost of revenues increased from 55% for
the three months ended September 30, 1998 to 74% for the three months ended
September 30, 1999, due to the mix of products sold. In the three months ended
September 30, 1998, 38% of net revenues was attributed to our WAVEXchange and
Network In A Box products, which earn higher gross profits, while 43% was
attributed to our WAVEXpress/BTS, which earns lower gross profits. In the three
months ended September 30, 1999, 24% of net revenues was attributed to our
WAVEXchange and Network In A Box products, which earn higher gross profits,
while 65% was attributed to our WAVEXpress/BTS, which earns lower gross profits.
The product mix in any quarter will vary depending on the customer's application
and network design, and therefore our gross profits will fluctuate. Due to the
relatively short time that we have been shipping our complete product line, we
are unable to forecast with certainty our product mix on a quarterly basis.
However, we expect that our gross profits will fluctuate on a quarterly basis.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses declined approximately $0.3 million or 8%
from $3.9 million for the three months ended September 30, 1998 to $3.6 million
for the three months ended September 30, 1999. The decrease was primarily due to
a $0.5 million reduction in non-recurring engineering costs and engineering
contractor expenses, partially offset by a $0.2 million increase in engineering
staff and recruiting expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $329,000 or 19%
during the three months ended September 30, 1999 compared with the three months
ended September 30, 1998. Approximately $274,000 of the increase was due to
increased sales and administration personnel and approximately $66,000 was due
to increased sales commissions on higher revenue. Selling, general and
administrative expenses are expected to continue to increase as we expand our
marketing and sales support staff to support the increased number of customers
we serve and as we increase our general, administrative and
29
<PAGE>
management expenses to provide support as a public company. For example, our
chief financial officer joined our payroll in July 1999, and our president and
chief operating officer joined our payroll in September 1999.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation increased $1,801,000 or 118%
during the three months ended September 30, 1999 compared with the three months
ended September 30, 1998. During the three months ended September 30, 1999,
options to purchase 1,973,750 common shares were granted at an average exercise
price of $1.45 resulting in an addition to deferred stock compensation of
$11.7 million.
INTEREST EXPENSE
Interest expense increased from $49,000 in the three months ended
September 30, 1998 to $1,959,000 in the three months ended September 30, 1999.
Of the 1999 amount, $1,744,000 was due to amortization of the discount ascribed
to the warrants issued in conjunction with the bridge loan financing. See
Note 8 to the Consolidated Financial Statements. The notes were converted to
Series H1 preferred shares as of September 10, 1999. As a result of the
conversion of the notes into Series H1 preferred shares in September, the
unamortized discount was converted to additional paid-in-capital, and no further
interest expense will be incurred relative to the bridge loan financing. Should
we elect to borrow funds under our committed revolving line of credit, we will
incur interest expense during any periods when amounts are outstanding under the
line. At current interest rates, the maximum borrowings under the available line
would result in quarterly interest expense of approximately $112,000. There are
no current plans to draw down any of the available funds under this revolving
line of credit.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NET REVENUES
We began generating revenue in May 1997. Net revenues increased
$11.2 million, from $1.8 million in 1997 to $13.0 million in 1998. This increase
was due primarily to the generation of revenue in four quarters of 1998 versus
only two months of 1997.
Net revenues increased $4.3 million or 33%, from $13.0 million in 1998 to
$17.3 million in 1999. This increase was principally due to increased sales to
Nortel Networks, who began marketing our products in the fourth quarter of 1998.
Nortel Networks accounted for $8.8 million of our 1999 net revenues, an increase
of $6.4 million over 1998. This increase, however, was offset by a reduction in
sales, through ADC Telecommunications who, with our consent, assigned our
distribution agreement to Microcellular Systems, a new company formed by a group
of former ADC Telecommunications employees in the spring of 1999. ADC
Telecommunications accounted for $3.4 million of our sales in 1999 and
$6.1 million in 1998. Also, in the second half of fiscal 1998, wireless service
providers in Asia were adversely impacted by local economic conditions and
accordingly curtailed their planned programs to deploy our products aggressively
in their networks. Thus, sales to Hutchison Telecommunications Group and Total
Access Communications each declined to less than 10% of our revenues in fiscal
1999. Net revenues in 1999 included $1.0 million related to training and support
services provided to a communications equipment provider. We incurred
$0.2 million of expenses related to this net revenue.
COST OF REVENUES
Cost of revenues increased $8.7 million from $3.6 million in 1997 to
$12.3 million in 1998. This increase is primarily attributable to the increase
in net revenues described above. As a percentage of net revenues, cost of
revenues decreased from 196% in 1997 to 94% in 1998, due primarily to a smaller
rate of increase in customer support costs than in net revenues. The 1998 cost
of revenues includes an
30
<PAGE>
approximately $1.4 million charge due to an inventory write-off of product
originally ordered to satisfy anticipated product orders from our Asian
customers in the second half of fiscal 1998, but which could not be shipped due
to the economic status in that region.
Cost of revenues increased $0.2 million from $12.3 million in 1998 to
$12.5 million in 1999. As a percentage of net revenues, cost of revenues
decreased from 94% in 1998 to 72% in 1999. The decrease in the percentage of net
revenues was primarily due to lower cost of revenues associated with the
WAVEXchange and Network In A Box products introduced in the first half of fiscal
1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $1.1 million or 8% from
$14.2 million in 1997 to $15.3 million in 1998. The major items contributing to
the increase included employee related expenses and non-recurring engineering
expenses of $1.2 million, depreciation expenses of $0.6 million, and facilities
related expenses of $0.9 million. These increases were offset by the decrease of
$1.7 million in preproduction manufacturing and service support expenses which
were classified as cost of revenues in 1998 with the deployment and shipment of
revenue.
Research and development expenses decreased $1.1 million or 7% from
$15.3 million in 1998 to $14.2 million in 1999 primarily due to a reduction in
nonrecurring engineering costs and engineering contractors expenses of
$1.2 million. In addition, expenses were reduced $0.3 million for hiring and
relocation expense, and $0.5 million for prototype materials. These reductions
were offset with other expense increases including additional personnel costs of
$0.4 million, increased depreciation expense of $0.2 million and intangible
amortizations of $0.3 million.
We anticipate an acceleration in research and development expenditures. From
1997 through 1999, however, the growth in our research and development
expenditures was affected by our difficulties in attracting and retaining
trained personnel. Nevertheless, we have recently begun to increase our research
and development expenses with an increase in research and development staff from
67 employees at June 30, 1999 to 75 employees at September 30, 1999. We expect
to continue to add staff to future product development activities, including
products utilizing the Internet Protocol and products utilizing the future
standard.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $0.8 million from
$6.9 million in 1997 to $7.7 million in 1998. This increase consists of the
addition of employees in our Hong Kong and Beijing offices to support our direct
sales activity in the Pacific region and expenses associated with our
participation in the 1998 GSM World Congress in Cannes, France.
Selling, general and administrative expenses declined $0.3 million from
$7.7 million in 1998 to $7.4 million in 1999. This decrease was due to a shift
in our sales strategy to emphasize indirect sales channels. Selling general and
administrative expenses began increasing in the fourth quarter of 1999 as we
began making investments in marketing programs and increasing our presence in
Hong Kong and Paris.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation increased $1.2 million from
$6.4 million in 1997 to $7.6 million in 1998. Amortization of deferred stock
compensation decreased $2.3 million from $7.6 million in 1998 to $5.3 million in
1999.
31
<PAGE>
INCOME TAXES
There is no income tax on income earned in Bermuda.
In 1997, 1998 and 1999 our U.S. subsidiary incurred net losses for United
States federal and state income tax purposes; and we recorded a provision for
income taxes of $111,000, $220,000 and $113,000, respectively, related to
current international income tax provided on the profits attributable to our
foreign operations. As of June 30, 1999, we had $23.8 million of federal and
$12.7 million of state net operating loss carryforwards to offset future taxable
income. The difference between available net operating losses and our
accumulated deficit as reported for financial statement purposes is principally
because losses incurred in Bermuda are not subject to a carry-forward since
there is no tax on income earned in Bermuda, and the losses attributable to our
U.S. subsidiary relate to the manufacturing and development operations of our
U.S. subsidiary and not to our global sales and marketing activity.
QUARTERLY RESULTS OF OPERATIONS
The following presents net revenues for our seven most recent quarters ended
October 1, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
MAR 27, JUNE 26, SEPT 25, DEC 25, MAR 25, JULY 2, OCT 1,
1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............... $ 1,009 $ 5,465 $ 4,487 $ 4,097 $ 4,024 $ 4,685 $ 5,377
</TABLE>
We believe that period-to-period comparisons of our operating results are
not necessarily meaningful. You should not rely on them to predict future
performance. The amount and timing of our operating expenses may fluctuate
significantly in the future as a result of a variety of factors. We face a
number of risks and uncertainties encountered by early stage companies,
particularly those in rapidly evolving markets such as the wireless
communications industry. We may not be able to address these risks and
difficulties successfully. In addition, we may not be able to continue to add
new customers on a regular basis and our revenue may not grow, and we may not
achieve or maintain profitability in the future.
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future. It is likely that in some
future quarter our operating results will fall below the expectations of
securities analysts and investors. In this event, the market price of our common
share could significantly decline.
See "Risk Factors--Our quarterly operating results are likely to fluctuate
significantly and may fail to meet the expectations of securities analysts and
investors, causing our stock price to decline" for more information on the
factors affecting our quarterly results.
Our sales cycle, which is typically between six and twelve months,
contributes to fluctuations in our quarterly operating results. Further, the
emerging and evolving nature of the market for systems such as our Network In A
Box may lead prospective customers to postpone their purchasing decisions. In
addition, general concerns regarding year 2000 compliance may further delay
purchase decisions by prospective customers.
Most of our expenses, such as employee compensation and lease payments for
facilities and equipment, are relatively fixed in the near term. In addition,
our expense levels are based, in part, on our expectations regarding future
revenues. As a result, any shortfall in revenues relative to our expectations
could cause significant changes in our operating results from quarter to
quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the sale
of preferred equity securities and more recently through the sale of secured
convertible notes and warrants.
32
<PAGE>
The following tables describe the preferred share issuances and debt
financings that have funded our operations from inception through January 18,
2000:
PREFERRED STOCK FINANCINGS
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C> <C> <S> <C>
WARRANTS
CONSIDERATION PRICE PREFERRED OR
($ PER SHARES OPTIONS EXERCISE
DATE CLOSED SERIES MILLIONS) SHARE ISSUED ISSUED PRICE/SHARE PRINCIPAL INVESTOR(S) NOTES
<CAPTION>
<C> <C> <C> <C> <C> <C> <C> <S> <C>
8/94 A $ 2.8 $ 0.83 3,400,000 1,000,000 $1.00 EXCELlink (1)
8/94 B $ 3.2 $ 1.20 2,670,000 -- -- Mainwell
1/95 C $ 1.5 $ 1.50 1,000,000 -- -- EXCELlink, Sasson
5/95 D $14.0 $ 3.00 4,680,000 100,000 $0.30 Mayfield, Morgan Stanley, (2)
Sasson
3/96 E $25.7 $10.00 2,567,167 -- -- Holodeck Limited (3)
5/97 F $17.3 $11.50 1,500,000 -- -- UCOM Company
International Limited
3/98 G $24.5 $ 5.35 3,714,286 2,000,000 $7.00 Nortel Networks (4)
6/99 H $ 2.5 $ 7.00 360,000 -- -- ADC Telecommunications (5)
6/99 H1 $ 2.0 6.26 285,715 40,000 $1.00 DAMAC (6)
9/99 H1 $10.0 $ 6.06 1,430,000 200,000 $1.00 Intasys, MediaTel (6)
11/99 I1 $12.2 $ 8.00 1,526,663 -- -- Alcatel
12/99 I1 $16.0 $ 8.00 2,000,000 -- -- Holodeck Limited
</TABLE>
(1) A warrant to purchase an additional 1,000,000 Series A preferred shares at
$1.00 per share was issued to EXCELlink and was exercised in May 1995.
EXCELlink subsequently transferred the 1,000,000 Series A preferred to third
parties.
(2) 80,000 of the 4,680,000 Series D preferred shares were sold to 15
sophisticated individual investors. Stock options to purchase a total of
100,000 common shares were issued to the Mayfield entities and were
exercised in March 1997.
(3) All Series E preferred shares were sold to 75 sophisticated individual
investors. Holodeck purchased 400,000 Series E preferred shares.
(4) Nortel Networks was the sole investor in the Series G preferred financing.
The 3,714,286 Series G preferred shares listed includes shares issued in
exchange for patent license rights and services to be rendered under an
original equipment manufacturing agreement. The warrant issued to Nortel
Networks is for 2,000,000 Series G preferred shares at $7.00 per share.
Using the Black-Scholes option valuation model, $4,629,000 of the amount
raised in the Series G preferred financing is attributed to the warrant.
Additional information regarding this preferred stock financing is provided
under "Certain Transactions-Series G Preferred Financing" and "Consolidated
Financial Statements-Note 9".
(5) The purchase price for the 360,000 Series H preferred shares listed was paid
by the cancellation and satisfaction of all outstanding invoices and
indebtedness by us for services performed by ADC Telecommunications.
(6) In addition to the 1,715,715 Series H1 preferred shares listed, an
additional 1,872,362 Series H1 preferred shares were issued upon the
automatic conversion of our 1999 convertible note and warrant financing.
Additional information regarding the conversion is provided under "Certain
Transactions-Convertible Note and Warrant Financing".
Each preferred share converts automatically into 1 common share upon completion
of our initial public offering.
33
<PAGE>
DEBT FINANCINGS
<TABLE>
<CAPTION>
<C> <C> <C> <S> <C> <C>
FUNDS
BORROWED ($ ANNUAL
DATE CLOSED MILLIONS) RATE DESCRIPTION OF DEBT PRINCIPAL INVESTOR(S) NOTES
<CAPTION>
<C> <C> <C> <S> <C> <C>
5/96 $ 6.0 12% Note convertible into Series E Holodeck Limited (1)
Preferred Shares
2/97-8/97 $ 1.6 (2) Note Payable PhoenixCor (2)
12/98-6/99 $12.7 8%-12% Notes convertible into Series H1 EXCELlink, Holodeck, Mayfield, (3)
Preferred Shares Morgan Stanley, Nortel Networks,
UCOM, other shareholders
</TABLE>
(1) The note and all accrued interest was paid in full in May 1998.
(2) Financing of capital equipment under a $2.5 million secured line of credit.
The line of credit has expired. The current outstanding balance is
$0.7 million. The interest rate is 6% above average term treasury notes.
(3) Notes payable, convertible by their terms upon closing of at least
$10 million in gross proceeds in permanent preferred share financing which
occurred on September 10, 1999, including interest accrued at 12% per annum
from December 1998 to March 1999 and 8% per annum from March 1999 through
September 10, 1999.
During the second quarter of fiscal 1999, we experienced a shortage of cash.
In December 1998, we obtained a 60 day loan from Nortel Networks for
$1.4 million. On the maturity date in February 1999, we were unable to pay the
principal amount of the note. To remedy the default, we issued Nortel Networks a
warrant to acquire 24,000 common shares at an exercise price of $1.15 per share.
The principal balance of $1.4 million was applied towards a bridge loan and
warrant financing in March 1999. An additional $3.7 million was loaned to us in
this bridge loan and warrant financing in March 1999 by Nortel Networks,
EXCELlink, Mayfield Funds and Morgan Stanley Dean Witter Venture Partners. In
May and June 1999, other preferred investors loaned us $7.6 million in this
bridge loan and warrant financing. Each of our preferred shareholders were given
the opportunity to participate in this financing and, if they participated at a
minimum percentage of their initial investment, they were entitled to exchange
their original preferred shares for shares of series A1, B1, C1, D1, E1, F1 and
G1 whose terms were identical to the original preferred shares except that the
new preferred shares were preferential in liquidation to all original preferred
shares. Approximately 95% of our preferred shareholders participated at least to
their minimum level and received the senior security. In conjunction with these
loans, we issued five year warrants to purchase 6,345,939 common shares of
$0.70 per share. These warrants were valued using the Black-Scholes model at
$5,877,018. See Note 8 to the Consolidated Financial Statements.
On September 10, 1999 we converted the principal and interest into 1,872,362
Series H1 preferred shares and issued warrants to purchase an additional
253,874 common shares at an exercise price of $1.00 per share to the
participants in the bridge loan and warrant financing. These warrants expire on
September 10, 2002 or upon the consummation of an initial public offering.
As of September 30, 1999, cash and cash equivalents were $13.0 million. In
November and December 1999, we received $28.0 million in net proceeds from the
sale of additional preferred shares.
We expect the net proceeds of this offering to be $85.6 million, based on an
assumed offering price of $11.00 and after deducting underwriting discounts and
estimated offering expenses. In addition, as a result of the exercise of
warrants which would otherwise expire on the effectiveness of the offering, we
could receive additional proceeds of up to $15.1 million. We plan to use
$4.5 million of the net proceeds for capital expenditures during fiscal 2000. We
also will use a portion of the net proceeds to fund increased facility rent of
$1.0 million per year beginning in fiscal 2000. We expect to
34
<PAGE>
use the remainder of the net proceeds for general corporate purposes including
moderate increases from prior levels of research and development and working
capital.
Cash used in operating activities was $1.2 million for the three months
ended September 30, 1999, $13.3 million in 1999, and $21.0 million in 1998.
Cash used in investing activities was $1.0 million for the three months
ended September 30, 1999, $2.0 million in 1999 primarily for capital equipment
purchases, and cash provided by investing activities was $0.3 million in 1998
resulting from the sale of short term investments partially offset by capital
equipment purchases.
Cash provided by financing activities was $11.4 million for the three months
ended September 30, 1999, $11.8 million in 1999, and $13.1 million in 1998. Cash
provided by financing activities in 1999 was primarily due to issuances of
convertible notes and warrants while in 1998 cash provided by financing
activities was primarily due to issuances of preferred shares and sale of a
related warrant, partly offset by payments on notes payable to shareholders.
Our accounts receivable balances have been dominated by large amounts due
from our principal customers who are all large, internationally recognized
corporations. While terms of sale vary from customer to customer, payment
practices of these large corporations have resulted in delays in collection and
our quarterly days sales outstanding was 134 days based on the accounts
receivable as of June 30, 1999. Based on quarterly sales and accounts receivable
as of September 30, 1999 we reduced quarterly days sales outstanding to 109
days. Depending on the mix of sales to U.S. and non-U.S. based customers, and
depending on the mix of terms of sale, our days sales outstanding will fluctuate
from period to period.
In November 1999 we received a commitment for a $5 million revolving line of
credit from a commercial bank. This credit facility would allow us to borrow up
to 70% of eligible accounts receivable at interest rates equal to the bank
reference rate plus 1.25%. The lender would obtain a security interest in
essentially all of our assets, and advances would be subject to our compliance
with quarterly financial covenants including minimum tangible net worth, minimum
earnings before interest, taxes, depreciation and amortization, and compliance
with selected balance sheet ratios. While the lender has provided a firm
commitment, we cannot be certain that we will execute a loan agreement.
We have no material commitments other than obligations under our facilities
leases including a lease we entered in December 1999 for our principal
engineering and administrative offices. See Note 11 and Note 15 to the
Consolidated Financial Statements for more information on our facilities leases.
Our future capital requirements will depend upon many factors, including the
timing of research and product development efforts and expansion of our
marketing efforts. We expect to continue to expend significant but smaller
amounts on property and equipment related to the expansion of our facilities,
and on research and development laboratory and test equipment, as the capital
required for volume manufacturing is being committed by our contract
manufacturers. We provide six or twelve month forecasts to our contract
manufacturers. We generally commit to purchase products to be delivered within
the next 60 days covered by these forecasts with cancellation fees. As of
December 27, 1999, we had committed to make purchases totaling $4.8 million from
these manufacturers in the next 60 days. In addition, in specific instances we
may agree to assume liability for limited quantities of specialized components
with lead times beyond this 60-day period.
In future periods, we generally anticipate significant increases in our
working capital needs on a period-to-period basis primarily as a result of
planned increases in sales and marketing activity. In conjunction with the
expected increases in sales, we expect higher levels of inventory and trade
accounts receivable. While we also expect an increase in trade accounts payable
and other liabilities, we do not expect that they will offset the increases in
inventory and trade accounts receivable.
We believe that continued substantial investment in research and development
is critical to attaining our strategic product and cost-reduction objectives. We
also expect to expand our field sales
35
<PAGE>
and customer support organizations as customers move from trials to large scale
deployments. The growth of our business and operation as a public company will
require additional personnel and related costs, resulting in increases in our
selling, general and administrative expenses.
We believe that the net proceeds of this offering, together with our
existing cash balances, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may need or could elect to seek
additional funding prior to that time. In November 1999, we received a
commitment from a financial institution for a revolving line of credit in the
amount of $5,000,000 for a one year term subject to advances against eligible
accounts receivable. In the event that we need to raise additional funds, we may
not be able to do so on terms favorable to us. Furthermore, if we issue equity
securities, shareholders may experience dilution or the new equity securities
may have rights, preferences and privileges senior to those of existing holders
of common shares. If additional funds are raised through the issuance of debt
securities, such securities would have rights, preferences and privileges senior
to holders of common shares, and the terms. If we cannot raise funds on terms
favorable to us, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements. See "Use of Proceeds," "Dilution" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for more information on our capital
requirements.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish between 20th and 21st century dates. This may result in software
failures or the creation of erroneous results.
We have largely completed our year 2000 readiness compliance and tested
current versions of our products and vendor's software. We believe all current
versions of our products are "year 2000 compliant," as defined below, when
configured and used in accordance with the related documentation, and provided
that the underlying operating system of the computer on which our products run
and any other software used with or in the computer on which our products run,
are compliant.
We define "year 2000 compliant" as the ability to:
- correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
- function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
- if the date elements in interfaces and data storage specify the century,
store and provide output of date information in ways that are unambiguous
as to century; and
- recognize the year 2000 as a leap year.
We have tested software obtained from third parties that is incorporated
into our products, and we believe that licensed software is year 2000 compliant.
Despite testing by us and by current and potential clients, and assurances from
developers of products incorporated into our products, our products may contain
undetected errors or defects associated with year 2000 date functions. Known or
unknown errors or defects in our products could result in delay or loss of
revenue, diversion of development resources, damage to our reputation, or
increased service and warranty costs, any of which could materially adversely
affect our business, operating results or financial condition. Some industry
analysts have predicted significant litigation regarding year 2000 compliance
issues, and we are aware of such lawsuits against other vendors. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent we may be affected by it.
36
<PAGE>
We have initiated an assessment of our material internal information
technology systems, including both our own software products and third party
software and hardware technology. We have completed testing and we believe that
we are compliant. If our information technology systems are not year 2000
compliant, we may not have allowed sufficient time for remediation of any
deficiencies. To the extent that we are not able to test the technology provided
by third party vendors, we are seeking assurances from vendors that their
systems are year 2000 compliant. We have completed the inventory/ assessment of
licensed software included in our products and have confirmed that the licensed
software that we incorporate in our products is year 2000 compliant. This
confirmation has been achieved through a combination of internal testing,
vendor's year 2000 Readiness Disclosures, and an ongoing certification program
addressing all of our suppliers and vendors.
We are not currently aware of any material operational issues or costs
associated with preparing our internal information technology for the year 2000.
Our costs incurred through September 30, 1999, have totaled less than $25,000.
We expect to incur less than $100,000 in costs to complete our year 2000
compliance efforts. However, we may experience material unanticipated problems
and costs caused by undetected errors or defects in the technology used in our
internal information technology systems.
We do not currently have any information concerning the year 2000 compliance
status of some of our customers. If our current or future customers fail to
achieve year 2000 compliance or if they divert technology expenditures to
address year 2000 compliance problems, our business could suffer.
We have funded our year 2000 plan from available cash and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We expect to incur additional costs related to the year 2000 plan
for administrative personnel to manage the project, outside contractor
assistance, technical support for our products, product engineering and customer
satisfaction. In addition, we may experience material problems and costs with
year 2000 compliance that could adversely affect our business, results of
operations, and financial condition.
We have developed and documented contingency plans for business partners
deemed to be at risk. We have also developed contingency plans for all of our
business areas. In addition, we have contingency plans for critical internal
inventory items, hardware and software, used in our internal infrastructure and
our product cycle. These plans have been documented and distributed to
potentially affected users of our systems. The overall cost of developing and
implementing our plan may be material. Finally, we are also subject to external
forces that might generally affect industry and commerce, such as utility or
transportation company year 2000 compliance failures and related service
interruptions.
We believe our year 2000 worst case scenario would be the failure of a sole
or limited source supplier to be year 2000 compliant. Our failure or the failure
of one of these suppliers to be year 2000 compliant could seriously interrupt
our manufacturing process, thereby substantially reducing our revenues. To date,
we have not experienced any material disruption in our operations as a result of
year 2000 problems, nor have we incurred any unplanned expenses to address year
2000 concerns.
FINANCIAL MARKET RISK
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; however, through June 30, 1999, we
have not experienced any significant negative impact on our operations as a
result of fluctuations in foreign currency exchange rates.
37
<PAGE>
BUSINESS
OVERVIEW
We provide compact 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 the following applications in a cost-effective manner:
- WIRELESS OFFICES. Our systems allow wireless users in organizations such
as large corporations, government entities and universities to maintain
contact with the organization's private telephone network whether the
users are in their offices, out of their offices or moving between
locations.
- COMMUNITY NETWORKS. Our systems enable wireless service providers to add
capacity in heavy usage areas and to provide telephone service in
previously unserved communities.
Our core product, WAVEXpress, delivers a comprehensive set of wireless
network capabilities which are based on the GSM standard. WAVEXpress systems can
serve as:
- a base station to receive and transmit voice and data signals over radio
frequencies;
- a switch to route voice and data signals to their correct destinations;
- a base station controller to manage voice and data signals between the
base station and the switch; or
- any combination of these functions depending on our system's hardware and
software configuration.
Our all-in-one solution, the Network In A Box, provides the capabilities of
a complete wireless network in an enclosure approximately the size of a personal
computer tower.
We market and sell our solutions around the world utilizing a three-pronged
sales strategy which includes selling to communications equipment providers, to
systems integrators which integrate our systems with the products of other
companies and through our own direct sales force. Since 1997 we have sold over
1,000 units which have been installed in 17 countries worldwide. We have
established a strategic alliance with Nortel Networks, which accounted for 51%
of our revenues in 1999 and which owns 22.4% of our outstanding shares, assuming
the exercise of all warrants. We have also recently entered into a strategic
alliance with Alcatel, which included their purchase of 4.3% of our outstanding
shares. These alliances include purchase and distribution agreements through
which both companies will market our products to their customers.
In addition, in December 1999 we strengthened our strategic alliance with
Hutchison Telecommunications Group, which included the purchase by Holodeck
Limited, an affiliate of Hutchison Telecommunications Group, of 2 million
preferred shares at $8.00 per share, increasing their ownership to 7.2% of our
outstanding shares. We have also signed contracts with affiliates of Hutchison
Telecommunications Group to sell our products in Hong Kong and Sri Lanka.
INDUSTRY
RAPID GROWTH FOR MOBILE WIRELESS COMMUNICATIONS
In recent years, worldwide demand for mobile wireless communications has
increased dramatically. According to International Data Corporation, the
worldwide wireless market is expected to grow from 303 million users in 1998 to
approximately 1.1 billion by 2003, a compounded annual growth rate of
approximately 29%. This rapid growth has been driven by the increasing
availability, functionality and affordability of wireless products and services.
The market for our systems is a subset of the worldwide wireless market. Since
the market for our systems is new and emerging, industry analysts have not
compiled reliable data about the size or growth rate of our target markets. Our
growth rate and the
38
<PAGE>
growth rate of our target markets may not match the growth rate of worldwide
wireless markets in general.
Changes in the worldwide regulatory environment, including the elimination
of monopolies for public communications services, privatization of
government-owned communications organizations and competitive licensing of radio
frequency spectrum by regulatory authorities, have led to an increase in the
number of communications service providers seeking to meet the rapidly growing
demand for mobile wireless communications. In Europe, for example, recent
European Union directives prohibit member countries from restricting competitive
access to mobile and local service after January 1, 1998. In the United States,
the Telecommunications Act of 1996 opened local telephone networks to new
competition. Similar trends in developing countries are creating significant
opportunities for new entrants in the communications market. This increasingly
competitive environment is rapidly driving down the prices that end-users pay
for services.
COMMUNICATIONS EQUIPMENT MARKET
Wireless service providers are investing in expanding and upgrading their
networks to add capacity and keep pace with the demand for value-added services.
These investments are being driven by increased competition, strong subscriber
growth and new product innovation. Such investments enable wireless service
providers to extend geographic coverage, improve call quality, and deliver
enhanced features and services. Despite reductions in the cost of communications
equipment, service providers' capital budgets have continued to increase
substantially. According to Dataquest, the digital wireless communications
equipment market is expected to grow from approximately $31 billion in 1998 to
over $41 billion by the end of 2002. The market for our systems is a subset of
the digital wireless communications equipment market. Currently, there is no
reliable data about the size or growth rate of our target markets. Growth rates
experienced by the industry as a whole may not reflect growth rates that we, or
our target markets, will experience. In addition, recessionary conditions in
Asia have resulted in reduced demand for wireless communications systems.
GLOBAL SYSTEM FOR MOBILE COMMUNICATIONS STANDARD
The GSM standard competes primarily with the code division multiple access
standard, or CDMA, the time division multiple access standard, or TDMA, and
analog standards. According to The Comprehensive Guide to Wireless Technologies,
an industry guide, all of the digital standards, including GSM, CDMA and TDMA,
offer clearer voice communications than the older analog standards. We believe
that digital standards will attract even more users in the future as functions
such as high-speed data communications become available. In addition to clearer
voice communications, the digital standards offer features not available with
analog standards. For example, GSM, CDMA and TDMA allow users to receive text
messages. Furthermore, the GSM standard allows users to roam across
international boundaries without an interruption in service. The TDMA and CDMA
standards do not allow this international roaming capability because those
phones do not have a removable personal identity card, which can be inserted in
phones using the local frequency range. Finally, CDMA does not have a maximum
number of calls it can handle at a given time. CDMA can accommodate additional
calls only by slightly degrading the quality of all ongoing calls. GSM and TDMA,
however, cannot expand the maximum number of calls to accommodate surges in
demand.
According to International Data Corporation, GSM is the world's most widely
accepted digital wireless standard with 132 million users in 1998 and is
projected to grow to 556 million users by 2003. In 1998, GSM accounted for
approximately 44% of the world wireless market while CDMA, TDMA and analog
accounted for 8%, 6% and 31% of the world market, respectively. GSM is the
dominant standard in Europe as a result of the European Union's decision to
endorse a single unifying digital standard in the 1980s. In Asia, the rate of
acceptance of the GSM standard is growing rapidly as wireless service providers
have selected GSM to offer differentiated services and to increase capacity. On
November 1, 1999, the GSM Association and the Universal Wireless Communications
Consortium, the governing bodies of the GSM and TDMA standards, respectively,
announced an agreement to
39
<PAGE>
jointly develop standards that enable GSM and TDMA systems to operate together.
International standards organizations are also working to develop the future
standard that will replace all three of these technologies.
Early in the history of the wireless market, analog standards achieved a
strong presence in the United States while the GSM standard was being adopted in
Europe. According to Allied Business Intelligence, Inc., at the end of 1998
there were 3 million GSM users in the United States, which represented 4.3% of
all wireless users in the United States. Today, although the acceptance of the
GSM standard in North America is in its early stages, increased penetration of
the GSM standard is being driven by its ability to support international
roaming, and will be further driven by its advanced data transmission and
messaging capabilities. GSM has been adopted in North America by communications
service providers, including Microcell, OmniPoint, PacBell and VoiceStream. Both
CDMA and TDMA have a significant presence in the United States. Sprint PCS and
GTE have deployed CDMA and AT&T Wireless has deployed TDMA in the United States.
FUTURE WIRELESS STANDARD
An international consortium of standards bodies is working to establish the
specifications of a future wireless standard, often referred to as the third
generation wireless standard, and to ensure its interoperability with existing
network standards. Since the installed base of wireless networks was not
designed to be interoperable with what we expect will be the future standard,
significant capital expenditures will be required to update them. We believe
wireless service providers will attempt to preserve their previous investments
in infrastructure and will seek incremental solutions that will facilitate
upgrading to the future wireless standard while ensuring interoperability among
disparate networks. Industry analysts expect the future standard to use the
Internet Protocol to enable high speed data transmissions over wireless
networks. The Internet Protocol is the networking standard used to communicate
voice and data across the Internet. Using the Internet Protocol for wireless
network access would provide potential cost-savings for wireless service
providers by allowing them to use the existing Internet infrastructure. We
expect these developments will increase the demand for cost-effective, flexible,
wireless networks that can be easily upgraded to the emerging future standard.
KEY DEVELOPING MARKET OPPORTUNITIES
Rapid technological innovation in wireless communications is creating new
and varied market opportunities.
WIRELESS OFFICES. Wireless office networks combine the mobility and
flexibility of wireless communications with all of the features of traditional
telephone networks, and enable organizations such as large corporations,
government entities and universities to integrate their private office networks
with public wireless networks. This integration enables abbreviated dialing
while the user remains within the private office network. After the user leaves
the office building, incoming calls are routed to the user's mobile phone via
the public wireless network. Wireless office networks can increase productivity
by making it possible to reach employees through a single phone number at all
times, regardless of location, while providing significant cost savings for the
organization. The wireless office market enables wireless service providers to
expand their customer base, reduce subscriber turnover, provide customized
billing and establish a presence from which to offer wireless data networks. The
Yankee Group estimates the market for GSM wireless office networks will be
10.9 million distinct phone lines in 2002 in the European corporate market
alone. GSM wireless office networks compete with a digital European cordless
telephone standard known as DECT. In 1998, DECT had an installed base of
1.6 million wireless office lines in Europe compared to 410,000 for GSM.
However, unlike GSM, the DECT standard does not permit roaming outside the
office premises. While some handset vendors either offer or are considering
offering phones that support both DECT and GSM, the Yankee Group expects a
limited market for such a product for both technical and economic reasons. The
Yankee Group estimates the European market for DECT wireless office networks
will be 4.7 million wireless office lines in 2002.
40
<PAGE>
COMMUNITY NETWORKS. Community networks enable the introduction of wireless
service to areas that are currently not served by wireless providers or that may
not have any telephone service. Wireless solutions such as wireless local loop
networks offer the most cost-effective way to provide telephone service to areas
with no current service. Wireless local loop networks are wireless
communications systems that connect users to the public telephone network using
radio signals as a substitute for traditional telephone connections. These
markets offer substantial growth potential due to the relatively low level of
rural and remote telephone service penetration and the continued need for
low-cost communications services. According to Frost & Sullivan, the wireless
local loop market is expected to grow from approximately $4.6 billion in 1998 to
$16.5 billion in 2002. Wireless solutions provide a high-value proposition in
developing countries since these solutions are generally less expensive than
establishing a traditional telephone infrastructure, according to Frost &
Sullivan. To succeed in the community networks market, we believe wireless
service providers need to employ network systems that minimize initial capital
expenditures while providing the flexibility to scale cost-effectively as demand
grows. In addition, wireless service providers need to minimize ongoing
operating costs, the largest of which are the charges associated with routing
calls through a central switch, where traditionally all calls are processed.
PRIMARY OBJECTIVES OF THE WIRELESS SERVICE PROVIDER
To better serve their existing user base and to gain market share, wireless
service providers are focused on the following primary objectives:
COST-EFFECTIVE NETWORK DEPLOYMENT. The deployment of traditional wireless
networks requires significant capital expenditures. A typical wireless network
consists of a switch to route voice and data signals to their correct
destinations, multiple base station controllers to aggregate and manage voice
and data signals between the switch and the base station and many base stations
to transmit and receive voice and data signals over radio frequencies. Wireless
networks are typically designed to support large user bases. Service providers
need cost-effective ways to address smaller user bases. As service providers
face increasing price competition, they will depend on communications equipment
providers for cost-effective and technologically advanced infrastructure
systems.
EXTENSION OF COVERAGE. In the past, wireless networks have been deployed
primarily in urban centers and other heavy usage areas. Increasing demand for
improved service over wider geographic areas has prompted wireless service
providers to accelerate the expansion of their networks. In addition, wireless
service providers are deploying networks in locations where service has
previously been inadequate or prohibitively expensive to provide.
IMPROVED QUALITY OF SERVICE. Currently, wireless networks in metropolitan
areas are prone to a lower quality of service when heavy usage causes capacity
limits to be exceeded. Furthermore, wireless service in buildings, tunnels and
subways is often interrupted or unavailable. Similarly, wireless services in
remote areas are often limited due to the lack of a fully-developed wireless
infrastructure. Improving the quality of wireless service involves increasing
network capacity and capabilities to address current network constraints.
VALUE-ADDED SERVICES. The extreme competition faced by wireless service
providers requires them to offer differentiated, value-added services including
the ability to roam across regional, national and international boundaries
without an interruption in service, access to high-speed data transmission and
other features such as voicemail and caller ID. In order to address increasing
competitive pressures, wireless service providers must use flexible systems that
enable them to deploy numerous services in a timely and cost-efficient manner.
As wireless service providers seek to achieve these objectives in an
extremely competitive market, they will increasingly require communications
equipment providers to develop wireless network solutions that enable the
flexible, cost-effective delivery of value-added services and that are capable
of being easily adapted to the future wireless standard.
41
<PAGE>
THE INTERWAVE SOLUTION
Our systems offer a number of important advantages to GSM service providers,
including:
COMPACT, FLEXIBLE AND MODULAR
Our WAVEXpress products provide a comprehensive set of GSM network
capabilities. We believe that we provide the only commercially available system
that supports an entire GSM network within a single enclosure approximately the
size of a personal computer tower. The WAVEXpress system can serve as a base
station, base station controller, switch or any combination of these functions
depending on our system's hardware and software configuration. The WAVEXpress
product uses only four hardware modules which enables the system to be updated
and enhanced by simply exchanging specific hardware modules and upgrading
software. Our compact and modular system enables wireless service providers to
implement wireless office networks, to fill in coverage blind spots, to increase
capacity in heavy usage areas and to provide service to previously unserved
areas.
COST-EFFECTIVE NETWORK DEPLOYMENT AND OPERATION
Our compact, flexible systems reduce both initial and incremental capital
expenditures for network deployment by wireless service providers. The flexible
nature of our products enable wireless service providers to rapidly add capacity
to their networks in a cost-effective manner. In addition, there are only four
WAVEXpress hardware modules, which result in reduced maintenance and training
costs, and a reduction in capital necessary to maintain spare parts in
inventory. Furthermore, we have a patented switch technology that allows the
network to determine whether a call should be directed to its destination by the
local network or by a central switch. This proprietary switch capability allows
a wireless service provider to reduce its dependence on the central switch and
increase network efficiency, resulting in lower operating costs.
INTEROPERABILITY WITH EXISTING GSM NETWORKS
We maintain strict adherence to GSM standards to ensure that our systems are
compatible with other communications equipment providers' products. We have
proven our systems' interoperability in live networks with equipment from all
major communications equipment providers, including Alcatel, Ericsson, Lucent,
Nokia, Nortel Networks and Siemens. Our systems are also compatible with
existing private telephone systems. Interoperability enables wireless service
providers to upgrade their existing systems without having to replace their
entire network, facilitating the introduction of new capabilities and services
in a timely and cost-effective manner. We plan to maintain our systems'
interoperability despite changes to software, equipment configuration, network
design and upgrades to the various network standards.
RAPID TIME-TO-MARKET FOR NEW, VALUE-ADDED SERVICES
Service providers using our wireless network systems can achieve rapid
time-to-market for new services which they can offer to new and existing users.
Our flexible design enables the system to be readily upgraded through simple
hardware additions and software reconfigurations. These features allow service
providers to decrease the implementation time required to offer new services to
customers. Our WAVEView products also allow for the control of all functions and
components of the network through a single management system. This enables
service providers to customize and expand service offerings to users without
deploying additional systems that require incremental training and testing. Our
expandable systems provide small, low-cost alternatives to expensive digital
communications infrastructure equipment. Furthermore, since our systems are
based on the Internet Protocol, we believe wireless service providers will be
able to easily adapt to the future wireless standard through simple software
upgrades or specific hardware replacements, instead of time-consuming deployment
of and costly investment in new network equipment.
42
<PAGE>
STRATEGY
Our goal is to be the premier global provider of cost-effective, compact
wireless systems in targeted segments of the GSM market. The key elements of our
strategy include:
PROVIDE GSM WIRELESS OFFICE SYSTEMS
We intend to provide cost-effective network systems for large organizations
such as corporations, universities and government entities. We have developed a
wireless office system that can function as a stand-alone network or as an
add-on to a new or existing network. Our system, and specifically our switch
technology, reduces costs for an organization by allowing a user's calls to any
campus to stay inside the organization's network. Nortel Networks and Alcatel
are actively marketing our wireless office system.
DELIVER FUTURE SOLUTIONS USING THE INTERNET PROTOCOL
Our research and development efforts are focused on using our WAVEXpress
products to offer voice and data communications over the Internet. We plan to
capitalize on the flexibility of our system design to speed our customers'
transition to the emerging future standard once its specifications are
finalized. Our fully-functional, GSM voice communications system that uses the
Internet Protocol was demonstrated at the February 1999 GSM World Congress. We
expect this system to be commercially available in early 2000.
FURTHER PENETRATE EXISTING MARKET OPPORTUNITIES
To date, our sales have been predominantly to wireless service providers
seeking to fill gaps in coverage, to increase capacity in heavy usage areas and
to provide wireless service to previously unserved areas. We believe that these
applications will continue to represent a significant market opportunity for our
systems. As our customers expand their networks, we plan to generate additional
orders. We intend to convert existing trials into large-scale commercial
deployments. Currently, we are involved in 16 trials in nine countries. We also
believe that our visibility as an early provider of network solutions that use
the Internet Protocol will lead to new deployments with new and existing
customers. For example, Alcatel will integrate our products that use the
Internet Protocol with their corporate office networking products and market
them through their enterprise solutions division.
STRENGTHEN AND EXPAND RELATIONSHIPS WITH COMMUNICATIONS EQUIPMENT PROVIDERS
We intend to use our strategic relationships with communications equipment
providers such as Nortel Networks, Alcatel and Sagem to expand our geographic
coverage and increase the market share for our solutions. Our relationships with
these equipment providers allow us to benefit from their sales forces selling
our products and enable us to reach new customers and strengthen our position
with existing customers. Communications equipment providers bundle our solutions
with their products to address the needs of wireless service providers. Our
sales are also enhanced by equipment providers' abilities to offer service and
support for our systems. We believe that strengthening these relationships and
selectively establishing new relationships will help us to generate new sales.
USE TECHNOLOGICAL LEADERSHIP TO PROVIDE COMPETITIVE ADVANTAGES FOR WIRELESS
SERVICE PROVIDERS
We intend to use our leading-edge technology and intellectual property to
expand the capabilities of our network systems, streamline system upgrades and
simplify the purchasing process. Furthermore, we intend to update our equipment
to use the latest generation Power PC processor which will provide significantly
more processing power and enhance the service providers' ability to handle heavy
data usage. Upcoming enhancements to our systems include the implementation of a
Web-based system to manage wireless networks, which will provide all monitoring,
configuration and maintenance capabilities. This will enable rapid emergency
response and enhance overall system management. Further, our system will be
upgraded to use the latest generation PowerPC processor, giving our systems
significantly more processing power to enhance service providers' ability to
handle heavy data
43
<PAGE>
usage. Finally, we intend to develop a Web-based system to enable service
providers to configure and purchase our solutions online, streamlining the
purchasing process and reducing related purchasing costs.
PRODUCT LINES
We operate in a single business segment, the manufacture and sale of
compact, wireless communication systems. We have two product lines, WAVEXpress
and WAVEView.
[A diagram of our WAVEXpress Network In A Box Configuration. The first
caption points to the base station controller. The second caption points to the
switch. The third caption points to the base station. There is a Note below
which states "Our WAVEXpress products use the same compact enclosure. The
hardware and software configuration varies based on the users' requirements."]
44
<PAGE>
45
<PAGE>
WAVEXPRESS
Our core WAVEXpress product can house any combination of our switch, our
base station controller and our base station in a single compact enclosure. The
WAVEXpress system is approximately the size of a personal computer tower and
weighs less than 50 pounds. Our WAVEXpress product line represented 80% and 88%
of our net revenues for fiscal year 1999 and the three months ending
September 30, 1999, respectively.
WAVEXCHANGE. The WAVEXchange is a wireless switch that routes calls and is
designed to allow the network to process calls locally rather than at a central
switch, thereby reducing operating costs. The small size and configurability of
the WAVEXchange enable wireless service providers to deploy value-added services
rapidly. The WAVEXchange can be integrated with existing private telephone
networks. The WAVEXchange is the only GSM switch on the market that can act
either as a base station controller extension of a central switch or as a local
switch, on a call-by-call basis. The WAVEXchange uses standard GSM interfaces
and can be configured with up to 16 connections that support up to 4,000 users,
depending on the requirements of the network. We began shipping WAVEXchange
products in June 1998.
WAVEXPRESS/BSC. The WAVEXpress/BSC is a compact base station controller
that aggregates and manages the communications between the WAVEXpress/BTS and
the central switch or a local WAVEXchange switch. The wall-mountable
WAVEXpress/BSC, one of the smallest GSM base station controllers on the market,
connects to any central switch supporting the GSM standard. The WAVEXpress can
be configured with up to 16 connections depending on the requirements of the
network. We began shipping the WAVEXpress/BSC in December 1996.
WAVEXPRESS/BTS AND TURBOWAVE/BTS. The WAVEXpress/BTS is a base station
which accommodates up to three radios providing up to 22 simultaneous
communication channels. Versions of the WAVEXpress/BTS are available in all
three GSM frequency bands: 900 MHz and 1800 MHz for Europe and Asia and 1900 MHz
for the Americas. The WAVEXpress/BTS connects the user to the network with no
need for additional components. In addition, we offer a higher powered version
of the WAVEXpress/BTS, the TurboWAVE, which is available in two configurations.
The TurboWAVE offers broader geographic coverage with over 20 kilometers of
range. In covering a longer range, the TurboWAVE offers the service provider
benefits from increased coverage, greater reduction in transmission costs and
lower infrastructure costs per user. We began shipping the WAVEXpress/BTS in
December 1996 and the TurboWAVE/BTS in December 1997.
NETWORK IN A BOX. The Network In A Box offers the ability to support a
complete GSM network by integrating the switch, base station controller and base
station in a single WAVEXpress unit. The Network In A Box is designed for rapid
deployment and provides easy network expansion as usage and coverage
requirements increase. Ideally suited for wireless office networks, the Network
In A Box can support a stand-alone GSM network or it can integrate with most
private telephone networks to provide wireless GSM interoperability with a
corporate telephone network. We have a patented switch technology which allows a
single Network In A Box to act as a wireless extension to a private telephone
network and as an extension to a public wireless network on a call-by-call
basis. In remote and rural communities, the Network In A Box enables rapid
deployment of GSM capabilities. Since a high percentage of calls stay within the
local network, transmission costs to a central switch are minimized. Coverage
and capacity can be increased quickly and easily by adding WAVEXpress/BTS and
WAVEXpress/BSC units to the network. The Network In A Box can also serve as a
cost-efficient GSM starter network allowing wireless service providers to match
their infrastructure expenditures to usage growth. We began shipping the Network
In A Box in August 1998.
WAVEXPRESS/BS PLUS. The WAVEXpress/BS Plus combines the functions of a base
station controller and base station in a single product. A WAVEXpress/BS Plus
can support up to 600 users and up to three external WAVEXpress/BTS base
stations to serve up to 2,400 users.
46
<PAGE>
WAVEVIEW
WAVEVIEW. The WAVEView is a management system for wireless service network
components. Our system simplifies the process of deploying new network
components, allowing the user to manage all aspects of wireless user profiles.
The WAVEView also allows wireless service providers to monitor network faults in
real-time and includes a comprehensive help function that guides users through
management tasks. We began shipping WAVEView in May 1998. Our WAVEView product
line represented 8% and 6% of our net revenue for fiscal year 1999 and the three
months ending September 30, 1999, respectively.
<TABLE>
PRODUCT NAME FUNCTION PRODUCT FEATURES
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
WAVEXchange Wireless switch that routes - Small size, low price per user
telephone calls through the GSM - Design allows capacity to be
network and can also act as a base increased by adding components
station controller - Can accomodate up to 4,000
users
WAVEXpress/BSC Base station controller that - Supports up to 16 connections
supports up to 30 base stations,
depending on the configuration
WAVEXpress/BTS Base station that supports the - Accommodates up to three radios
radio interface between wireless and 22 channels
phones and the rest of the network
TurboWAVE/BTS A WAVEXpress/BTS with high- - Extends range to over 20
powered radio transmitters kilometers
</TABLE>
47
<PAGE>
<TABLE>
PRODUCT NAME FUNCTION PRODUCT FEATURES
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Network In A Box All-in-one wireless network that - Incorporates all of the
includes the switch, base station functionality of the WAVEXchange,
control and base station functions WAVEXpress/BSC and
in a single enclosure WAVEXpress/BTS in a single
enclosure
- Supports up to two radios and
500 users
WAVEView Management system that manages - Operates on a standard UNIX
multiple base stations, base system with multiple system
station controllers and switches administrators. UNIX is a
standard computer operating
system used for technical
applications worldwide.
- Supports remote connections and
dial-in access
</TABLE>
APPLICATIONS OF OUR NETWORK SYSTEMS
Our network systems allow wireless service providers to expand capacity and
coverage on a permanent or emergency basis, to operate wireless office networks
and to provide service to remote and rural areas. The following case studies
show how our network solutions have been implemented to create value for
wireless service providers:
<TABLE>
<S> <C>
WIRELESS OFFICE NETWORK
PROBLEM: Employees spend little time in offices and
have difficulty staying in contact as they
travel between campus sites. Corporation
wants to provide abbreviated dialing and
other services over a wireless network, with
access to the public network
INTERWAVE SOLUTION: Network In A Box, WAVEView
VALUE PROPOSITION: - increase user base and overall minutes of
use
- centralize management of telephone,
wireless and data networks
- switch calls at local network level to
reduce transmission costs
- create different rate structure from main
network
- employees can have same phone number at
work and home
</TABLE>
48
<PAGE>
<TABLE>
<S> <C>
COMMUNITY NETWORKS
Fill-in Capacity Coverage
PROBLEM: Need to provide wireless service in the
subways in Beijing
INTERWAVE SOLUTION: WAVEXpress/BTS, WAVEXpress/BSC, WAVEView
VALUE PROPOSITION: - increase existing customer usage
- improve network coverage
- improve network quality
- small size and ease of installation
Mobile, Temporary Capacity Expansion
PROBLEM: Wireless service provider wants to deliver
service to natural disaster area to aid
relief efforts
INTERWAVE SOLUTION: Network In A Box, WAVEView
VALUE PROPOSITION: - enhance humanitarian relief efforts
- increase customer usage
- generate additional roaming revenue
Rural and Remote Services
PROBLEM: Wireless service provider wants to establish
cost-effective communications service to
rural regions in the Democratic Republic of
Congo
INTERWAVE SOLUTION: WAVEXpress/BTS, WAVEXpress/BSC, WAVEXchange,
WAVEView
VALUE PROPOSITION: - provide basic telephone services in the
Democratic Republic of Congo
- minimize initial capital investment
- allow service provider to add capacity in
a cost-effective manner as user base grows
- switch calls at local network level to
reduce transmission cost
</TABLE>
49
<PAGE>
CUSTOMERS
We have developed relationships with communications equipment providers,
systems integrators and wireless service providers. The following table
identifies our customers, the applications of our products and the intended end
users of communications networks employing our products. For the fiscal year
ended June 30, 1999, 51% of our revenues were derived from sales to Nortel
Networks and 20% of our revenues were derived from sales to ADC
Telecommunications. The other customers listed in the table each represented
less than 10% of our revenues for the fiscal year ended June 30, 1999.
<TABLE>
CUSTOMER APPLICATION END USERS
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMUNICATIONS EQUIPMENT PROVIDERS:
Nortel Networks - Rural and remote - Wireless users in
community networks developing countries
- Wireless office - Large organizations
networks
Alcatel(1) - Wireless office - Large organizations
networks
Sagem(1) - Specialized mobile - Large organizations and
radio military personnel
SYSTEMS INTEGRATORS:
Microcellular Systems(2) - Fill-in capacity - Subway passengers in
Beijing
HangZhou Topper Electric Corporation - Mobile, temporary - Dislocated people and
capacity expansion emergency workers in
disaster areas
WIRELESS SERVICE PROVIDERS:
Hutchison Telecommunications Group - Fill-in capacity - Wireless users in
Hong Kong
Total Access Communications - Fill-in capacity - Wireless users in
Bangkok
</TABLE>
(1) Currently engaged in testing of our products for incorporation into
networks.
(2) Created by a spin-off from ADC Telecommunications in May 1999.
SALES AND MARKETING
We market and sell our solutions around the world utilizing a three-pronged
sales strategy which includes selling to communications equipment providers, to
systems integrators that integrate our systems with the products of other
companies and through our own direct sales force.
We currently have 29 systems which are deployed in networks in Australia,
Austria, Central African Republic, China, Democratic Republic of Congo, France,
Gambia, Greece, Italy, Japan, Kosovo, Somalia, Taiwan, Tajikistan, Thailand, the
United Kingdom and the United States. We also have 16 trial systems located in
networks in Australia, China, France, Germany, South Africa, Sri Lanka, Taiwan,
the United Kingdom and the United States. We have provided additional
information about the geographic segments in which we operate in Note 14 to our
Consolidated Financial Statements.
50
<PAGE>
COMMUNICATIONS EQUIPMENT PROVIDERS
NORTEL NETWORKS. In March 1998, we entered into a five-year purchase and
distribution agreement with Nortel Networks. According to the terms of the
agreement, Nortel Networks has agreed to minimum purchase commitments of our
products on a quarterly basis through December 2000. The agreement requires that
we provide certain product features by various milestone dates. In addition, the
agreement precludes us from entering into similar agreements with Ericsson and
Nokia until December 31, 1999. After December 31, 1999, the restriction may be
terminated if the annual purchases by Nortel Networks in the calendar years
2000, 2001, or 2002 is less than 80% of their established minimum amounts.
The agreement was amended in April 1999 with respect to Nortel Networks'
obligations to meet specific quarterly purchase commitments and to specify our
requirements to meet certain product development milestones that are important
to Nortel Networks. In the first six quarters since the original agreement was
executed, Nortel Networks has purchased over $12 million of our products.
The agreement with Nortel Networks is one of a number of agreements executed
as part of a strategic alliance between our two companies. We also entered into
a patent license agreement whereby we acquired a license to certain patents held
by Nortel Networks and a technical information agreement whereby services for
systems testing facilities and equipment are provided. We have entered into a
number of financing transactions with Nortel Networks. Nortel Networks has made
an aggregate investment of $29.5 million in our company consisting of
$25.0 million in cash and delivery of license and technical information
agreements valued at $4.5 million. Assuming the exercise of all warrants held by
Nortel Networks, they own approximately 22.4% of our outstanding shares and will
own approximately 18.5% of our outstanding shares following the offering. See
"Certain Transactions".
ALCATEL. In July 1998, we entered into a two-year, non-exclusive purchase
and distribution agreement with Alcatel CIT. This agreement targeted specific
wireless service providers located in Western Europe where Alcatel CIT has a
significant supplier presence. Through September 30, 1999, Alcatel CIT had
purchased approximately $1.3 million of our products for initial testing along
with training and support services. In November 1999, we entered into a new
two-year, non-exclusive purchase and distribution agreement with Alcatel
Business Systems. Under this agreement, Alcatel Business Systems will integrate
our products, including those that use the Internet Protocol, with their
corporate office networking products and market them through their enterprise
solutions division. Alcatel Business Systems will provide us with $450,000 in
engineering funds. Alcatel Business Systems, which has made minimum purchase
commitments through December 2001 under the agreement, intends to resell our
products primarily to their corporate office customers. Under the agreement, we
agree to modify our products to contain certain features by various milestone
dates. In November 1999, Alcatel invested approximately $12.2 million in our
company by purchasing for cash approximately 1.5 million preferred shares at
$8.00 per share. As a result, Alcatel currently owns approximately 4.3% of our
outstanding shares.
Our purchase and distribution agreements with Nortel Networks and Alcatel
provide that those companies will receive our lowest price for the volume of
products that they purchase from us. In both agreements, we have product
development obligations. If we do not meet these obligations, the quarterly
purchase commitments from these customers may be lowered or removed entirely. In
the past, we have missed product development milestones, resulting in decreases
in quarterly revenue obligations from Nortel Networks. See "Certain
Transactions--Series G Preferred Financing, Purchase and Distribution Agreement"
and "Certain Transactions--Series I1 Preferred Share Financing, Purchase and
Distribution Agreement."
SAGEM. In February 1999, we entered into a five-year, non-exclusive
purchase and distribution agreement with Sagem, S.A. Through September 1999,
Sagem had purchased approximately $500,000
49
<PAGE>
of our products for internal testing and sales demonstration. Sagem is not
currently obligated to meet any minimum volume purchase commitments.
SYSTEMS INTEGRATORS
ADC TELECOMMUNICATIONS/MICROCELLULAR SYSTEMS. In early 1997, we entered a
four-year, non-exclusive distribution agreement with ADC Telecommunications,
which led to nearly $9.8 million in revenue between 1997 and early 1999. In
May 1999, ADC Telecommunications assigned the agreement to Microcellular
Systems, a company started by former ADC Telecommunications mobile systems
division employees. Microcellular Systems, headquartered in the U.K., is
targeted at providing systems integration and service/support to specific key
wireless service providers in Western Europe. Microcellular Systems accounted
for $1.1 million of our revenue representing 21% of our net revenue for the
three months ended September 30, 1999. Microcellular Systems is not currently
obligated to meet any minimum volume purchase commitments. ADC
Telecommunications also provided us with development support and testing
services. Between July 1998 and March 1999, we worked closely with the company
to jointly develop products for the North American market. In conjunction with
this activity, ADC Telecommunications acquired 360,000 of our preferred shares
in exchange for development services valued at approximately $2.5 million. This
agreement concluded in May 1999.
HANGZHOU TOPPER ELECTRIC CORPORATION. In June 1999, we began selling our
products in China through HangZhou Topper Electric, a private company
incorporated in China. We have sold $2.5 million of our products to HangZhou
Topper Electric through September 30, 1999. Sales to HangZhou Topper Electric
represented 38% of our revenues in the three months ended September 30, 1999. We
intend to enter into a joint venture agreement with HangZhou Topper Electric
whereby the joint venture will manufacture our products for the China market, as
well as develop new products. HangZhou Topper Electric is not currently
obligated to meet any minimum volume purchase commitments.
DIRECT SALES
We established a direct sales presence in Hong Kong in late 1995 and in
Paris in mid-1996. As a result, we have established a five-year cooperation
agreement with Telstra, headquartered in Australia, and a multi-year cooperation
agreement with France Telecom, headquartered in Paris, providing us with
information sharing opportunities with them. Through two GSM wireless service
providers, Hutchison Telecommunications Group, a unit of Hutchison Whampoa, and
Total Access Communications, a subsidiary of UCOM Group of Thailand, we have
deployed our network solutions in Hong Kong and Bangkok, respectively.
HUTCHISON TELECOMMUNICATIONS GROUP. We began deploying our products in Hong
Kong with Hutchison Telecommunications Group in 1997. In December 1999, we
executed a contract with an affiliate of Hutchison Telecommunications Group to
deploy our products in Sri Lanka. In addition, Holodeck Limited, an affiliate of
Hutchison Telecommunications Group and a wholly-owned subsidiary of Hutchison
Whampoa, purchased for cash 2 million preferred shares at $8.00 per share. As a
result, Holodeck Limited increased its beneficial ownership to 2.6 million
shares, or 7.2% of our outstanding shares, and will hold 5.8% of our outstanding
shares on completion of this offering. See "Certain Transactions--Series I1
Preferred Share Financing."
In connection with our contract with an affiliate of Hutchison
Telecommunications Group to sell our products in Sri Lanka, we entered into an
exclusivity agreement in which we agreed not to sell our WAVEXchange and
WAVExpress products to any party in Sri Lanka other than Hutchison's affiliate
for a period of three years. This period will be extended two years if at the
end of the three year period Hutchison's affiliate has ordered equipment in the
aggregate value of $15 million. In this agreement, we also agreed not to sell
these products to any party in Mumbai, India until March 31, 2000. If by that
date Hutchison or its affiliate has placed an order for the products in the
aggregate
50
<PAGE>
value of $6 million, we will not supply these products to any third party for
three years. This period will be extended two years if at the end of the three
year period Hutchison or its affiliate has placed an order in an aggregate value
of $15 million.
CUSTOMER SUPPORT--CUSTOMER ADVOCACY/ENGINEERING SERVICES
Our support organization provides pre-sale, installation and post-sale
support to wireless service providers who have purchased systems directly from
us. We offer 24-hour telephone support seven days a week. We provide manuals and
extensive training to support their deployment and operation of our systems. We
offer an ongoing maintenance program for our products, which consists of product
enhancements, product updates and technical support. System operators may renew
maintenance and support on an annual basis by paying a maintenance fee. We also
provide extensive support to communication equipment providers and systems
integrators through product training, 24-hour help-desk support and emergency
problem resolution. In addition, we work closely with their first-line support
organizations to insure that they have the necessary skills and specific product
knowledge to assist their customers with installation, management and other
network support requirements.
RESEARCH AND DEVELOPMENT
To maintain our technology leadership position, we focus our research and
development efforts on improving the functionality and performance of our
current products and developing new products. We obtain extensive development
input from our customers and actively monitor changes in the marketplace. We are
currently investing significant resources to:
- develop high-speed data capabilities while significantly reducing
manufacturing costs;
- expand the capacity of our base station;
- modify our WAVEView management system to adapt to the Internet Protocol;
and
- deliver product enhancements that allow communications equipment providers
to offer additional value-added services required by wireless service
providers.
We believe our future success will depend, in part, on our ability to
continue to develop and introduce new products and enhancements to our existing
products. Our research and development expenditures totaled approximately
$14.2 million, $15.3 million and $14.2 million in the fiscal years ended
June 30, 1997, 1998 and 1999, respectively.
We perform our research and product development activities in our Redwood
City and Hong Kong offices. As of September 30, 1999, our research and
development staff consisted of 75 full-time or contracted employees, that we
supplement from time to time with independent contractors and outside
development resources.
PROPRIETARY RIGHTS
Our success and ability to compete depends in part upon our proprietary
technology. We rely on a combination of patent, copyright and trade secret laws
as well as non-disclosure agreements to protect our proprietary technology. We
currently hold 15 United States patents and have 13 United States patent
applications pending. Many of these patent applications have also been filed in
a number of other countries. We cannot be certain that patents will be issued
with respect to pending or future patent applications or that our patents will
be upheld as valid or will be sufficient to prevent the development of
competitive products. We seek to protect our intellectual property rights by
limiting access to the distribution of our software, documentation and other
proprietary information. In addition, we have entered into confidentiality
agreements with our employees and certain customers, vendors and strategic
partners. Despite these efforts, it may be possible for unauthorized third
parties to copy certain portions of our products, to design around our patents,
or to reverse-engineer or
51
<PAGE>
otherwise obtain and use our proprietary information. In addition, we cannot be
certain that others will not develop substantially equivalent or superseding
proprietary technology, or that equivalent products will not be marketed in
competition with our products, thereby substantially reducing the value of our
proprietary rights. We are also subject to the risk of adverse claims and
litigation alleging infringement of the intellectual property rights of others.
In this regard, there can be no assurance that third parties will not assert
infringement claims in the future with respect to our current or future products
or that any such claims will not require us to enter into license arrangements
or result in protracted and costly litigation, regardless of the merits of such
claims.
No assurance can be given that any necessary licenses will be available or
that, if available, such licenses can be obtained on commercially reasonable
terms. In addition, the laws of some countries do not protect our proprietary
rights to the same extent as do the laws of the United States. Accordingly, we
may not be able to protect our proprietary rights against unauthorized
third-party copying or use, which could significantly harm our business.
In March, 1998, we acquired a license to certain GSM related patents held by
Nortel Networks in conjunction with Nortel Networks' equity investment in us. We
also have software license agreements with Lucent Technologies, TCSI, Inc.,
Trillium Digital Systems, Inc. and Wind River Associates which enable us to use
and modify the licensed software in our products.
MANUFACTURING
We rely heavily on contract manufacturers to provide labor and
capital-intensive production capacity. We currently use two primary
contractors--PEMSTAR Inc.'s Quadrus contract manufacturing division and
GSS/ARRAY Technology.
PEMSTAR, Inc. is responsible for manufacturing the majority of our
components and final system assembly. PEMSTAR has over 140,000 square feet of
manufacturing space in San Jose, California. Our initial manufacturing agreement
was signed in October 1995. GSS/ARRAY Technology is responsible for the
manufacture of our radio modules which they build for us pursuant to periodic
purchase orders. GSS/ARRAY has 100,000 square feet of total space in San Jose,
California and was recently acquired by ACT Manufacturing.
While relying on contractors for most of our manufacturing needs, we also
conduct final assembly and systems test operations at our Redwood City facility.
These functions are expected to be transferred to our contract manufacturers by
the middle of calendar year 2000. Accordingly, our dependence on our
manufacturers will increase. Problems encountered during the consolidation or
future problems relating to our manufacturers' inability to meet our quality and
delivery specifications could harm our operating results.
Since we typically have long sales cycles, we rely on a detailed sales
forecast to determine our production requirements and meet the ordering needs of
our contract manufacturers. We utilize the sales forecast to control our
inventory levels, and due to the hardware and software configuration of our
product line we are able to easily reconfigure our products in order to respond
to specific customer purchase orders in a timely manner. Our business is
generally not subject to any cyclicality, but rather our customers place
periodic purchase orders with us based on their requirements for our products.
Our systems include a number of components which come from sole source
suppliers such as Lucent, Motorola and Xilinx. Our contract manufacturers
procure these components from distributors or directly from the sole source
manufacturer. We do not have any contracts with these sole source suppliers, but
we communicate with them frequently in order to insure the continuing
availability of components. Generally, if a manufacturer decides to discontinue
a critical component, it would provide enough time for us and our contract
manufacturers to locate alternative components. However, we might be required to
redesign our products or take other steps which could delay their availability.
52
<PAGE>
We plan to consolidate the manufacturing of all of our products with PEMSTAR
by the middle of calendar year 2000.
COMPETITION
The GSM wireless market is rapidly evolving and highly competitive. We
believe that our business is affected by the following competitive factors:
- conformity to industry standards;
- breadth of product line;
- implementation of additional product features and enhancements, including
improvements in product performance, reliability, size and scalability;
- cost;
- ease of deployment;
- sales and distribution capability; and
- and technical support and service.
We expect that competition in each of our markets will increase in the
future. We currently compete against GSM communications equipment providers such
as Ericsson, Lucent, Motorola, Nokia, and Siemens. We also compete with the
TDMA, CDMA, DECT and wireless local loop product offerings from these same
communications equipment providers and expect that a number of them will develop
competing data communications products and technologies in the near future. We
also compete with the CDMA product offerings of Samsung and LG. In addition, we
compete with the wireless local loop product offerings of Hughes and NEC. While
Alcatel and Nortel Networks are our customers, we do compete in several market
applications. Most of these leading GSM communications equipment providers focus
on solutions that address large numbers of subscribers. Equipment providers are
beginning to focus on markets with smaller subscriber bases as we do currently.
All of the major GSM communications equipment providers have at least partial
GSM solutions that address our target markets.
Increased competition is likely to result in price reductions, shorter
product life cycles, reduced gross margins, longer sales cycles and loss of
market share, any of which would seriously harm our business. We cannot assure
you that we will be able to compete successfully against current or future
competitors or to preclude us from making or selling certain products or that
competitive pressures we face will not seriously harm our business and results
of operations.
EMPLOYEES
As of September 30, 1999, we employed or contracted 166 full-time persons,
including 20 in operations, 50 in marketing, sales and customer support, 75 in
research and development and 21 in finance and administration. Of these
employees, 14 were contract employees who were primarily engaged in software
engineering and systems integration and testing. None of our employees is
represented by a labor union and we have experienced no work stoppages to date.
We believe our relationship with our employees is good.
FACILITIES
Our principal administrative and engineering facilities are located in
leased facilities totaling approximately 28,500 square feet located in Redwood
City, California. We have recently signed a lease for approximately 56,000
square feet in Menlo Park, California for our principal administrative and
engineering facilities. The five-year lease commenced December 15, 1999. We
expect to sublet the premises in Redwood City following our relocation in early
2000 until the expiration of our Redwood
53
<PAGE>
City lease in 2002. However, we cannot be certain that we will be successful in
subletting the facilities or that subletting the facilities will allow us to
cover all of our current costs under the lease. In addition, we lease sales,
service and systems testing facilities totaling approximately 5,900 square feet
in Hong Kong and approximately 3,500 square feet in Paris, France. The leases
for the Hong Kong facilities expire in 2001 and 2003 and the lease for the Paris
facility expires in 2005.
GOVERNMENT REGULATION
We must obtain regulatory approval for our products to be used in some
jurisdictions. Regulators in Europe, Asia and North America have approved our
products as being compliant with GSM standards. We may sell and deploy our
products in these jurisdictions and in other jurisdictions which rely on these
jurisdictions for approvals. In some cases, specific country compliance testing
may be required. The delays inherent in this regulatory approval process may
cause the rescheduling, postponement or cancellation of the installation of our
products by our customers which, in turn, may significantly reduce sales of
products to such customers.
We are also subject to US government export controls. We rely on our
customers to inform us when they plan to deliver our products to other countries
and we regularly inform our customers of the export controls with which they
must comply.
LEGAL PROCEEDINGS
On June 28, 1999, we filed a complaint against JetCell Corporation in the
United States District Court for the Northern District of California (INTERWAVE
COMMUNICATIONS INTERNATIONAL LTD., V. JETCELL CORPORATION, Case No. C99-3125)
alleging misappropriation of trade secrets and infringement of United States
Patent Nos. 5,734,979 and 5,818,824. One of the founders of JetCell Corporation
is a former employee of interWAVE and JetCell also employs another former
employee of interWAVE. The complaint seeks injunctive relief and damages. On
July 19, 1999, JetCell filed an answer to the complaint and a series of
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. If the outcome
is adverse to us, we would 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.
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.
interWAVE, Network In A Box, TurboWAVE, WAVEview, WAVEXchange, WAVEXpress,
WAVEXpress BS Plus are trademarks of interWAVE. Nortel Networks is a trademark
of Nortel Networks Corporation. Other trademarks or service marks appearing in
this prospectus belong to their respective holders.
54
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding our directors,
executive officers and key employees, as of December 22, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Priscilla M. Lu........................... 47 Chief Executive Officer and Chairman of
the Board
Ian V. Sugarbroad......................... 53 President and Chief Operating Officer
Thomas W. Hubbs........................... 55 Executive Vice President and Chief
Financial Officer
Roger C. Cheung........................... 50 Vice President of Engineering
Denis A. Cote............................. 45 Vice President of Worldwide Sales
Edward W. Futcher......................... 45 Vice President of Technology
Michele D. Hogan.......................... 51 Vice President of Finance
H. David Jones............................ 54 Vice President of Product Marketing
Frank Seto................................ 43 Vice President of Operations
Roderick E. Thorne........................ 58 Vice President of Compliance and Quality
Lork Sang Chow............................ 65 Director
Pascal R. Debon........................... 52 Director
Kevin A. Fong(2).......................... 45 Director
William J. Harding(1)..................... 52 Director
James S. Loh.............................. 49 Director
Moses K. Tsang (2)........................ 51 Director
Andrew C. Wang (1)(2)..................... 63 Director
</TABLE>
- ------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
PRISCILLA M. LU founded our company in 1994 and has served as our Chief
Executive Officer and Chairman of the Board since June 1999 and as President
from June 1994 to August 1999. From 1992 to 1994, Dr. Lu was Vice President and
General Manager of the Network Systems Division at Network Equipment
Technologies, a wide-area network equipment provider. From June 1976 to December
1991, Dr. Lu worked for AT&T Bell Laboratories, a unit of AT&T that is now
Lucent Technologies, where she served as Business Unit Managing Director of the
Imaging and Multimedia Business Group and held other management positions.
Dr. Lu holds a B.S. and M.S. in Computer Science and Mathematics from the
University of Wisconsin and a Ph.D. in Electrical Engineering and Computer
Science from Northwestern University.
IAN V. SUGARBROAD has served as our President and Chief Operating Officer
since September 1999. From 1976 to August 1999, Mr. Sugarbroad worked for Nortel
Networks, a telecommunications equipment company. From January 1998 to August
1999, Mr. Sugarbroad was Vice President of Business Development, GSM Solutions,
located in Paris, France. From November 1996 to December 1997, Mr. Sugarbroad
was Vice President and General Manager of Nortel Networks wireless terminals
business in Dallas, Texas. Mr. Sugarbroad holds a B.Sc. in Physics from the
University of London and a M.Sc. in Physics and a M.B.A. from the University of
Western Ontario.
THOMAS W. HUBBS has served as our Executive Vice President and Chief
Financial Officer since July 1999 and as Senior Vice President and Chief
Financial Officer from December 1995 to April 1998. From November 1998 to
July 1999, Mr. Hubbs consulted with us in a variety of financial and business
development capacities. From April 1998 to October 1998, Mr. Hubbs served as
Senior Vice President
55
<PAGE>
and Chief Financial Officer for Walker Interactive Systems, Inc., a financial
systems software provider. From February 1987 to August 1995, Mr. Hubbs served
as Vice President and Chief Financial Officer for VeriFone, Inc., a transaction
automation systems company. Mr. Hubbs is a board member of Celeritek, Inc.
Mr. Hubbs holds a B.S. degree in Business Administration from Lehigh University
and a M.B.A. from the University of Santa Clara.
ROGER C. CHEUNG has served as our Vice President of Engineering since
September 1999. From February 1994 to September 1999, Dr. Cheung was Chief
Architect, Communications Industry Business Unit at Hewlett-Packard Company, a
computer and electronics equipment manufacturer. Dr. Cheung holds a B.S. degree
in Electrical Engineering from Lehigh University and a M.S. and Ph.D. in
Electrical Engineering from the University of California, Berkeley.
DENIS A. COTE has served as our Vice President of Worldwide Sales since
November 1998. From April 1979 until joining us in November 1998, Mr. Cote
worked for Harris Corporation, a telecommunications equipment supplier. From
November 1993 to November 1998, Mr. Cote was Vice President of World Wide
Marketing and Sales for Harris Farinon, a subsidiary of Harris Corporation.
Mr. Cote holds a B.S. in electrical engineering and a M.B.A. from the University
of Montreal.
EDWARD W. FUTCHER has served as our Vice President of Technology since
September 1999 and as our Vice President of Engineering from March 1998 to
September 1999 and was acting Vice President of Engineering from July 1997 to
March 1998. From May 1997 to July 1997, Dr. Futcher was Senior Director of
Systems and Software Development. From May 1994 to May 1997, he was Director of
Engineering at Tellabs, a telecommunications equipment supplier. From
October 1987 to May 1994, Dr. Futcher was the founder and President for
Novus, Inc., a software developer. Dr. Futcher holds a B.Sc. in Physics and a
Ph.D. in Theoretical Physics from the University of London.
MICHELE D. HOGAN has served as our Vice President of Finance since
August 1994. From July 1985 until January 1994, Ms. Hogan was employed by
Network Equipment Technologies, a wide-area network equipment provider, where
she served as Director of Operations, Finance. Ms. Hogan holds a B.S. in
Sociology from the University of Santa Clara, and a M.B.A. from San Jose State
University.
H. DAVID JONES has been Vice President of Product Marketing since
September 1999 and was Vice President of Sales from April 1996 to March 1997,
and Director of Sales from August 1994 to March 1996. From November 1998 until
September 1999, Mr. Jones consulted with us in a number of sales and marketing
capacities. From April 1997 until May 1998, he was co-founder and Vice President
of Sales and Marketing for Symmetry Communications Systems, Inc., a high speed
wireless communications company. He holds a B.S. in Business Administration from
Capital University and a M.B.A. from Ohio University.
FRANK SETO has served as our Vice President of Operations since October
1999. From July 1998 until October 1999, Mr. Seto was Director of Global
Operations Finance at Lucent Technologies, a telecommunications equipment
company. From August 1986 until July 1998, Mr. Seto was Manufacturing Operations
Controller and Divisional Controller at 3Com Corporation, an electronics
equipment manufacturer. Mr. Seto holds a B.S. in Business Administration from
the University of California, Berkeley and a M.B.A. from Golden Gate University.
RODERICK E. THORNE has served as our Vice President, Compliance and Quality
since September 1999, was our Director, Hardware Engineering from June 1996
until September 1999 and served in other roles from August 1994 until June 1996.
Dr. Thorne holds a B.S. in Electrical Engineering from Yale University and a
M.S. and Ph.D. in Electrical Engineering from the University of California,
Berkeley.
LORK SANG CHOW has served as a director of our company since 1994. Mr. Chow
has retired. Mr. Chow holds a diploma from Pui Ching Middle School.
56
<PAGE>
PASCAL R. DEBON has served as a director of our company since 1998.
Mr. Debon has been in general management positions with Nortel Networks since
1994. Mr. Debon is President of Wireless Solutions for Nortel Networks, based in
Dallas, Texas, and was formerly President of GSM Networks at Nortel Networks in
Paris. Mr. Debon holds a B.S. in Economics from l'Universite de Nanterre.
KEVIN A. FONG has served as a director of our company since 1995. Mr. Fong
has been a General Partner of Mayfield Fund, a venture capital firm, since 1989.
Mr. Fong is a board member of Legato Systems, Inc. and Vixel Corporation and
several private companies. Mr. Fong holds a B.S. in Electrical Engineering from
the University of California, Berkeley, and a M.S. in Electrical Engineering and
a M.B.A. from Stanford University.
WILLIAM J. HARDING has served as director of our company since July 1995.
Dr. Harding has been a Managing Member of Morgan Stanley Dean Witter Venture
Partners, a venture capital firm, since 1994. From 1985 to 1994, Dr. Harding was
a General Partner of J.H. Whitney & Co., an investment management company.
Dr. Harding is a board member of Commerce One, Inc., InterNAP Network Services
Corporation and Persistence Software, Inc. Dr. Harding holds a B.S. in
Engineering Mathematics and a M.S. in Systems Engineering from the University of
Arizona, and a Ph.D. in Engineering from Arizona State University.
JAMES S. LOH has served as a director of our company since 1994. Mr. Loh was
recently appointed Vice Chairman, Barclays Capital, the investment banking
division of Barclays PLC, a global financial institution. From 1988 to 1999,
Mr. Loh was a Senior Vice President of UBS AG, a global investment bank and has
been a Principal at Mainwell Holdings, a venture capital firm, since 1993.
Mr. Loh has a B.Sc. in Business Economics from the University of Bridgeport and
a M.B.A. from the University of Chicago.
MOSES K. TSANG has served as a director of our company since 1994.
Mr. Tsang has been General Partner at Ankar Capital Management, a venture
capital firm, since 1999. From 1998 to 1999, Mr. Tsang was employed by Goldman
Sachs Asia LLC, an investment banking firm, as an Advisory Director. From 1994
to 1998, Mr. Tsang was a Limited Partner and during 1994 he served as Chairman.
Mr. Tsang has a B.S. from Minnesota State University and a M.S.W. from the
University of Iowa.
ANDREW C. WANG has served as a director of our company since 1994. Dr. Wang
has been Chairman of Industrial Technology Investment Corporation, a venture
capital firm, and Taiwan Mask Corporation, a semiconductor manufacturer, since
1989. From 1992 to 1997, Dr. Wang was President and Chief Executive Officer of
Optical Microwave Network, Inc., a microwave component company. From 1994 to
1997, Dr. Wang was Chairman and Chief Executive Officer of Mobile
Telesystems, Inc., a satellite communications company. Dr. Wang holds a B.S. in
Electrical Engineering from the National Taiwan University, a M.S. in Electrical
Engineering from the University of California, Berkeley, and a Ph.D. in
Electrical Engineering from Stanford University.
BOARD OF DIRECTORS
We currently have eight directors. Our directors hold office until the next
annual meeting of shareholders or until their successors are duly elected or
appointed. All eight of our directors were elected pursuant to voting
agreements between us and certain of our shareholders. The most recent voting
agreement required that the parties to the agreement vote all of their shares so
as to elect as directors two persons designated by holders of the common shares,
one person designated by EXCELlink Corporation, one person designated by
Mainwell Corporation, one person designated by Sasson International Holdings,
Inc., one person designated by Mayfield VII and Mayfield Associates Fund II, one
person designated by Morgan Stanley Venture Capital Fund II and one person
designated by Nortel Networks. All of the voting agreements terminate on the
effective date of our initial public offering. Following this offering, our
board of directors will be divided into three classes. The
57
<PAGE>
directors in each class will serve for a three-year term, one class being
elected each year by our shareholders.
BOARD COMMITTEES
The audit committee currently consists of Messrs. Harding and Wang. The
audit committee reviews our annual audit and supervises independent auditors
that review the company's internal accounting procedures and financial
management practices.
The compensation committee currently consists of Messrs. Fong, Tsang and
Wang. The compensation committee makes recommendations concerning salaries,
stock options, incentives and other forms of compensation for directors,
officers and other employees of our company. The compensation committee also
administers our common share plans.
DIRECTOR COMPENSATION
Our 1999 option plan provides for grants of options to purchase common stock
to our directors who are not employees. Non-employee directors will receive
annual 10,000 share option grants annually on an ongoing basis, commencing with
our 2001 annual meeting. In November 1999, each of our non-employee directors
received an option to purchase 50,000 common shares at an exercise price of
$7.60 per share. In addition, our directors are reimbursed for expenses incurred
in connection with attending board and committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently, or has been
at any time since our formation, one of our officers or employees. During the
fiscal year ended June 30, 1999, no executive officer of our company served as a
member of the board of directors or compensation committee of any entity that
has one or more officers serving as a member of our board of directors or
compensation committee.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors or
officers.
EXECUTIVE COMPENSATION
In fiscal year 1999, we paid an aggregate $917,582 in cash compensation to
the directors and officers named under the caption "Directors, Executive
Officers and Key Employees," as a group.
At January 18, 2000, our directors and officers, as a group, held options to
purchase a total 2,156,007 common shares, at exercise prices ranging from $0.30
to $7.60 per share. These options are scheduled to expire on various dates
between February 15, 2006 and November 19, 2009.
58
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by, or
paid to our Chief Executive Officer and the other four most highly compensated
executive officers, each of whose total cash compensation exceeded, or would
exceed on an annualized basis, $100,000 during the year ended June 30, 1999.
<TABLE>
<CAPTION>
OTHER
ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- -------- -------- -------- ------------
<S> <C> <C> <C> <C>
Priscilla M. Lu
Chief Executive Officer............................. 1999 $200,000 $ -- $21,443
Thomas W. Hubbs
Executive Vice President............................ 1999 210,600 -- --
Edward W. Futcher
Vice President, Technology.......................... 1999 155,961 6,750 --
Michele B. Hogan
Vice President, Finance............................. 1999 140,961 19,500 --
Denis Cote
Vice President, Worldwide Sales..................... 1999 132,367 30,000 --
</TABLE>
Dr. Lu's other annual compensation consists of educational and child care
expenses for family members. On October 4, 1999, Dr. Lu's annual base salary was
increased to $285,000.
Thomas W. Hubbs, Executive Vice President and Chief Financial Officer,
rejoined us in July 1999. In the fiscal year ended June 30, 1999, Mr. Hubbs
served as our acting Chief Financial Officer on a consulting basis, and all
compensation in the table for Mr. Hubbs reflects consulting fees.
Denis Cote joined us in November 1998 as Vice President, Worldwide Sales.
Mr. Cote's salary in fiscal year ended June 30, 1999 consists of $98,077 in
salary and $34,290 in sales commissions.
Ian V. Sugarbroad, President and Chief Operating Officer, joined us in
September 1999. Mr. Sugarbroad's salary on an annualized basis is $250,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted during fiscal year 1999 to the other four executive officers who
received salary compensation of more than $100,000 and who received option
grants in the last fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF SHARE PRICE
SECURITIES GRANTED APPRECIATION FOR
UNDERLYING TO EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED 1999 PER SHARE DATE 5% 10%
- ---- ---------- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Hubbs..................... 185,000 7.7% $0.70 03/18/09 $ 81,442 $206,390
Edward W. Futcher................... 80,000 3.3 0.70 03/18/09 35,218 89,250
20,000 0.8 1.15 07/28/08 14,465 36,656
Michele D. Hogan.................... 50,000 2.1 0.70 03/18/09 22,011 55,781
12,000 0.5 1.15 07/28/08 8,679 21,994
Denis Cote.......................... 140,000 5.8 1.15 11/12/08 101,252 256,593
40,000 1.7 0.70 03/18/09 17,609 44,625
</TABLE>
As of January 18, 2000, 132,500 of the options granted to Mr. Hubbs in the
last fiscal year have vested. The options vested 50% on the date of grant, and
the balance vest in a series of monthly installments over the next two years of
service. In the event the ownership of our company changes substantially, 50% of
Mr. Hubbs unvested options shall vest automatically.
59
<PAGE>
As of January 18, 2000, 23,750 of the options granted to Mr. Futcher in the
last fiscal year have vested. The options vest in a series of monthly
installments over the four years of service following the date of grant.
As of January 18, 2000, 14,667 of the options granted to Ms. Hogan in the
last fiscal year have vested. The options vest in a series of monthly
installments over the four years of service following the date of grant.
As of January 18, 2000, 57,500 of the options granted to Denis Cote in the
last fiscal year have vested. 100,000 of the options vest in a series of monthly
installments over the four years of service following the date grant. 40,000 of
the options vest upon achievement of revenue targets.
In accordance with the rules of the SEC, the above shows the potential
realizable value over the term of the option (the period from the grant date to
the expiration date) based on assumed rates of share price appreciation of 5%
and 10%, compounded annually. These amounts do not represent our estimate of
future share price. Actual gains, if any, on option exercises will depend on the
future performance of our common shares.
OPTION GRANTS SINCE END OF LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted from the end of the last fiscal year until January 18, 2000 to the
executive officers and directors. From the end of the last fiscal year until
January 18, 2000, options to purchase 2,860,000 common shares were granted at a
weighted average exercise price of $1.96.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
----------------------------------- ASSUMED ANNUAL RATES
NUMBER OF OF SHARE PRICE VALUE OF
SECURITIES APPRECIATION FOR OPTION OPTION GRANT
UNDERLYING EXERCISE TERM AT ASSUMED
OPTIONS PRICE EXPIRATION ----------------------- INITIAL
NAME GRANTED PER SHARE DATE 5% 10% OFFERING PRICE
- ---- ---------- --------- ---------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ian V. Sugarbroad................... 500,000 $0.70 07/29/09 $220,113 $ 557,810 $5,150,000
Thomas W. Hubbs..................... 100,000 0.70 07/29/09 44,023 111,562 1,030,000
Roger C. Cheung..................... 390,000 1.50 08/26/09 367,903 932,339 3,705,000
Denis Cote.......................... 40,000 1.50 08/30/09 37,734 95,625 380,000
40,000 5.25 10/07/09 132,068 334,686 230,000
Michele D. Hogan.................... 30,000 1.50 08/26/09 28,300 71,718 285,000
H. David Jones...................... 100,000 1.50 08/27/09 94,334 239,061 950,000
50,000 5.25 10/07/09 165,085 418,357 287,500
Frank Seto.......................... 200,000 4.00 09/27/09 503,116 1,274,994 1,400,000
Roderick E. Thorne.................. 57,000 4.00 09/27/09 143,388 363,373 399,000
Lork Sang Chow...................... 50,000 7.60 11/19/09 238,980 605,622 170,000
Pascal Debon........................ 50,000 7.60 11/19/09 238,980 605,622 170,000
Kevin A. Fong....................... 50,000 7.60 11/19/09 238,980 605,622 170,000
William J. Harding.................. 50,000 7.60 11/19/09 238,980 605,622 170,000
James S. Loh........................ 50,000 7.60 11/19/09 238,980 605,622 170,000
Moses K. Tsang...................... 50,000 7.60 11/19/09 238,980 605,622 170,000
Andrew C. Wang...................... 50,000 7.60 11/19/09 238,980 605,622 170,000
</TABLE>
In accordance with the rules of the SEC, the above shows the potential
realizable value over the term of the option (the period from the grant date to
the expiration date) based on assumed rates of share price appreciation of 5%
and 10%, compounded annually. These amounts do not represent our estimate of
future share price. Actual gains, if any, on option exercises will depend on the
future performance of our common shares.
60
<PAGE>
YEAR-END OPTION VALUES
The following table sets forth information for our Chief Executive Officer
and our other executive officers who received salary compensation of more than
$100,000 in fiscal year ending June 30, 1999, relating to the number and value
of securities underlying exercisable and unexercisable options held at June 30,
1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1999 (#) JUNE 30, 1999 ($)
------------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Priscilla M. Lu........................ 391,667 8,333 $4,179,087 $ 88,913
Thomas W. Hubbs........................ 106,250 78,750 1,094,375 811,125
Edward W. Futcher...................... 41,979 147,813 415,743 1,489,708
Michele D. Hogan....................... 2,960 60,292 30,130 615,112
Denis Cote............................. 22,500 157,500 222,750 1,568,250
</TABLE>
The value of unexercised in-the-money options represents the difference
between the fair market value of the underlying common shares using an assumed
initial public offering price of $11.00 per share and the exercise price of the
option, multiplied by the number of shares underlying the option.
EMPLOYMENT AGREEMENTS
In June 1999, we entered into an employment agreement with Thomas Hubbs, our
Executive Vice President and Chief Financial Officer. The agreement provides for
an annual base salary of $260,000 and quarterly bonuses up to 30% of his then
annual salary per year, beginning in fiscal year 2000, upon meeting corporate
objectives established by the board of directors. The agreement also provides
Mr. Hubbs with incentive stock options to purchase an aggregate of 100,000
common shares subject to time-based vesting over a four-year period. The
agreement provides that Mr. Hubbs is an employee at will, which means that his
employment may be terminated at any time at our sole discretion. The agreement
also provides that if Mr. Hubbs' duties or position is changed in a detrimental
manner towards him upon a sale of our assets or merger with or into another
entity, we will owe him severance of one year salary and accelerate the vesting
of some of his option shares.
In September 1999, we entered into an employment agreement with Ian
Sugarbroad, our President and Chief Operating Officer. The agreement provides
for an annual base salary of $250,000 and quarterly bonuses up to $50,000 per
year upon meeting revenue and expense targets. The agreement also provides
Mr. Sugarbroad with incentive stock options to purchase an aggregate of 300,000
common shares subject to time-based vesting over a four-year period. In
addition, Mr. Sugarbroad may earn up to 50,000 common shares for each of the
next four years in quarterly bonuses. The agreement provides that
Mr. Sugarbroad is an employee at will, which means that his employment may be
terminated at any time at our sole discretion. If we terminate Mr. Sugarbroad's
employment without cause, we must pay him up to 100% of his annual salary for
one year. The agreement also provides that if Mr. Sugarbroad's duties or
position is changed in a detrimental manner towards him upon a sale of our
assets or a merger with or into another entity, we will owe him severance of one
year salary and accelerate the vesting of some of his option shares.
EMPLOYEE BENEFIT PLANS
1999 OPTION PLAN
Our option plan was approved by our board in September 1999 and will be
submitted to our shareholders for their approval prior to the date of this
offering to become effective on the date of this offering. Our option plan
provides for the grant of incentive stock options to employees and for the
61
<PAGE>
grant of nonstatutory stock options and share purchase rights to employees,
directors and consultants. Unless terminated sooner, this option plan will
terminate automatically in 2009. The 1999 option plan will have 1,818,867
initial shares available for grant, which were the reserved and unissued shares
under the 1994 stock plan The amount reserved under the option plan will
automatically increase at the end of each fiscal year by the lesser of 2,000,000
shares or 4.0% of outstanding shares on such date or an amount determined by the
board.
The option plan may be administered by the board or a committee of the
board, which committee must, in the case of options intended to qualify as
"performance-based compensation" consist of two or more "outside directors." The
administrator of the option plan has the power to determine the terms of the
options or share purchase rights granted, including the exercise price of each
option or share purchase right, the number of shares subject to each option or
share purchase right, the exercisability of options, and the form of
consideration payable upon exercise of an option or share purchase right. In
addition, the administrator has the authority to amend, suspend or terminate the
option plan, provided that no action by the administrator may affect any of the
common shares previously issued and sold or any option previously granted under
the option plan.
Options and share purchase rights granted under the option plan are not
generally transferable by the optionee, and each option and share purchase right
is exercisable during the lifetime of the optionee only by the optionee. Options
granted under the option plan must generally be exercised within three months
after the end of optionee's status as our employee, our director or as our
consultant. In the case of termination by reason of death or disability, an
option will generally remain exercisable for a period of 12 months. In no event
may an option be exercised later than the expiration of the option's term.
Options generally vest over a 4-year period at a rate of 1/4 of the shares
subject to the option after the first year and 1/48 of the shares subject to the
option each following month.
In the case of share purchase rights, unless the administrator determines
otherwise, the restricted share purchase agreement entered into at the time a
share purchase right is exercised grants us a repurchase option exercisable upon
the voluntary or involuntary termination of the purchaser's employment or
consulting relationship with us for any reason including death or disability.
The purchase price for shares repurchased pursuant to the restricted share
purchase agreement is the original price paid by the purchaser and may be paid
by cancellation of any indebtedness of the purchaser to us. The administrator
determines the rate at which a repurchase option will lapse.
The administrator determines the exercise price of nonstatutory stock
options granted under the option plan, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Internal Revenue Code, as amended, the exercise
price must at least be equal to the fair market value of the common shares on
the date of grant. The exercise price of all incentive stock options granted
under the option plan must be at least equal to the fair market value of the
common shares on the date of grant and the term of such option may not exceed
ten years. With respect to any participant who owns shares possessing more than
10% of the voting power of all classes of our outstanding capital shares, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date and the term of such incentive stock
option must not exceed five years. The administrator determines the term of all
other options.
Commencing with our 2001 annual meeting of shareholders, each of our
non-employee directors will automatically be granted an option to purchase
10,000 shares each year following the date of our annual shareholder's meeting,
if on such date he or she will have served on the board of directors for at
least the previous 6 months. Each option will have a term of 10 years and the
exercise price will be 100% of the fair market value per common share on the
date of grant. Each option will vest as to 1/12
62
<PAGE>
of the shares each month following the date of grant, provided the optionee
still serves as a director on those dates.
The option plan provides that in the event that we merge with or into
another corporation, sell substantially all of our assets or enter a similar
transaction, the successor corporation will assume or substitute each option or
right. If the outstanding options or rights are not assumed or substituted, the
administrator will provide notice to the optionee that he or she has the right
to exercise the option or right as to all of the shares subject to the option or
right, including shares which would not otherwise be exercisable, for a period
of 15 days from the date of the notice. The option or right will terminate upon
the expiration of the 15-day period.
1999 EMPLOYEE SHARE PURCHASE PLAN
Our employee share purchase plan was adopted by the board in September 1999
and will be submitted to our shareholders for their approval prior to the date
of this offering, to become effective on the date of this offering. A total of
300,000 of our common shares have been reserved for issuance under the employee
share purchase plan. The amount reserved under the employee share purchase plan
will be increased automatically at the end of each fiscal year in the amount of
the lesser of 200,000 shares, 0.5% of the outstanding shares on such date or an
amount determined by the board.
The board of directors or a committee appointed by the board of directors
administers the employee share purchase plan. The board of directors or its
committee has full and exclusive authority to interpret the terms of the
employee share purchase plan and determine eligibility.
The employee share purchase plan contains successive, overlapping 24-month
offering periods. Each offering period includes four 6-month purchase periods.
The offering periods generally start on the first trading day on May 1 and
November 1 of each year, except for the first offering period, which commences
on the date of this offering and ends on the last trading day before
October 31, 2001.
Employees are eligible to participate in our employee share purchase plan if
they are customarily employed by us or any participating subsidiary for at least
20 hours per week and more than five months in any calendar year, although any
employee who would own shares representing 5% or more of the total combined
voting power or value of all classes of our capital shares may not participate
in the employee share purchase plan. In addition, no employee of ours may be
granted an option to purchase shares under the plan if that person's right to
purchase shares under all of our employee share purchase plans accrues at a rate
that exceeds $25,000 worth of shares for each calendar year. The employee share
purchase plan permits participants to purchase common shares through payroll
deductions of up to 15% of the participant's compensation which includes the
participant's base straight time gross earnings, commissions, payments for
overtime, profit sharing payments, shift premium payments, incentive
compensation, incentive payments and bonuses. The maximum number of shares a
participant may purchase during any single offering period is 10,000 shares.
Amounts deducted and accumulated under the employee share purchase plan are
used to purchase common shares at the end of each 6-month purchase period. The
price of shares purchased under the employee share purchase plan is 85% of the
lower of the fair market value of the common shares at the beginning of the
offering period or after a purchase period end. If the offering period commences
on the date of this offering, the price of the shares purchased shall be the
price to the public of the shares offered in this offering. In the event the
fair market value at the end of a purchase period is less than the fair market
value at the beginning of the offering period, participants will be withdrawn
from the current offering period following their purchase of shares on the
purchase date and will be automatically re-enrolled in a new offering period.
Participants may end their participation at any time during an offering period
and will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us. Rights granted under the
employee share
63
<PAGE>
purchase plan are not transferable by a participant other than by will, the laws
of descent and distribution, or as otherwise provided under the employee share
purchase plan.
The employee share purchase plan provides that, in the event that we merge
with or into another corporation or sell substantially all of our assets, each
outstanding right to purchase shares under the employee share purchase plan
during the offering period then in progress may be assumed or substituted for by
the successor corporation. If the successor corporation refuses such assumption
or substitution, the offering period then in progress will be shortened and a
new purchase date will be set at or prior to the closing of that transaction
after which time the employee share purchase plan will terminate.
The employee share purchase plan will terminate in 2009. The board has the
authority to amend or terminate the employee share purchase plan, except that no
such action may adversely affect any outstanding rights to purchase shares under
the employee share purchase plan.
1994 STOCK PLAN
This stock plan was adopted on July 13, 1994. This plan provides for the
grant of incentive stock options to our employees, including employee directors,
and nonstatutory stock options and stock purchase rights to our employees,
directors and consultants. We have reserved 10,730,000 common shares for
issuance under this plan. As of September 30, 1999, options to purchase
5,130,509 common shares were outstanding at a weighted average exercise price of
$1.10, 2,991,686 shares had been issued upon exercise of outstanding options,
and 2,607,805 shares were available for future grant and have been added to the
1999 option plan.
This stock plan is administered by our board of directors or by a committee
appointed by our board of directors. The administrator determines the terms of
options granted under the option plan, including the number of shares subject to
the option, exercise price, term and exercisability. Unless terminated earlier
by our board of directors, this option plan shall terminate on July 12, 2004.
Incentive stock options granted under the option plan must have an exercise
price of at least 100% of the fair market value of the common shares on the date
of grant and at least 110% of the fair market value in the case of an optionee
who holds more than 10% of the total voting power of all classes of our shares.
Nonstatutory stock options granted under the option plan must have an exercise
price of at least 85% of the fair market value of the common shares on the date
of grant. If an optionee holds more than 10% of the voting power of all classes
of our capital shares, any options granted to that optionee must have an
exercise price of at least 110% of the fair market value of the common shares on
the date of grant. Payment of the exercise price may be made in cash or other
consideration as determined by the administrator. The term of an incentive stock
option cannot exceed 10 years, and the term of an incentive stock option granted
to a holder of more than 10% of our voting power cannot exceed five years.
No option may be transferred by the optionee other than by will or the laws
of descent or distribution. Each option may be exercised during the lifetime of
the optionee only by the optionee or permitted transferee. Options granted under
the option plan generally must be exercised within 90 days after termination of
the optionee's status as our employee, our director or our consultant, or within
6 months if termination is due to the disability of the optionee or 12 months if
termination is due to the death of the optionee, but in no event later than the
expiration of the option's term.
In the event that we merge with or into another corporation, or sell
substantially all of our assets, each outstanding option may be assumed or an
equivalent option substituted by the successor organization. However, if the
successor corporation does not agree to assume or substitute the option, the
option will terminate. Our board of directors has the authority to amend or
terminate the option plan provided that no action that impairs the rights of any
holder of an outstanding option may be
64
<PAGE>
taken without the holder's consent. In addition, our shareholders must approve
any modification to the option plan.
401(K) PLAN
In 1995, we adopted a 401(k) plan covering our full-time employees located
in the United States. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code, so that contributions to the 401(k)
plan by employees or by us, and the investment earnings thereon, are not taxable
to employees until withdrawn from the 401(k) plan, and so that we can deduct our
contributions, if any, when made. Pursuant to the 401(k) plan, employees may
elect to reduce their current compensation by up to the lesser of 20% of their
annual pre-tax gross compensation or the statutorily prescribed annual limit of
$10,000 in 1999 and to have the amount of the reduction contributed to the
401(k) plan. Matching contributions by us, if any, are vested when made; all
other contributions, and earnings on such contributions, are at all times fully
vested. We did not contribute to the plan in the fiscal year ending June 30,
1999, but have agreed to match up to $1,000 of employee contributions in a
calendar year beginning with the fiscal year ending June 30, 2000.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our bye-laws provide that we shall indemnify our directors, officers,
employees and other agents but for acts of fraud and dishonesty on the part of
indemnified parties. In addition, our bye-laws provide that our shareholders
agree to waive any claims or right of actions the shareholders may have against
any of our directors or executive officers on account of any action taken by the
directors or executive officers in their capacity for us. This waiver does not
apply to claims arising under the U.S. federal securities laws. Our bye-laws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether our bye-laws expressly permit indemnification.
We will be entering into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bye-laws. These
agreements, among other things, will indemnify our directors and executive
officers for certain expenses including attorneys' fees, judgments, fines and
settlement amounts incurred by any director or executive officer in any action
or proceeding, including any action by or in our right arising out of that
person's services as a director, officer, employee, agent or fiduciary for us,
any subsidiary of ours or any other company or enterprise to which the person
provides services at our request. The agreements do not provide for
indemnification in cases where
- the claim is brought by the indemnified party;
- the indemnified party has not acted in good faith;
- the claim arises under section 16(b) of the exchange act; or
- the indemnified party has engaged in acts, omissions or transactions for
which the indemnified party is prohibited from receiving indemnification
under the agreement or applicable law.
We believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers. It is the position
of the SEC that indemnification for liabilities arising under federal or state
securities laws is against public policy and not enforceable.
At present, there is no pending litigation or proceeding involving any of
our directors or officers in which indemnification is required or permitted, and
we are not aware of any threatened litigation or proceeding that may result in a
claim for such indemnification.
65
<PAGE>
CERTAIN TRANSACTIONS
SERIES G PREFERRED FINANCING
SERIES G PREFERRED SHARES AND WARRANTS
In March and April 1998, we sold 3,714,286 Series G preferred shares and a
warrant to purchase 2,000,000 shares of Series G preferred shares at $7.00 per
share to Nortel Networks for an aggregate purchase price of $24,500,000. We
incurred financing costs of $1,756,000 in association with this financing.
Consideration of the purchase price consisted of:
- a cash payment by Nortel Networks of $20,000,000
- the signing and delivery of a technology patent license agreement by
Nortel Networks granting us a license to certain Nortel Networks' patents
with a value of $1,000,000 and;
- the signing and delivery of a technical information agreement by Nortel
Networks granting us access to Nortel Networks' technical assistance,
testing services and other documentation and support with a value to us of
$3,500,000
The warrant to purchase 2,000,000 Series G preferred shares at $7.00 per
share expires on the earlier of March 27, 2001, the closing of an initial public
offering or a sale of all or substantially all of our assets. Nortel Networks
has notified us of its intent, which may be withdrawn, to exercise this warrant
at the time of this offering. We therefore assumed the exercise and subsequent
conversion into common shares as indicated throughout this filing.
The Series G preferred shares contain a $7.00 per share liquidation
preference and converts to common shares on a one-to-one basis. Concurrently
with the sale of the Series G preferred shares, Nortel Networks entered into a
registration rights agreement with us providing the registration rights
described in "Description of Share Capital--Registration Rights" and a voting
agreement providing for the election of our board of directors. Additional
information regarding the voting agreement is provided below.
Assuming the exercise of all warrants held by Nortel Networks, they
currently own approximately 22.4% of our outstanding common shares and will own
18.5% of our outstanding common shares following the offering. Pascal R. Debon,
President of Wireless Solutions for Nortel Networks, is a member of our board of
directors. Sales to Nortel Networks represented 51% and 18% of our net revenues
for fiscal years 1999 and the three months ending September 30, 1999,
respectively.
PATENT LICENSE AGREEMENT
The patent license agreement provides us with a license to certain patents
held by Nortel Networks. The patent licenses continue in one year periods and
are subject to renewal at the end of each year with the consent of Nortel
Networks and us.
Nortel Networks may terminate the patent technology license agreement if it
is assigned by us to a third party. However, Nortel Networks may not terminate
the agreement if the third party is not a competitor of Nortel Networks, we
transfer all or substantially all of our assets to the third party, the
financial condition of the third party is not substantially worse than ours at
March of 1998 and the third party agrees to assume all of our obligations under
the patent technology license agreement. If the patent technology license
agreement is terminated due to assignment to a third party prior to the fourth
anniversary of its March 27, 1998 effective date, Nortel Networks shall refund,
at its option, to us the amounts set forth below either in cash or our shares.
However, Nortel Networks shall pay the refund in cash if the fair market value
of one share of our Series G preferred shares is less than six dollars and six
cents per share.
66
<PAGE>
<TABLE>
<S> <C> <C> <C>
Date of Termination of Percent Cash
Patent License Agreement Refund Shares Payment
Prior to 1(st) anniversary 80% 132,063 $800,000
After 1(st) and prior to 2(nd)
anniversary 60% 99,047 $600,000
After 2(nd) and prior to 3(rd)
anniversary 40% 66,032 $400,000
After 3(rd) and prior to 4(th)
anniversary 20% 33,016 $200,000
</TABLE>
TECHNICAL INFORMATION AGREEMENT
The technical information agreement provides us access to Nortel Networks'
technical assistance and testing services and other support and technical
information relating to the functionality, performance, testing, development and
interfaces with Nortel Networks' products. The information agreement terminates
upon termination of the purchase and distribution agreement signed concurrently
with the technical information agreement.
Nortel Networks may terminate portions of the technical information
agreement relating to technical information, technical assistance and technology
development if it is assigned by us to a third party. However, Nortel Networks
may not terminate any portion of the agreement if the third party is not a
competitor of Nortel Networks, we transfer all or substantially all of our
assets to the third party, the financial condition of the third party is not
substantially worse than ours at March of 1998 and the third party agrees to
assume all of our obligations under the technical information agreement.
If a portion of the technical information agreement is terminated due to
assignment to a third party prior to the fourth anniversary of its March 27,
1998 effective date, Nortel Networks shall refund, at its option, to us the
amounts set forth below payable in either cash or our shares. However, Nortel
Networks shall pay the refund in cash if the fair market value of one share of
our Series G preferred shares is less than six dollars and six cents per share.
<TABLE>
<S> <C> <C> <C>
Date of Termination of Percent Cash
Technical Information Agreement Refund Shares Payment
Prior to 1(st) anniversary 65% 375,556 $2,275,000
After 1(st) and prior to 2(nd)
anniversary 45% 260,000 $1,575,000
After 2(nd) and prior to 3(rd)
anniversary 30% 173,333 $1,050,000
After 3(rd) and prior to 4(th)
anniversary 15% 86,667 $ 525,000
</TABLE>
PURCHASE AND DISTRIBUTION AGREEMENT
Concurrently with the sale of Series G preferred shares, Nortel Networks
entered into a purchase and distribution agreement with us in which Nortel
Networks agreed to purchase goods and services according to certain
specifications and we agree to supply the goods and services.
This agreement establishes minimum amounts of goods to be purchased by
Nortel Networks for each quarter starting in June 1998 and ending in December
2000. The agreement requires that we provide specified product features by
various milestone dates. The minimum amounts of goods to be purchased can be
periodically adjusted to reflect the prevailing conditions of markets for the
goods. If the established minimum amount of goods for each quarter above is not
purchased, Nortel Networks
67
<PAGE>
shall pay us a percentage of the shortfall of goods not purchased for that
quarter. We shall credit Nortel Networks in the subsequent quarter the amount
paid for Nortel Networks' shortfall if Nortel Networks makes up the shortfall
with an excess in orders in the following quarter.
This agreement further provides that until December 31, 1999 we shall not
enter into a purchase and distribution agreement with Nokia or Ericsson for
products developed using information contained in or as a result of the
technical information or purchase and distribution agreements with Nortel
Networks. After December 31, 1999, the above restriction shall be terminated
only if the annual purchase by Nortel Networks for the calendar years 2000, 2001
and 2002 is less than eighty (80%) percent of the established minimum amounts.
This agreement between us and Nortel Networks may be immediately terminated,
in whole or in part, by either party if the other party fails to remedy a breach
of an order within 60 days of written request, declares or seeks bankruptcy
protection or ceases to carry on business.
AMENDMENT OF BYE-LAWS
In connection with the sale of Series G preferred shares, we amended our
bye-laws to require Nortel Networks' consent before an increase to the
authorized number of Series G preferred shares.
Our bye-laws were further amended to provide for the following until the
closing of an initial public offering:
- Prohibit us from engaging, directly or indirectly, in any business other
than the microcellular business except with the prior consent of Nortel
Networks or, if the limited exclusivity provisions contained in the
purchase and distribution agreement have terminated, with the prior
consent of a majority of directors who are neither officers nor employees
- Prohibit us from acquiring stock or making an investment in any person
engaged primarily in the compact wireless communications systems business
involving an aggregate of $5,000,000 except with the prior consent of
Nortel Networks or, if the limited exclusivity provisions contained in the
purchase and distribution agreement have terminated, with the prior
consent of a majority of directors who are neither officers nor employees
- Prohibit us from acquiring stock or making an investment in any person NOT
engaged primarily in the compact wireless communications systems business
involving an aggregate of $1,000,000 except with the prior consent of
Nortel Networks or, if the limited exclusivity provisions contained in the
purchase and distribution agreement have terminated, with the prior
consent of directors who are neither officers nor employees
- Prohibit us from selling technology or assets described in the patent
license agreement and the technology license agreement outside the
ordinary course of business except in compliance with the provisions
contained in those agreements or with the prior consent of Nortel Networks
- Prohibit us from entering into any transaction with any person that is the
beneficial owner or is affiliated with a beneficial owner of 5% or more of
the outstanding voting shares except with the prior written consent of
Nortel Networks
- Require a majority of our board members to consent to its budget for each
fiscal year, and any material expenditures made beyond the limits set by
such budget
- Prohibit us from incurring any debt in an amount exceeding $1,000,000
except with the prior approval of two-thirds of its board members
- Require our bye-laws to provide for a board consisting of nine members, at
least seven of whom will be neither officers nor employees. Further, a
majority of the directors holding office will be necessary for a quorum,
provided that if the number of directors holding office is less than five
and the director nominated by Nortel Networks remains in office, then
Nortel Networks' director must be present to constitute a quorum
68
<PAGE>
- Require our compensation committee to approve any employment agreement
with any officer or other employee under which the total compensation
package may be expected to exceed $250,000
- Require transactions taken by any of our majority-owned subsidiaries to be
subject to the same provisions described above.
LOAN AGREEMENT
In December 1998 we entered into a loan agreement with Nortel Networks in
which we borrowed $1,400,000 at 12% annual interest. The loan's maturity date
was the earlier of:
- February 21, 1999
- the date on which we closed a public offering or obtained net cash
proceeds in the sale of assets or a financing of $6,000,000
- the date of the signing and delivery of an agreement providing for our
acquisition by another company; or
- a change in control of our management
We were able to pay the accrued interest on the note but we were not able to
repay the principal amount borrowed at the maturity date of February 21, 1999
causing a default under the terms of the loan agreement. To remedy the default,
on April 22, 1999, we issued to Nortel Networks a warrant to acquire 24,000
common shares at $1.15 per share. The warrant expires on the earlier of
April 22, 2002 or the closing of an initial public offering.
The principal balance of $1,400,000 borrowed in the loan agreement was
applied as payment for Nortel Networks' participation in our March 1999,
convertible loan and warrant financing. As a result, Nortel Networks' $1,400,000
became a loan to us under the convertible loan and warrant financing. Additional
information regarding our convertible loan and warrant financing is provided
below.
CONVERTIBLE NOTE AND WARRANT FINANCING
Between March 1999 and June 1999, we entered into convertible note and
warrant agreements with 106 investors, all of which were existing shareholders,
in which we borrowed an aggregate of $12,691,830 at 8% annual interest. In
connection with the convertible note financing, we granted the investors
warrants to purchase an aggregate of 6,345,939 common shares at a purchase price
of $0.70 per share. These warrants expire at various times between March 2004
and June 2004.
As an additional incentive to participate in the convertible note financing,
shareholders of series A, B, C, D, E, F and G preferred shares participating in
the convertible note financing at a minimum level based on their respective
ownership percentage were entitled to exchange their original preferred shares
for A-1, B-1, C-1, D-1, E-1, F-1 and G-1 preferred shares, respectively, whose
terms were identical to the original preferred shares, except that the new
preferred shares would be preferential in liquidation to all original preferred
shares.
The convertible note and warrant agreement provided for the automatic
conversion of the outstanding principal balance and accrued interest upon the
closing of our next equity financing which raised at least $10,000,000 in gross
proceeds. As a result of the financing that closed on September 10, 1999, the
notes and aggregate accrued interest of $414,946 converted, according to the
terms of the agreement, into 1,872,362 Series H1 preferred shares and we granted
the investors additional warrants to purchase 253,874 common shares at a
purchase price of $1.00 per share. Each investor was issued the number of
Series H1 preferred shares calculated by dividing the sum of each investor's
note and accrued interest by $7.00 and a warrant to purchase 0.02 common shares
at $1.00 per share for each $1.00 of principal note amount. These warrants
expire on September 10, 2002 or upon the consummation of an initial public
offering. The liquidation preference for all Series H1 preferred
69
<PAGE>
shares issued in the equity financing and the subsequent conversion of notes was
$7.00 per share. Additional information regarding the Series H1 preferred share
financing is provided below.
The following table shows officers, directors, 5% shareholders and
affiliated investors who participated in our convertible note and warrant
financing.
<TABLE>
<CAPTION>
ANNUAL CONVERSION BENEFICIAL
OFFICERS, DIRECTORS DATE OF NOTE INTEREST INITIAL SECOND TO H1 OWNERSHIP AS
AND 5% SHAREHOLDERS INVESTOR NOTE AMOUNT RATE WARRANT(1) WARRANT(2) SHARES(3) OF 1/18/2000
- ------------------- ------------------- -------- ---------- -------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pascal Debon.......... Nortel 3/3/99 $1,400,000 8%(4) 700,000 28,000 208,311 22.4%
Networks 3/3/99 1,147,347 8% 573,674 22,947 170,717
5/26/99 2,452,653 8% 1,226,327 49,054 358,476
---------- --------- ------- -------
5,000,000 2,500,001 100,001 737,504
Kevin Fong............ Mayfield Funds 3/3/99 746,037 8% 373,019 14,922 111,004 7.5%
Lork Sang Chow........ EXCELlink(5) 3/3/99 744,817 8% 354,814 14,897 110,824 10.3%
William Harding....... Morgan Stanley Dean 3/3/99 652,782 8% 326,391 13,056 97,128 6.3%
Witter Venture
Partners
Moses Tsang........... MKT Holdings LLC(6) 4/1/99 503,412 8% 196,706 22,585 74,815 3.3%
James Loh............. Mainwell Holdings 3/19/99 436,020 8% 218,010 8,721 64,655 4.2%
Holodeck Limited...... Holodeck Limited 4/15/99 201,091 8% 100,546 4,022 29,652 7.2%
Priscilla M. Lu....... Priscilla M. Lu 4/7/99 100,000 8% 50,000 2,000 14,771 10.6%
Denis A. Cote......... Denis A. Cote 3/31/99 35,000 8% 17,500 700 5,177 *
Michele D. Hogan...... Michele D. Hogan 3/29/99 30,000 8% 15,000 600 4,439 *
Edward W. Futcher..... Edward W. Futcher 3/21/99 10,000 8% 5,000 200 1,482 *
Thomas W. Hubbs....... Voleas Ltd. 3/22/99 9,000 8% 4,500 180 1,333 *
Cynthia Hubbs Trust 3/23/99 5,000 8% 2,500 100 740 *
Bryna Hubbs Trust 3/23/99 5,000 8% 2,500 100 740 *
Roderick Thorne....... Roderick Thorne 3/24/99 3,016 8% 1,508 61 446 *
Andrew Wang........... Sasson 6/8/99 0 8% 12,874 0 0 7.0%
International
Holdings LLC(7)
</TABLE>
- ------------------------
(1) Represents the initial warrants granted to the note and warrant investors,
who received one-half of a warrant for each dollar of principal amount
invested by each such investor. The warrants are exerciseable at a price of
$0.70 per share and expire between March, 2004 and June, 2004.
(2) Represents additional warrants granted to the note and warrant investors on
September 10, 1999. Each investor received .02 additional warrants for each
dollar of principal amount invested by each such investor. The warrants are
exerciseable at a price of $1.00 per share and expire upon the earlier of
September 10, 1999 or an initial public offering.
(3) Represents the number of Series H1 shares issuable to the note and warrant
investors upon conversion of the principal amount and accrued interest.
(4) Nortel Networks' note in the amount of $1,400,000 represents the conversion
of a previous note issued to Nortel Networks for the same principal amount
originally at 12% annual interest.
(5) Represents current holdings in the convertible loan and warrant financing
following the assignment of a portion of EXCELlink's original investment of
$1,148,528 in principal amount, 574,264 initial warrant and 22,971 second
warrant to the following entities:
Transfer to MKT Holdings LLC of $403,711 of principal amount, 146,855
initial warrant and 8,075 second warrant
Transfer to Saintsville Limited of 55,000 initial warrant
Transfer to Cheerio Profits Limited (BVI) of 17,595 initial warrant
70
<PAGE>
(6) Represents current holdings in the convertible loan and warrant financing
following receipt of assignment from the following entities:
Transfer from EXCELlink of $403,711 of principal amount, 146,855 initial
warrant and 8,075 second warrant
Transfer from Tsang and Associates (Cayman Islands) L.L.C. of $99,701 of
principal amount, 49,851 initial warrant and 1,995 second warrant
Transfer from Sasson International Holdings LLC of 12,515 second warrant
(7) Represents current holdings in the convertible loan and warrant financing
following the assignment of a portion of Sasson International Holdings
LLC's original investment of $1,251,492 in principal amount, 625,746
initial warrant and 25,030 second warrant to the following entities:
Transfer to Mercantile Teleco Venture of $1,251,492 of principal amount,
312,873 initial warrant and 12,516 second warrant
Transfer to Saintsville Limited of 195,000 initial warrant
Transfer to Cool Breeze Holdings Limited of 105,000 initial warrant
SERIES H PREFERRED SHARE FINANCING
In July 1999 we sold 360,000 Series H preferred shares to ADC
Telecommunications, Inc. at $7.00 per share for a total of $2,520,000. The
purchase price was paid by the cancellation and satisfaction of all outstanding
invoices and indebtedness by us for services performed by ADC Telecommunications
in the aggregate amount of $2,520,000.
SERIES H1 PREFERRED SHARE FINANCING
INVESTMENT BY INTASYS CORPORATION, DAMAC INVESTORS, INC. AND MEDIATEL CAPITAL
Between July 1 and September 10, 1999 we sold Series H1 preferred shares and
issued warrants as follows:
<TABLE>
<S> <C> <C> <C> <C>
Warrants to
purchase common
Shares H1 Preferred shares
Closing Date Investor Shares (1) at $1.00 per share Total Consideration
6/30/99 DAMAC Investors, Inc. 285,715 40,000(2) $2,000,005
7/26/99 Intasys Corporation 715,000 100,000(3) 5,005,000
9/10/99 Mediatel Capital 715,000 100,000(3) 5,005,000
</TABLE>
(1) Liquidation Preference $7.00 per share;
(2) Warrants valued by Black-Scholes using $1.00 exercise price, $6.26 fair
market value, 70% volatility and 6% risk-free rate of return yields warrant
value of $5.47 per share.
(3) Warrants valued by Black-Scholes using $1.00 exercise price, $7.50 fair
market value, 70% volatility and 6% risk-free rate of return yields warrant
value of $6.70 per share.
The warrants expire on the earlier of three years from the issuance date or
upon the effectiveness of an initial public offering.
Concurrently with the financing, we entered into a memorandum of
understanding with Intasys Corporation providing for our distribution and
manufacturing of Intasys Corporation's products and for
71
<PAGE>
the marketing of our products in Canada. In conjunction with the memorandum of
understanding we issued to Intasys Corporation another warrant to purchase
615,000 common shares at an exercise price of $1.00 per share and we received a
three-year warrant to purchase 225,225 Intasys Corporation's common shares at an
exercise price of $3.31 per share. This second warrant issued to Intasys
Corporation also expires on the earlier of three years from the issuance date or
upon the effectiveness of an initial public offering. The warrant to purchase
615,000 common shares was in addition to a warrant to purchase 100,000 common
shares at $1.00 per share issued to Intasys Corporation in the sale of the
Series H1 preferred shares.
CONVERSION OF PRINCIPAL UNDER CONVERTIBLE NOTE AND WARRANT FINANCING
The sale of Series H1 preferred shares to Intasys Corporation and MediaTel
Capital met the minimum financing requirements and triggered the automatic
conversion provided in the convertible note and warrant agreement. In
September 1999 the notes, along with accrued interest, converted into 1,872,362
Series H1 preferred shares and warrants to purchase 253,874 common shares at an
exercise price of $1.00 per share.
TERMS OF SERIES H1 PREFERRED SHARES
The Series H1 preferred shares contain a $7.00 per share liquidation
preference and converts to common shares on a one-to-one basis. Concurrently
with the sale of the Series H1 preferred shares, Intasys Corporation, MediaTel
Capital and the investors in the convertible note and warrant financing entered
into a registration rights agreement with us providing the registration rights
described in "Description of Share Capital--Registration Rights".
Intasys Corporation and MediaTel Capital also entered into a voting
agreement with us providing for the election of our board of directors.
Additional information regarding the voting agreement is provided below.
SERIES I1 PREFERRED SHARE FINANCING
In November and December 1999 we sold 1,526,663 Series I1 preferred shares
to Alcatel and 2,000,000 Series I1 preferred shares to Holodeck Limited at $8.00
per share for a total of $28,213,304. We incurred financing costs of $200,000 in
connection with this financing.
PURCHASE AND DISTRIBUTION AGREEMENT
Concurrently with the sale of Series I1 preferred shares, Alcatel entered
into an agreement with us in which Alcatel agreed to purchase goods and services
according to certain specifications and we agree to supply the goods and
services.
This agreement establishes minimum amounts of goods and services to be
purchased by Alcatel in each successive six month period, beginning with the six
month period starting January 1, 2000. If the established minimum amount of
goods for each six month period is not purchased, Alcatel shall pay us a
percentage of the shortfall of goods not purchased for that six months. If
Alcatel exceeds its commitment for a six month period, we shall credit Alcatel a
percentage of the exceeded amount. The agreement requires that we meet certain
product development objectives by various milestone dates. Among other
objectives, we must conduct the beta test by May 15, 2000 and have Alcatel's
final acceptance by July 15, 2000. The agreement terminates on December 31,
2001, but is automatically renewable for successive twelve month periods.
If Ericsson, Lucent Technologies, Siemens, Cisco or Nokia purchases more
than 15% of our shares, the terms of this agreement with Alcatel will be
modified to allow Alcatel, at its election, to extend the duration of this
agreement or to terminate this agreement with a six month prior written notice
and Alcatel's minimum purchase requirements will be terminated. If Ericsson,
Lucent Technologies, Siemens, Cisco or Nokia purchases more than 50% of our
shares, we change our business model or fail
72
<PAGE>
to meet the terms of this agreement, the terms of this agreement with Alcatel
will be modified as described in the preceding sentence and Alcatel may elect to
receive a manufacturing license from us for a fee.
This agreement between us and Alcatel may be immediately terminated, in
whole or in part, by either party if the other party fails to remedy a breach of
the agreement within 90 days of a written request, declares or seeks bankruptcy
protection or ceases to carry on business.
PURCHASE AGREEMENT
Concurrently with the sale of Series I1 preferred shares, an affiliate of
Hutchison entered into an agreement with us in which the affiliate agreed to
purchase goods and services in Sri Lanka according to certain specifications and
we agree to supply the goods and services.
In connection with this agreement, we entered into an exclusivity agreement
in which we agreed not to sell our WAVEXchange and WAVExpress products to any
party in Sri Lanka other than Hutchison's affiliate for a period of three years.
This period will be extended two years if at the end of the three year period
Hutchison's affiliate has ordered equipment in the aggregate value of
$15 million. In this agreement, we also agreed not to sell these products to any
party in Mumbai, India until March 31, 2000. If by that date Hutchison or its
affiliate has placed an order for the products in the aggregate value of
$6 million, we will not supply these products to any third party for three
years. This period will be extended two years if at the end of the three year
period Hutchison or its affiliate has placed an order in an aggregate value of
$15 million.
This agreement between us and the affiliate of Hutchison may be immediately
terminated by this affiliate if we fail to complete the work under the agreement
and the failure continues for 45 days after written notice is sent by the
affiliate to us.
TERMS OF SERIES I1 PREFERRED SHARES
The Series I1 preferred shares contain a $8.00 per share liquidation
preference and convert to common shares on a one-to-one basis. Concurrently with
the sale of the Series I1 preferred shares, Alcatel and Holodeck Limited entered
into a registration rights agreement providing the registration rights with us
described in "Description of Share Capital--Registration Rights".
Alcatel and Holodeck Limited also entered into a voting agreement with us
providing for the election of our board of directors. Additional information
regarding the voting agreement is provided below.
DIRECTED SHARE PROGRAM
The underwriters have reserved for sale, at the initial public offering
price, up to 1,500,000 common shares for customers, directors, employees and
other persons associated with us who have expressed an interest in purchasing
common shares in the offering. This group may include Alcatel which may purchase
approximately 600,000 common shares and entities associated with the principal
stockholder of Hutchison Whampoa Limited, which is the corporate parent of
Holodeck Limited, one of our shareholders which may purchase approximately
500,000 common shares.
LOAN TO DR. LU
We loaned Dr. Lu $132,000 in August 1999 so that she could exercise her
expiring option holdings. The options were exercised for 400,000 of our common
shares at an exercise price of $0.33 per share. In exchange for the loan,
Dr. Lu entered into a promissory note with us in which she agreed to repay the
loan on or before August 26, 2004. The note accrues interest at 7.05% and may be
prepaid without penalty.
73
<PAGE>
STOCKHOLDER VOTING AGREEMENT
All eight of our directors were elected pursuant to a voting agreement
between us and the shareholders listed in footnote 1. The most recent voting
agreement, which supersedes the prior agreements, provides that the parties to
the agreement vote all of the shares they own beneficially to elect as directors
- Two persons designated by the holders of common shares
- One person designated by EXCELlink Corporation
- One person designated by Mainwell Corporation
- One person designated by Sasson International Holdings, Inc.
- One person designated by Mayfield VII and Mayfield Associates Fund II
- One person designated by Morgan Stanley Dean Witter Venture Partners
- One person designated by Nortel Networks
The voting agreement further provides for restrictions in the sale of shares
consisting of more than 5% of our outstanding shares to any of Nokia, Ericsson,
Motorola, Lucent, Siemens or Alcatel or any of their affiliates.
The voting agreement terminates on the effective date of our initial public
offering.
(1) The parties to the voting agreement include:
- Alcatel
- EXCELlink
- Intasys Corporation
- Mainwell Corporation
- Mayfield Funds
- Morgan Stanley Dean Witter Venture Partners
- Nortel Networks
- MediaTel Capital
- Sasson International Holdings
- Holodeck Limited
- Priscilla M. Lu
OPTION ISSUANCES
Since the end of fiscal year 1999, we have issued options to several of our
directors and executive officers. Our non-employee directors will also be
eligible for option grants under our 1999 option plan. Please see "Management"
for information regarding these matters.
FUTURE TRANSACTIONS
We believe that the transactions described in this section were made on
terms no less favorable than could have been obtained from third parties. We
plan to adopt a policy that requires all future transactions between us and
officers, directors and affiliates to be on terms no less favorable than could
be obtained from unaffiliated third parties and such future transactions must be
approved by a certain number or percentage of disinterested directors. Under our
bye-laws, our directors may participate in transactions involving us or in which
we are interested.
74
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common shares as of January 18, 2000 and as adjusted
to reflect the sale of common shares offered in this prospectus:
- each shareholder known by us to own beneficially more than 5% of our
common shares, as explained below;
- each of our executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, the common shares subject to options or
warrants held by that person that are currently exercisable or will become
exercisable within 60 days after January 18, 2000, are deemed outstanding, while
the shares are not deemed outstanding for purposes of computing percentage
ownership of any other person.
Unless otherwise indicated below, the address for each shareholder on this
table is c/o interWAVE Communications International, Ltd., 656 Bair Island Road,
Suite 108, Redwood City, CA 94063. Unless otherwise indicated below, the persons
and entities named in the table have sole voting or investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable.
The percentage of shares beneficially owned are based on the aggregate of
- 35,870,878 common shares outstanding as of January 18, 2000, assuming
conversion of all outstanding preferred shares into common shares, and
- 8,500,000 common shares issued in this offering. Assumes no exercise of
underwriters' over-allotment option. Percentage ownership figures after
the offering do not include shares that may be purchased by each person in
the offering.
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
- ---------------- ------------ -------- --------
<S> <C> <C> <C>
Nortel Networks Corporation(1) ............................. 9,075,792 22.4% 18.5%
8200 Dixie Road, Suite 100
Brampton, Ontario, L6T 5P6
Canada
Entities associated with EXCELlink(2) ...................... 3,744,235 10.3 8.4
Lork Sang Chow
c/o King Fook Finance Co., Ltd.
30-32 Des Voeux Road
Hong Kong
Entities associated with Mayfield Funds(3) ................. 2,718,911 7.5 6.1
c/o Kevin Fong
Mayfield Funds
2800 Sand Hill Road
Menlo Park, CA 94025
Holodeck Limited(4) ........................................ 2,594,220 7.2% 5.8
Hutchison House, 22nd Floor
10 Harcourt Road
Hong Kong
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
- ---------------- ------------ -------- --------
<S> <C> <C> <C>
Sasson International Holdings, Inc.(5) ..................... 2,502,274 7.0 5.6
c/o Dr. Andrew Wang
Sasson International Holdings, Inc.
710 Lakeway Drive, Suite 140
Sunnyvale, CA 94086
Entities associated with Morgan Stanley Dean Witter
Venture Partners(6) ...................................... 2,291,545 6.3 5.1
c/o William J. Harding
Morgan Stanley Dean Witter Venture Partners
3000 Sand Hill Road
Bldg 4, Suite 250
Menlo Park, CA 94025
Mainwell Corporation(7) .................................... 1,530,397 4.2 3.4
c/o James Loh
UBS Securities
80 Raffles Place, UOB Plaza I
Singapore 0104
MKT Holdings LLC and related entities(8) ................... 1,198,027 3.3 2.7
c/o Moses Tsang
Goldman Sachs & Co.
37th Floor Asia Pacific Finance Tower
Citibank Plaza, 3 Garden Road
Hong Kong
Priscilla M. Lu(9).......................................... 3,815,191 10.6 8.6
Ian V. Sugarbroad(10)....................................... 20,000 * *
Thomas W. Hubbs(11)......................................... 306,026 * *
Roger B. Cheung(12)......................................... 40,000 * *
Denis A. Cote(13)........................................... 127,437 * *
Edward W. Futcher(14)....................................... 83,662 * *
H. David Jones(15).......................................... 41,249 * *
Michele D. Hogan(16)........................................ 189,872 * *
Pascal R. Debon(17)......................................... 9,075,792 22.4 18.5
Kevin A. Fong(18)........................................... 2,768,911 7.6 6.2
William J. Harding(19)...................................... 2,341,545 6.5 5.2
James S. Loh(20)............................................ 1,580,397 4.4 3.5
Moses K. Tsang(21).......................................... 1,388,027 3.8 3.1
Andrew C. Wang(22).......................................... 2,552,274 7.1 5.7
Lork Sang Chow(23).......................................... 3,794,235 10.5 8.5
Frank Seto(24).............................................. 200,000 * *
Roderick Thorne(25)......................................... 66,286 * *
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
- ---------------- ------------ -------- --------
<S> <C> <C> <C>
All directors and executive officers as a group 28,390,904 75.9% 61.8%
(17 persons)..............................................
</TABLE>
- ------------------------
* Less than 1% of the outstanding common shares.
(1) Consists of 4,451,790 shares held by and 4,624,002 shares issuable pursuant
to warrants held by Nortel Networks. Mr. Debon, one of our directors, is an
employee of Nortel Networks.
(2) Consists of 3,374,524 shares held by and 369,711 shares issuable pursuant
to warrants held by EXCELlink. Mr. Chow, a member of our board of
directors, is affiliated with EXCELlink.
(3) Consists of 117,279 shares held by and 21,954 shares issuable pursuant to
warrants held by Mayfield Associates Fund II; and 2,213,691 shares held by
and 365,987 shares issuable pursuant to warrants held by Mayfield
Associates Fund VII. Mr. Fong, a member of our board of directors, is
affiliated with Mayfield Funds.
(4) Consists of 2,489,652 shares held by and 104,568 shares issuable upon
exercise of warrants held by Holodeck Limited.
(5) Consists of 2,489,400 shares held by and 12,874 shares issuable pursuant to
warrants held by Sasson International Holdings, Inc. Dr. Wang, a member of
our board of directors, is a principal of Sasson International Holdings,
Inc.
(6) Consists of 322,363 shares held by and 56,055 shares issuable pursuant to
warrants held by Morgan Stanley Venture Capital Fund II, CV; 1,293,916
shares held by and 224,997 shares issuable pursuant to warrants held by
Morgan Stanley Venture Capital Fund II, LP; 335,819 shares held by and
58,395 shares issuable pursuant to warrants held by Morgan Stanley Venture
Investors, LP. Dr. Harding, a member of our board of directors, is
affiliated with Morgan Stanley Dean Witter Venture Partners.
(7) Consists of 1,303,666 shares held by and 226,731 shares issuable pursuant
to warrants held by Mainwell Corporation. Mr. Loh, a member of our board of
directors, is affiliated with Mainwell Holdings.
(8) Consists of 527,835 shares held by and 177,766 shares issuable pursuant to
warrants held by Tsang & Associates; and 273,135 shares held by and 219,291
shares issuable pursuant to a warrant held by MKT Holdings LLC. Mr. Tsang,
a member of our board of directors, is affiliated with MKT Holdings.
(9) Consists of 1,673,191 shares held by and 52,000 shares issuable pursuant to
warrants held by Dr. Lu; 2,000,000 shares held by Best Ventures; 30,000
shares held by Douglas Lu-Hill, Irrevocable Trust; 30,000 shares held by
Felicity Lu-Hill, Irrevocable Trust; and 30,000 shares held by the Olivia
Lu-Hill Irrevocable Trust. All of the options held by Dr. Lu have been
exercised.
(10) Consists of 20,000 shares issuable upon exercise of stock options.
(11) Consists of 113,750 shares held by Mr. Hubbs; 26,333 shares held by and
4,680 shares issuable pursuant to warrants held by Voleas Ltd.; 740 shares
held by and 2,600 shares issuable pursuant to a warrant held by Thomas
Hubbs C/F Cynthia Megan Hubbs UTMA/CA; 740 shares held by and 2,600 shares
issuable pursuant to a warrant held by Thomas Hubbs C/F Bryna N. Hubbs
UTMA/CA; and 154,583 shares which may be acquired upon exercise of stock
options.
(12) Consists solely of 40,000 shares issued upon exercise of stock options.
(13) Consists of 100,070 shares held by and 18,200 shares issuable upon
exercise of warrants held by Mr. Cote; and 9,167 shares which may be
acquired upon exercise of stock options.
(14) Consists of 68,382 shares held by and 5,200 shares issuable pursuant to
warrants held by Dr. Futcher; and 10,080 shares issuable upon exercise of
stock options.
(15) Consists of 36,041 shares held by Mr. Jones; and 5,208 which may be
acquired upon exercise of stock options.
77
<PAGE>
(16) Consists of 160,188 shares held by and 15,600 shares issuable pursuant to
warrants held by Ms. Hogan; and 14,084 shares which may be acquired upon
exercise of stock options.
(17) Consists of 4,451,790 shares held by and 4,624,002 shares issuable
pursuant to warrants held by Nortel Networks. Mr. Debon, one of our
directors, is an employee of Nortel Networks.
(18) Consists of 117,279 shares held by and 21,954 shares issuable pursuant to
warrants held by Mayfield Associates Fund II; 2,213,691 shares held by and
365,987 shares issuable pursuant to warrants held by Mayfield Associates
Fund VII. Mr. Fong, a member of our board of directors, is affiliated with
Mayfield Funds. Also includes 50,000 shares issuable upon exercise of
stock options.
(19) Consists of 322,363 shares held by and 56,055 shares issuable pursuant to
warrants held by Morgan Stanley Venture Capital Fund II, CV; 1,293,916
shares held by and 224,997 shares issuable pursuant to warrants held by
Morgan Stanley Venture Capital Fund II, LP; 335,819 shares held by and
58,395 shares issuable pursuant to warrants held by Morgan Stanley Venture
Investors, LP. Dr. Harding, a member of our board of directors, is
affiliated with Morgan Stanley Dean Witter Venture Partners. Also includes
50,000 shares issuable upon exercise of stock options.
(20) Consists of 1,303,666 shares held by and 226,731 shares issuable pursuant
to warrants held by Mainwell Corporation. Mr. Loh, a member of our board
of directors, is affiliated with Mainwell Corporation. Also includes
50,000 shares issuable upon exercise of stock options.
(21) Consists of 527,835 shares held by and 177,766 shares issuable pursuant to
warrants held by Tsang & Associates; and 273,135 shares held by and
219,291 shares issuable pursuant to a warrant held by MKT Holdings LLC.
Mr. Tsang, a member of our board of directors, is affiliated with MKT
Holdings. Also includes 140,000 shares held by Mr. Tsang and 50,000 shares
issuable upon exercise of stock options.
(22) Consists of 2,489,400 shares held by and 12,874 shares issuable pursuant
to warrants held by Sasson International Holdings, Inc. Dr. Wang is a
principal of Sasson International Holdings, Inc. Also includes 50,000
shares issuable upon exercise of stock options.
(23) Consists of 3,374,524 shares held by and 369,711 shares issuable pursuant
to warrants held by EXCELlink. Mr. Chow, a member of our board of
directors, is affiliated with EXCELlink. Also includes 50,000 shares
issuable upon exercise of stock options.
(24) Consists of 200,000 shares held by Mr. Seto and subject to a repurchase
right by interWAVE which lapses over forty-eight months.
(25) Consists of 48,820 shares held by Dr. Thorne, 1,569 shares issuable upon
exercise of warrants held by Dr. Thorne, and 15,897 shares which may be
acquired pursuant to stock options.
78
<PAGE>
DESCRIPTION OF SHARE CAPITAL
GENERAL
After this offering, we will be authorized to issue 100,000,000 common
shares, $0.001 par value, and 10,000,000 shares of undesignated preferred
shares, $0.001 par value. Immediately after this offering, we estimate there
will be approximately 44,370,878 common shares outstanding, 7,286,594 common
shares will be issuable upon exercise of outstanding warrants, 5,317,191 common
shares issuable on exercise of outstanding options and no preferred shares will
be issued and outstanding as of January 18, 2000. The weighted average exercise
price of the options is $1.56 and the weighted average exercise price of the
warrants is $0.75.
Our memorandum of association and bye-laws contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and which may have the effect of delaying,
deferring, or preventing a future takeover of us unless such takeover or change
in control is approved by the board of directors.
COMMON SHARES
Holders of common shares are entitled to one vote per share on all matters
to be voted upon by the shareholders.
Holders of the common shares are entitled to receive such dividends as may
be declared from time to time by the board of directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
with holders of our preferred shares. We have never declared or paid cash
dividends on our capital shares, expect to retain future earnings, if any, for
use in the operation and expansion of our business, and do not anticipate paying
any cash dividends in the foreseeable future. In the event of our liquidation,
dissolution or winding up, the holders of common shares are entitled to share
ratable in all assets legally available for distribution after payment of all
debts and other liabilities and subject to the prior rights of any holders of
preferred shares then outstanding. Holders of common shares have no preemptive
or other subscription or conversion rights. There are no redemption or sinking
fund provisions applicable to the common shares.
PREFERRED SHARES
Effective upon the closing of this offering, we will be authorized to issue
10,000,000 shares of undesignated preferred shares, none of which will be
outstanding. The board of directors has the authority to issue the preferred
shares in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by our
shareholders. The issuance of preferred shares, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change in
control of us without further action by the shareholders and may adversely
affect the market price of, and the voting and other rights of, the holders of
common shares. The issuance of preferred shares with voting and conversion
rights may adversely affect the voting power of the holders of common shares,
including the loss of voting control to others. We have no current plans to
issue any preferred shares. The conversion rate of the existing preferred shares
to common shares is 1:1. All outstanding shares will convert to common shares
upon the closing of this offering.
REGISTRATION RIGHTS
Certain shareholders holding an aggregate of 27,566,806 shares are entitled
to rights with respect to registration of these shares under the securities act.
The rights are provided under the terms of an
79
<PAGE>
agreement between us and the holders of registrable securities. Beginning six
months following the completion of this offering, holders of then outstanding
registrable securities may require on up to two occasions and Nortel Networks
may require on one occasion that we register their shares for public resale. We
are obligated to register these shares only if the outstanding registrable
securities have an anticipated public offering price of at least $5,000,000.
Also, holders of registrable securities who hold more than one percent of our
outstanding registerable securities may require, on one separate occasion in any
12 month period and four occasions in the aggregate, that shares for public
resale on Form F-3 or similar short-form registration if the value of the
securities to be registered is at least $1,000,000. Furthermore, in the event we
determine to register any of our securities under the Securities Act of 1933,
either for our own account or for the account of other security holders
exercising their registration rights, the holders of registrable securities are
entitled to include their common shares in the registration. The registration
rights are subject to conditions and limitations, among them our right to limit
the number of shares included in the registration which may reduce the number of
shares proposed to be registered in view of market conditions. These
registration rights are not triggered by this offering. All expenses in
connection with any registration, other than underwriting discounts and
commissions, will be borne by us. All registration rights will terminate five
years following the consummation of this offering.
ANTITAKEOVER EFFECTS OF SOME PROVISIONS OF MEMORANDUM OF ASSOCIATION AND
BYE-LAWS
The following provisions, summarized below, are generally expected to
discourage coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of
us to first negotiate with our board. We believe that the benefits of increased
protection resulting from our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure us outweigh
the disadvantage of discouraging these proposals because we believe that the
negotiation of these proposals could result in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, one class being elected each year by our
shareholders. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us because it generally makes it more difficult for
shareholders to replace a majority of the directors.
SHAREHOLDER MEETINGS
Under our bye-laws, only the board of directors, the chairman of the board,
the president and any shareholder or group of shareholders holding greater than
10% of the voting shares may call special meetings of shareholders. Under
Bermuda law, shareholders may act by written consent only if the written consent
is unanimous.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF SHAREHOLDER NOMINATIONS AND PROPOSALS
Our bye-laws establish advance notice procedures with respect to shareholder
proposals and the nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of directors or a committee
of the board. A minimum of 120 calendar days written notice is required. The
notice shall specify the place, day and time of the meeting, and the general
nature of the business to be considered. No business not referred to in the
notice shall be conducted at such meeting.
80
<PAGE>
UNDESIGNATED PREFERRED SHARES
The authorization of undesignated preferred shares makes it possible for the
board of directors to issue preferred shares with voting or other rights or
preferences that could impede the success of any attempt to change control of
us. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control of us or our management.
AMENDMENT OF BYE-LAWS PROVISIONS
The amendment of the above provisions relating to the election and removal
of directors, shareholder meetings and elimination of shareholder action by
written consent requires approval by holders of at least 66% of the outstanding
common shares.
NASDAQ NATIONAL MARKET LISTING
We have been approved, subject to notice of issuance, for listing our shares
on the Nasdaq Stock Market's National Market under the symbol "IWAV."
TRANSFER AGENT
The transfer agent and registrar for the common shares is Norwest Bank
Minnesota, N.A. Norwest's telephone number for shareholder inquiries is
(800) 468-9716.
CERTAIN BERMUDA LAW CONSIDERATIONS
The following discussion is based on the advice of Conyers Dill & Pearman,
our Bermuda counsel. We have been designated as a non-resident for exchange
control purposes by the Bermuda Monetary Authority, Foreign Exchange Control,
whose permission for the issue and transfer of common shares has been obtained
subject to the common shares being listed on the Nasdaq National Market. This
Prospectus has been filed with the Registrar of Companies in Bermuda in
accordance with Bermuda law.
The transfer of common shares between persons regarded as non-resident in
Bermuda for exchange control purposes and the issue of shares after the
completion of the offering to such persons may be effected without specific
consent under the Exchange Control Act, 1972 and regulations thereunder subject
to the common shares being listed on the Nasdaq National Market. Issues and
transfers of shares to any person regarded as resident in Bermuda for exchange
control purposes require specific prior approval under the Exchange Control Act,
1972.
There are no limitations on the rights of persons regarded as non-residents
of Bermuda for foreign exchange control purposes owning common shares to hold or
vote their common shares. Because we have been designated as a non-resident for
Bermuda exchange control purposes, there are no restrictions on our ability to
transfer funds in and out of Bermuda or to pay dividends to United States
residents or other non-residents of Bermuda who are holders of common shares,
other than in respect of local Bermuda currency. In addition, because we have
been designated as a non-resident for Bermuda exchange control purposes, we do
not intend to maintain Bermuda dollar deposits and, accordingly, will not pay
dividends on the common shares in Bermuda currency.
In accordance with Bermuda law, share certificates are issued only in the
names of corporations or individuals. In the case of an applicant acting in a
special capacity (for example, as an executor or trustee), certificates may, at
the request of the applicant, record the capacity in which the applicant is
acting. Notwithstanding the recording of any such special capacity, we are not
bound to investigate or incur any responsibility in respect of the proper
administration of any such estate or trust. We will take no notice of any trust
applicable to any of its common shares whether or not we had notice of the
trust.
There is no minimum subscription which must be raised by this offering to
provide the sums required to be provided for under Section 28 of the Companies
Act 1981 of Bermuda.
81
<PAGE>
TAXATION
We believe that a significant portion of our income will be earned in
Bermuda, which currently has no corporate income tax, or other countries with
favorable tax regimes such as Hong Kong and the Netherlands in which we or our
affiliates conduct activities or in which our customers are located. However,
this belief is based upon the anticipated nature and conduct of our business,
which may change, and upon our understanding of our position under the tax laws
of the various countries in which we have assets or conduct activities, which
position is subject to review and possible challenge by taxing authorities and
to possible changes in law which may have retroactive effect. The extent to
which certain taxing jurisdictions, including the United States, may require us
to pay tax or to make payments in lieu of tax cannot be determined in advance.
In addition, our operations and the payments due to us may be affected by
changes in taxation, including retroactive tax claims or assessments of
withholding on amounts payable to us or other taxes assessed at the source, in
excess of the taxation anticipated by us based on business contacts and
practices of ours and the current tax regimes. There can be no assurance that
these factors will not have a material adverse effect on us.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
We and our non-United States subsidiaries will be subject to United States
federal income tax at regular corporate rates, as well as branch profits tax, on
our income that is effectively connected with the conduct of a trade or business
within the United States, and will be required to file federal income tax
returns reflecting that income. We intend to conduct our operations so as to
reduce the amount of our effectively connected income. However, no assurance can
be given that the Internal Revenue Service will agree with the positions taken
by us in this regard. Moreover, our United States subsidiary will be subject to
United States federal income tax on its worldwide income regardless of its
source, subject to reduction by allowable foreign tax credits, and distributions
by the United States subsidiary to us will be subject to United States
withholding.
BERMUDA TAX CONSIDERATIONS
Under current Bermuda law, we are not subject to tax on income or capital
gains. Furthermore, we obtained from the Minister of Finance of Bermuda under
the Exempted Undertakings Tax Protection Act 1966, an undertaking that, in the
event that Bermuda enacts any legislation imposing tax computed on profits,
income, any capital asset, gain or appreciation, or any tax in the nature of
estate duty or inheritance tax, then the imposition of the tax will not be
applicable to us or to any of our operations, or to our capital, or to our
capital shares, until March 28, 2016. This undertaking does not, however,
prevent the imposition of property taxes on any of our real property or
leasehold interests in Bermuda.
We are required to pay to the Bermuda government an annual registration fee
based upon our assessable capital subject to a maximum fee of BD$26,500.
TAXATION OF SHAREHOLDERS
BERMUDA TAX CONSIDERATIONS
Under current Bermuda law, no income, withholding or other taxes or stamp or
other duties are imposed upon the issue, transfer or sale of capital shares or
on any payments thereunder. See "Taxation--Bermuda Tax Considerations" for a
description of the undertaking on taxes obtained by us from the Minister of
Finance of Bermuda.
82
<PAGE>
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations that apply to the acquisition, ownership and disposition of our
common shares by United States shareholders as of the date hereof.
Although the following summary does not purport to describe all of the tax
considerations that may be relevant to a prospective purchaser of our common
shares, this summary describes the material United States federal income tax
consequences to a United States shareholder. No assurance can be given that the
conclusions set out below would be sustained by a court if challenged by the
Internal Revenue Service. This summary deals only with common shares that are
held as capital assets by United States shareholders, and does not address tax
considerations applicable to United States shareholders that may be subject to
special tax rules, such as dealers or traders in securities, financial
institutions, insurance companies, tax-exempt entities, United States
shareholders that hold common shares as a part of a straddle, conversion
transaction, constructive sale or other arrangement involving more than one
position, United States shareholders that owned or are deemed to own 10% or more
of the total combined voting power of all classes of our voting shares, United
States shareholders that have a principal place of business or "tax home"
outside the United States or United States shareholders whose functional
currency is not the United States dollar. Further this summary does not address
the alternative minimum tax consequences of an investment in our common shares.
The discussion below is based upon the provisions of the Internal Revenue
Code and regulations, rulings and judicial decisions thereunder as of the date
hereof; any such authority may be repealed, revoked or modified, perhaps with
retroactive effect, so as to result in federal income tax consequences different
from those discussed below.
The discussion set out below is intended only as a summary of certain United
States federal income tax consequences of an investment in common shares.
Prospective investors are urged to consult their own tax advisors as to the tax
consequences of an investment in the common shares, including the application to
their particular situation of the tax considerations discussed below, as well as
the application of state, local or foreign tax laws. The statements of United
States federal income tax law set out below are based on the laws in force and
interpretations thereof as of the date of this prospectus, and are subject to
any changes occurring after that date.
A United States shareholder of common shares means a holder that is:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof;
or
- an estate or trust the income of which is subject to United States federal
income taxation regardless of its source.
TAXATION OF DIVIDENDS. Distributions received from us by United States
shareholders will constitute dividends for U.S. federal income tax purposes and
will be taxable in the United States as ordinary income to the extent of our
current or accumulated earnings and profits. Amounts paid as dividends that
exceed our current or accumulated earnings and profits will be treated first as
a non-taxable return of capital that reduces the United States shareholder's tax
basis in the common shares, and any amount in excess of the shareholder's U.S.
tax basis will be treated as either long-term or short-term capital gain,
depending on the shareholder's holding period for the common shares. Dividends
paid by us are not eligible for the dividends received deduction otherwise
allowed to United States shareholders on dividends from U.S. corporations.
TAXATION OF CAPITAL GAINS. A United States shareholder will recognize gain
or loss for U.S. federal income tax purposes upon the sale, exchange or other
disposition of common shares in an amount
83
<PAGE>
equal to the difference between the amount realized from the sale, exchange or
other disposition and the shareholder's tax basis in the common shares. In most
cases, the gain or loss will be capital gain or loss, and will be long-term
capital gain or loss if such shareholder's holding period for the common shares
is more than one year. The deductibility of capital losses is restricted and may
only be used to reduce capital gains, except that individual taxpayers may
deduct annually $3,000 of capital loss in excess of their capital gains.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING. Distributions made by us
with respect to our common shares and gross proceeds received from the
disposition of the common shares may be subject to certain information reporting
requirements to the Internal Revenue Service and to a 31% backup withholding
tax. However, backup withholding generally will not apply to payments made to a
United States shareholder who furnishes a correct taxpayer identification number
and provides certain other required information. If backup withholding applies,
the amount withheld is not an additional tax, but is credited against the
shareholder's United States federal income tax liability.
PASSIVE FOREIGN INVESTMENT COMPANIES. We will be classified as a passive
foreign investment company for United States federal income tax purposes if we
satisfy either of the following two tests:
- 75% or more of our gross income is passive income; or
- on average for the taxable year, 50% or more of our assets by value or by
adjusted basis produce or are held for the production of passive income.
We do not believe that we satisfy or, after the completion of this offering,
will satisfy either of the tests for passive foreign investment company status.
Because the determination of whether the common shares constitutes shares of a
passive foreign investment company will be based upon the composition of our
income and assets from time to time, there can be no assurance that we will not
be considered a passive foreign investment company for any future fiscal year.
If we are a passive foreign investment company for any taxable year, U.S.
holders would be required to either:
- pay an interest charge together with tax calculated at maximum ordinary
income rates on certain "excess distributions"; or
- if a qualified electing fund election is made, to include in their taxable
income certain undistributed amounts of our income.
Each U.S. holder should consult its own tax advisor regarding the
advisability of making the qualified electing fund election.
84
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
We cannot provide any assurance that after this offering has been completed
a significant public market for our common shares will develop or be sustained.
The sale of substantial numbers of our common shares in the public market, or
the possibility of a sale, could adversely affect prevailing market prices for
our common shares. Furthermore, only a limited number of our common shares
currently held by our shareholders will be available for sale shortly after this
offering because of contractual and legal restrictions on resale described
below. Future sales of substantial amounts of our shares in the public market
after these restrictions lapse could adversely affect the prevailing market
price and our ability to raise equity capital in the future.
Upon completion of this offering and assuming no exercise after that date of
the underwriters' over-allotment option or of any outstanding options or
warrants, we expect to have 44,370,878 common shares outstanding based on shares
outstanding as of January 18, 2000.
Of the common shares, 8,500,000 of the shares that we expect to sell in the
offering, and any common shares sold upon exercise of the underwriters'
over-allotment option, will be freely tradable without restriction under the
securities act. However, there will be trading restrictions imposed on
"affiliates" and "control persons" as defined under Rule 144. The remaining
common shares held by existing shareholders are restricted securities as that
term is defined in Rule 144 of the securities act. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 promulgated under the securities act, which
rules are summarized below. As a result of the contractual restrictions
described below and the provisions of Rule 144, the restricted securities will
be eligible for sale in the public market immediately following the offering
subject to the expiration of 180-day lock-up agreements with representatives of
the underwriters and to volume limitations and other conditions under Rule 144.
Following this offering, the holders of an aggregate of 27,566,806 of the
outstanding common shares and 7,286,594 common shares issuable upon the exercise
of warrants have the right to require us to register their shares for sale upon
meeting requirements to which the parties have previously agreed. See
"Description of Share Capital--Registration Rights" for additional information
regarding registration rights.
The following table indicates approximately when the 43,157,472 of our
common shares, held by existing shareholders, that are not being sold in the
offering but which will be outstanding at the time the offering is complete will
be eligible for sale into the public market:
<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET
- ----------------------------------------------------------
<S> <C>
At effective date........................................... 0
90 days after effective date................................ 0
180 days after effective date............................... 28,725,805
After 180 days post-effective date.......................... 14,431,667
</TABLE>
The shares eligible for sale includes shares outstanding as of January 18,
2000 and assumes conversion of all outstanding preferred shares into common
shares and the exercise of the 2,000,000 preferred and 7,286,594 common warrants
outstanding as of January 18, 2000.
LOCK-UP AGREEMENTS
Our officers and directors and substantially all our existing shareholders
have signed lock-up agreements under which they agreed not to dispose of or
hedge any common shares or securities convertible into or exchangeable for
common shares for a period of 180 days from the date of this prospectus.
Dispositions can be made sooner with the prior written consent of Salomon Smith
Barney Inc.
85
<PAGE>
OPTIONS AND WARRANTS
As of January 18, 2000, a further 1,818,867 and 300,000 of the common shares
will be reserved for future issuance pursuant to our 1999 option plan and 1999
employee share purchase plan, respectively. An aggregate of 1,727,697 common
shares issuable upon the exercise of the outstanding options will be vested
180 days following the date of this prospectus. At the date of the offering, a
total of 1,248,813 shares issuable on the exercise of options held by employees
shall be vested and exercisable and not subject to the lock-up agreements. We
intend to file, shortly after to effectiveness of this offering, a registration
statement on Form F-3 or F-8 under the securities act covering all common shares
reserved for issuance under the share plans and subject to outstanding options
under our 1994 stock plan. Substantially all of the common shares issuable upon
exercise of outstanding options are subject to 180-day lock-up agreements with
the representatives of the underwriters.
At the date of the offering, none of the shares issuable on exercise of
outstanding warrants will be eligible for sale. After 180 days following the
date of the prospectus upon the expiration of the lock-up agreements, 9,478,805
of the common shares issuable on exercise of the outstanding warrants will first
become available for sale in the public markets. The warrants expire prior to
March 3, 2004.
Outstanding warrants to purchase 2,000,000 preferred shares and 1,132,874
common shares will expire on the closing of the offering if not exercised
earlier. We have received commitments from the preferred warrant holder and
holders of warrants to purchase 188,410 common shares that they intend to
exercise their warrants. The exercise price of these warrants is less than the
minimum estimated initial public offering price per share.
RULE 144
In general, under Rule 144, as in effect on the date of this prospectus, any
person who has beneficially owned restricted securities for at least one year
will be entitled to sell in any three-month period a number of shares that does
not exceed the greater of:
- 1% of the then outstanding common shares which are approximately 440,000
shares immediately after the offering; or
- the average weekly trading volume of our common shares on the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the SEC. Sales of
restricted securities pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of
current public information about us. Our affiliates must also comply with
the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, in order to sell common shares which are not
restricted securities.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell those shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
RULE 701
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from us by employees, directors,
officers, consultants or advisers between May 20, 1988, the effective date of
86
<PAGE>
Rule 701, and the date the issuer becomes subject to the reporting requirements
of the securities exchange act, pursuant to written compensatory benefit plans
or written contracts relating to the compensation of such persons. In addition,
the SEC has indicated that Rule 701 will apply to typical stock options granted
by an issuer before it becomes subject to the reporting requirements of the
exchange act, along with the shares acquired upon exercise of such options
beginning May 20, 1988. Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, such securities may be
sold:
- by persons other than our affiliates, subject only to the manner of sale
provisions of Rule 144; and
- by our affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.
87
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each of the underwriters named below has severally agreed
to purchase, and we have agreed to sell to the underwriters, the respective
number of common shares set forth opposite the name of each underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
NAME COMMON SHARES
- ---- -------------
<S> <C>
Salomon Smith Barney Inc....................................
Banc of America Securities LLC..............................
SG Cowen Securities Corporation.............................
---------
Total..................................................... 8,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the common shares included in this offering are subject
to the approval of legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all of the common shares offered hereby
other than those covered by the over-allotment option described below if they
purchase any of the common shares.
The underwriters, for whom Salomon Smith Barney Inc., Banc of America
Securities LLC and SG Cowen Securities Corporation are acting as
representatives, initially propose to offer some of the common shares directly
to the public at the public offering price set forth on the cover page of this
prospectus and some of the common shares to various securities dealers at the
public offering price less a concession not exceeding $ per common share.
The underwriters may allow, and these dealers may reallow, a concession not
exceeding $ per common share to certain brokers and dealers. After the
initial offering of the common shares to the public, the public offering price
and other selling terms may from time to time be varied by the representatives.
The representatives have advised us that the underwriters do not intend to
confirm any sales to any accounts over which they exercise discretionary
authority.
We have granted the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of 1,275,000
additional common shares at the public offering price less the underwriting
discount. The underwriters may exercise this option solely to cover
over-allotments, if any, in connection with this offering. To the extent that
the underwriters exercise this option, each of them will be obligated, subject
to certain conditions, to purchase a number of additional shares approximately
proportionate to the underwriters' initial commitment.
interWAVE, each of our officers and directors and our other shareholders
have agreed with the representatives that, for a period of 180 days after the
date of this prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc., dispose of or hedge any common shares or any of our
securities convertible into or exchangeable for common shares other than, in the
case of interWAVE, shares pursuant to any employee stock option plan, stock
ownership plan or dividend reinvestment plan of interWAVE in effect at the time
the underwriting agreement is signed and common stock issuable upon the
conversion of securities or the exercise of warrants outstanding at the time the
underwriting agreement is signed, and in the case of the officers, directors and
shareholders, shares of common stock disposed of as bona fide gifts approved by
Salomon Smith Barney Inc. Salomon Smith Barney Inc. in its sole discretion may
release any of the securities subject to the lock-up agreements at any time
without notice. The release of any lock-up is considered on a case by case
basis. Factors in deciding whether to release shares may include the length of
time before the lock-up expires, the trading price of the common stock and
whether the person seeking the release is an officer,
88
<PAGE>
director or affiliate of interWAVE. Salomon Smith Barney Inc. has no current
intention to release shares subject to the lock-up agreements.
The underwriters have reserved for sale, at the initial public offering
price, up to 1,500,000 common shares for customers, directors, employees and
other persons associated with us who have expressed an interest in purchasing
common shares in the offering. This group may include Alcatel which may purchase
approximately 600,000 common shares and entities associated with the principal
stockholder of Hutchison Whampoa Limited, which is the corporate parent of
Holodeck Limited, one of our shareholders which may purchase approximately
500,000 common shares. The number of shares available for sale to the general
public in the offering will be reduced to the extent these persons purchase
these reserved shares. Any reserved shares not so purchased will be offered by
the underwriters to the general public on the same terms as the other shares.
Prior to this offering, there has been no public market for the common
shares. Consequently, the initial public offering price for the common shares
was determined by negotiations between us and the representatives. Among the
factors considered in determining the initial public offering price were our
record of operations, our current financial condition, our future prospects, our
markets, the economic conditions in and future prospects for the industry in
which we compete, our management, and currently prevailing general conditions in
the equity securities markets, including current market valuations of publicly
traded companies considered comparable to us. We cannot assure you, however,
that the prices at which the shares will sell in the public market after this
offering will not be lower than the price at which they are sold by the
underwriters or that an active trading market in the common shares will develop
and continue after the offering.
We have applied to have our common shares included for quotation on the
Nasdaq Stock Market's National Market under the symbol "IWAV."
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional common shares.
<TABLE>
<CAPTION>
PAID BY INTERWAVE
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share............................................ $ $
Total................................................ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discounts and
commissions, are estimated to be $1,350,000 and are payable entirely by us.
The expenses consist of the following:
- an SEC registration fee of $30,967;
- an NASD filing fee of $12,230;
- a Nasdaq application fee of $90,000;
- estimated blue sky qualification fees and expenses of $10,000;
- estimated printing and engraving expenses of $350,000;
- estimated legal fees and expenses of $350,000;
- estimated accounting fees and expenses of $300,000;
- estimated transfer agent and registrar fees of $25,000; and
- estimated miscellaneous fees and expenses of $181,803.
89
<PAGE>
In connection with the offering, Salomon Smith Barney Inc. on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common shares in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common shares in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common shares made for the purpose of preventing or retarding a
decline in the market price of the common shares while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when Salomon Smith Barney Inc., in covering syndicate
short positions or making stabilizing purchases, repurchases shares originally
sold by that syndicate member. These activities may cause the price of the
common shares to be higher than the price that otherwise would exist in the open
market in the absence of such transactions. These transactions may be effected
on the Nasdaq National Market or in the over-the-counter market, or otherwise
and, if commenced, may be discontinued at any time.
The prospectus may be used by underwriters and dealers in connection with
offers and sales of the common shares, including common shares initially sold
outside the United States, to persons located in the United States.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the securities act, or to contribute to
payments the underwriters may be required to make with respect to any of those
liabilities.
Initial sales of the common shares offered in the United States will be
settled in U.S. dollars. Subsequent trading of common shares effected on the
Nasdaq National Market will be settled in U.S. dollars in accordance with the
normal settlement practices of the Nasdaq.
LEGAL MATTERS
The validity of the common shares offered hereby and other matters of
Bermuda law relating to the offering are being passed upon for us by Conyers
Dill & Pearman, Bermuda. Certain legal matters relating to the offering are
being passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California, with respect to U.S. law. Certain legal
matters relating to the offering are being passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of interWAVE Communications
International, Ltd. and subsidiaries as of June 30, 1999 and 1998, and for each
of the years in the three-year period ended June 30, 1999, have been included in
this prospectus and registration statement in reliance upon the report of
KPMG LLP, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
a registration statement on Form F-1 under the U.S. securities act with respect
to the common shares offered by this prospectus. This prospectus, which forms a
part of the registration, does not contain all the information included in the
registration statement. Certain information is omitted and you should refer to
the registration statement and its exhibits.
Any statement in this prospectus about any of our contracts or other
documents is only a summary of the material provisions of the contract or
document. If the contract or document is filed as an
90
<PAGE>
exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
You may review a copy of the registration statement, including exhibits and
schedules filed with it, at the SEC's public reference facilities in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, and at the
regional offices of the SEC located at 7 World Trade Center, 13(th) Floor, New
York, New York 10048 and at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such
materials from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed rates. You
may call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. The SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants such as interWAVE that file electronically with the SEC. We have
applied for quotation of the common shares on the Nasdaq national market, and
reports and other information about us may also be inspected at the offices of
the National Association of Securities Dealers, Inc., 9513 Key West Avenue,
Rockville, Maryland 20850.
You may read and copy any reports, statements or other information that we
file with the SEC at the addresses indicated above, and you may also access them
electronically at the web site set forth above. These SEC filings are also
available to the public from commercial document retrieval services.
Prior to this offering, we have not been required to file reports under the
exchange act. Following consummation of the offering, we will be required to
file reports and other information with the SEC under the exchange act. You are
invited to read and copy any reports, statements or other information that we
file with the SEC.
We intend to provide to our shareholders proxy statements and annual reports
prepared in accordance with applicable law. Our annual reports will contain
audited consolidated financial statements following the end of each fiscal year,
and we will make available quarterly reports containing unaudited summary
consolidated financial information for each of the first three fiscal quarters
of each fiscal year. As a foreign private issuer under the exchange act, we will
be exempt from provisions of that act which require us to provide proxy
statements in prescribed form to shareholders and which relate to short swing
profit reporting and liability.
91
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-2
Consolidated Balance Sheet as of June 30, 1998 and 1999..... F-3
Consolidated Statement of Operations for the years ended
June 30, 1997, 1998 and 1999.............................. F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive loss for the years ended June 30, 1997, 1998
and 1999.................................................. F-5
Consolidated Statement of Cash Flows for the years ended
June 30, 1997, 1998 and 1999.............................. F-7
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
interWAVE Communications International, Ltd.:
We have audited the accompanying consolidated balance sheets of interWAVE
Communications International, Ltd. and subsidiaries as of June 30, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity and comprehensive loss, and cash flows for each of the years in the three
year period ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of interWAVE
Communications International, Ltd. and subsidiaries as of June 30, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three year period ended June 30, 1999 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
September 10, 1999
F-2
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
JUNE 30, 1999
-------------------- --------------
1998 1999 SEPTEMBER 30, 1999
-------- --------- ------------------ PRO FORMA
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 7,340 $ 3,919 $ 12,988 $ 56,327
Short-term investments................................. 75 -- -- --
Trade receivables, net of allowance of $125, $255 and
$173 at June 30, 1998 and 1999, and September 30,
1999, respectively................................... 5,776 6,999 6,540 6,540
Inventories............................................ 3,949 6,339 5,346 5,346
Prepaid expenses and other current assets.............. 893 844 1,192 1,192
-------- --------- --------- --------
Total current assets................................. 18,033 18,101 26,066 69,405
Property and equipment, net.............................. 6,622 5,334 5,524 5,524
Intangibles, net......................................... 3,023 2,855 2,722 2,722
Other assets............................................. 1,935 278 768 768
-------- --------- --------- --------
Total assets......................................... $ 29,613 $ 26,568 $ 35,080 $ 78,419
======== ========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 4,526 $ 2,757 $ 3,538 $ 3,538
Accrued expenses and other current liabilities......... 1,515 2,354 2,237 2,237
Convertible notes...................................... -- 8,754 -- --
Current portion of notes payable....................... 540 590 680 680
Deferred revenue....................................... 511 323 157 157
Income taxes payable................................... 171 215 215 215
Customer deposits...................................... -- 1,500 1,500 1,500
-------- --------- --------- --------
Total current liabilities............................ 7,263 16,493 8,327 8,327
Deferred revenue, long-term.............................. 2,087 -- -- --
Notes payable, net of current portion.................... 1,074 486 261 261
Other long-term liabilities.............................. 736 789 924 924
-------- --------- --------- --------
Total liabilities.................................... 11,160 17,768 9,512 9,512
Commitments and contingencies
Shareholders' equity:
Convertible preferred shares, $0.83 par value;
28,250,000 shares authorized at June 30, 1998 and
56,500,000 shares authorized at June 30, 1999 and
September 30, 1999, respectively; 19,531,453,
20,177,168 and 23,479,530 shares issued and
outstanding at June 30, 1998 and 1999 and
September 30, 1999, respectively; aggregate
liquidation preference of $90,488, $95,008 and
$118,124 at June 30, 1998 and 1999 and
September 30, 1999, respectively..................... 16,211 16,747 19,488 --
Common shares, $0.001 par value; 100,000,000 shares
authorized; 4,793,747, 5,071,921 and
6,074,019 shares issued and outstanding at June 30,
1998 and 1999 and September 30, 1999, respectively... 5 5 6 36
Additional paid-in capital............................. 95,400 109,712 145,316 208,113
Deferred stock compensation............................ (4,830) (3,717) (12,090) (12,090)
Services receivable from shareholder................... (3,143) (2,071) (5,542) (5,542)
Subscriptions and amounts receivable from
shareholders......................................... -- (2,284) (416) (416)
Accumulated other comprehensive income................. 62 128 51 51
Accumulated deficit.................................... (85,252) (109,720) (121,245) (121,245)
-------- --------- --------- --------
Total shareholders' equity........................... 18,453 8,800 25,568 68,907
-------- --------- --------- --------
Total liabilities and shareholders' equity........... $ 29,613 $ 26,568 $ 35,080 $ 78,419
======== ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................... $ 1,841 $ 12,995 $ 17,293 $ 4,487 $ 5,377
Cost of revenues, excluding deferred
compensation amortization amounts........ 3,617 12,251 12,531 2,477 3,973
-------- -------- -------- -------- --------
Gross profit (loss).................... (1,776) 744 4,762 2,010 1,404
-------- -------- -------- -------- --------
Operating expenses:
Research and development, excluding
deferred compensation amortization
amounts................................ 14,169 15,300 14,174 3,872 3,562
Selling, general and administrative,
excluding deferred compensation
amortization amounts................... 6,923 7,742 7,440 1,759 2,088
Amortization of deferred stock
compensation*.......................... 6,377 7,604 5,254 1,523 3,324
-------- -------- -------- -------- --------
Total costs and expenses............... 27,469 30,646 26,868 7,154 8,974
-------- -------- -------- -------- --------
Operating loss......................... (29,245) (29,902) (22,106) (5,144) (7,570)
Interest expense........................... (479) (1,115) (2,403) (49) (1,959)
Other income (loss), net................... 653 415 154 102 59
-------- -------- -------- -------- --------
Net loss before income taxes........... (29,071) (30,602) (24,355) (5,091) (9,470)
Income tax expense......................... 111 220 113 -- --
-------- -------- -------- -------- --------
Net loss............................... $(29,182) $(30,822) $(24,468) $ (5,091) $ (9,470)
-------- -------- -------- -------- --------
Dividend effect of beneficial conversion
feature to H-1 shareholders.............. -- -- -- -- (2,055)
-------- -------- -------- -------- --------
Net loss attributable to common
shareholders............................. $(29,182) $(30,822) $(24,468) $ (5,091) $(11,525)
======== ======== ======== ======== ========
Basic and diluted net loss per share....... $ (7.12) $ (6.68) $ (4.96) $ (1.05) $ (2.10)
Weighted average common shares
outstanding.............................. 4,099 4,614 4,934 4,840 5,480
(*)Amortization of deferred stock
compensation:
Cost of revenues......................... $ 175 $ 1,512 $ 893 $ 275 $ 453
Research and development................. 4,533 3,874 2,555 836 1,468
Selling, general and administrative...... 1,669 2,218 1,806 412 1,403
-------- -------- -------- -------- --------
Total.................................. $ 6,377 $ 7,604 $ 5,254 $ 1,523 $ 3,324
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE DATA)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND (UNAUDITED) THREE MONTH
ENDED SEPTEMBER 30, 1999.
<TABLE>
<CAPTION>
CONVERTIBLE SERVICES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- --------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDER
---------- -------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances as of June 30, 1996.................. 14,027,000 $11,642 3,940,977 $ 4 $ 43,602 $ --
Issuance of Series E, less issuance costs of
$75......................................... 290,167 241 -- -- 2,584 --
Issuance of Series F, less issuance costs of
$75......................................... 1,500,000 1,245 -- -- 15,979 --
Exercise of stock options..................... -- -- 334,963 -- 85 --
Deferred stock compensation related to stock
option grants............................... -- -- -- -- 8,617 --
Amortization of deferred stock compensation... -- -- -- -- -- --
Stock-based compensation to nonemployees...... -- -- -- -- 44 --
Comprehensive loss:
Net loss.................................... -- -- -- -- -- --
Foreign currency translation adjustment..... -- -- -- -- -- --
Total comprehensive loss......................
---------- ------- ---------- ---- -------- -------
Balances as of June 30, 1997.................. 15,817,167 13,128 4,275,940 4 70,911 --
Issuance of Series G and warrants less
issuance costs of $1,756.................... 3,714,286 3,083 -- -- 19,661 (3,500)
Issuance of common stock...................... -- -- 70,000 -- 428 --
Exercise of stock options..................... -- -- 447,807 1 160 --
Performance of services....................... -- -- -- -- -- 357
Deferred stock compensation related to stock
option grants............................... -- -- -- -- 4,240 --
Amortization of deferred stock compensation... -- -- -- -- -- --
Comprehensive loss:
Net loss.................................... -- -- -- -- -- --
Foreign currency translation adjustment..... -- -- -- -- -- --
Total comprehensive loss......................
---------- ------- ---------- ---- -------- -------
Balances as of June 30, 1998.................. 19,531,453 16,211 4,793,747 5 95,400 (3,143)
Issuance of Series H, less issuance costs of
$7.......................................... 360,000 299 -- -- 2,214 --
Issuance of Series H1......................... 285,715 237 -- -- 1,763 --
Exercise of stock options..................... -- -- 278,174 -- 153 --
Performance of services....................... -- -- -- -- -- 1,072
Issuance of warrants in connection with bridge
loan........................................ -- -- -- -- 5,878 --
Deferred stock compensation related to stock
option grants............................... -- -- -- -- 4,141 --
Amortization of deferred stock compensation... -- -- -- -- -- --
Stock-based compensation to non-employees..... -- -- -- -- 163 --
Comprehensive loss:
Net loss.................................... -- -- -- -- -- --
Foreign currency translation adjustment..... -- -- -- -- -- --
Total comprehensive loss......................
---------- ------- ---------- ---- -------- -------
Balances as of June 30, 1999.................. 20,177,168 $16,747 5,071,921 $ 5 $109,712 $(2,071)
========== ======= ========== ==== ======== =======
<CAPTION>
SUBSCRIPTIONS
AND AMOUNTS ACCUMULATED
RECEIVABLE DEFERRED OTHER TOTAL
FROM STOCK COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
SHAREHOLDER COMPENSATION INCOME DEFICIT EQUITY
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances as of June 30, 1996.................. $ -- $(5,954) $ -- $ (25,248) $ 24,046
Issuance of Series E, less issuance costs of
$75......................................... -- -- -- -- 2,825
Issuance of Series F, less issuance costs of
$75......................................... -- -- -- -- 17,224
Exercise of stock options..................... -- -- -- -- 85
Deferred stock compensation related to stock
option grants............................... -- (8,617) -- -- --
Amortization of deferred stock compensation... -- 6,377 -- -- 6,377
Stock-based compensation to nonemployees...... -- -- -- -- 44
Comprehensive loss:
Net loss.................................... -- -- -- (29,182) (29,182)
Foreign currency translation adjustment..... -- -- 28 -- 28
Total comprehensive loss...................... --
------- ------- ---- --------- ---------
Balances as of June 30, 1997.................. -- (8,194) 28 (54,430) 21,447
Issuance of Series G and warrants less
issuance costs of $1,756.................... -- -- -- -- 19,244
Issuance of common stock...................... -- -- -- -- 428
Exercise of stock options..................... -- -- -- -- 161
Performance of services....................... -- -- -- -- 357
Deferred stock compensation related to stock
option grants............................... -- (4,240) -- -- --
Amortization of deferred stock compensation... -- 7,604 -- -- 7,604
Comprehensive loss:
Net loss.................................... -- -- -- (30,822) (30,822)
Foreign currency translation adjustment..... -- -- 34 -- 34
Total comprehensive loss......................
------- ------- ---- --------- ---------
Balances as of June 30, 1998.................. -- (4,830) 62 (85,252) 18,453
Issuance of Series H, less issuance costs of
$7.......................................... -- -- -- 2,513
Issuance of Series H1......................... (2,000) -- -- -- --
Exercise of stock options..................... -- -- -- -- 153
Performance of services....................... -- -- -- -- 1,072
Issuance of warrants in connection with bridge
loan........................................ (284) -- -- -- 5,594
Deferred stock compensation related to stock
option grants............................... -- (4,141) -- -- --
Amortization of deferred stock compensation... -- 5,254 -- -- 5,254
Stock-based compensation to non-employees..... -- -- -- -- 163
Comprehensive loss:
Net loss.................................... -- -- -- (24,468) (24,468)
Foreign currency translation adjustment..... -- -- 66 -- 66
Total comprehensive loss......................
------- ------- ---- --------- ---------
Balances as of June 30, 1999.................. $(2,284) $(3,717) $128 $(109,720) $ 8,800
======= ======= ==== ========= =========
<CAPTION>
COMPREHENSIVE
LOSS
--------------
<S> <C>
Balances as of June 30, 1996..................
Issuance of Series E, less issuance costs of
$75.........................................
Issuance of Series F, less issuance costs of
$75.........................................
Exercise of stock options.....................
Deferred stock compensation related to stock
option grants...............................
Amortization of deferred stock compensation...
Stock-based compensation to nonemployees......
Comprehensive loss:
Net loss.................................... $(29,182)
Foreign currency translation adjustment..... 28
--------
Total comprehensive loss...................... $(29,154)
========
Balances as of June 30, 1997..................
Issuance of Series G and warrants less
issuance costs of $1,756....................
Issuance of common stock......................
Exercise of stock options.....................
Performance of services.......................
Deferred stock compensation related to stock
option grants...............................
Amortization of deferred stock compensation...
Comprehensive loss:
Net loss.................................... (30,822)
Foreign currency translation adjustment..... 34
--------
Total comprehensive loss...................... $(30,788)
========
Balances as of June 30, 1998..................
Issuance of Series H, less issuance costs of
$7..........................................
Issuance of Series H1.........................
Exercise of stock options.....................
Performance of services.......................
Issuance of warrants in connection with bridge
loan........................................
Deferred stock compensation related to stock
option grants...............................
Amortization of deferred stock compensation...
Stock-based compensation to non-employees.....
Comprehensive loss:
Net loss.................................... (24,468)
Foreign currency translation adjustment..... 66
--------
Total comprehensive loss...................... $(24,402)
========
Balances as of June 30, 1999..................
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND (UNAUDITED) THREE MONTH
ENDED SEPTEMBER 30, 1999.
<TABLE>
<CAPTION>
CONVERTIBLE SERVICES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- --------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDER
---------- -------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances as of June 30, 1999.................. 20,177,168 $16,747 5,071,921 $ 5 $109,712 $(2,071)
Unaudited activity:
Conversion of the bridge financing to
Series H1 preferred stock and warrants...... 1,872,362 1,555 -- -- 9,291 --
Issuance of Series H1, less issuance cost of
$766........................................ 1,430,000 1,186 -- -- 10,113 --
Exercise of stock options and issuance of
shares for services......................... -- -- 1,002,098 1 382 --
Cash received from issuance of preferred
stock....................................... -- -- -- -- -- --
Deferred stock compensation related to stock
option grants............................... -- -- -- -- 11,697 --
Amortization of deferred stock compensation... -- -- -- -- -- --
Exchange of Warrants in connection with joint
sales agreement............................. -- -- -- -- 4,121 (3,646)
Performance of services....................... -- -- -- -- -- 175
Comprehensive loss
Net loss.................................... -- -- -- -- -- --
Foreign currency translation adjustment..... -- -- -- -- -- --
Total comprehensive loss...................... -- -- -- -- -- --
---------- ------- ---------- ---- -------- -------
Balances as of September 30, 1999
(unaudited)................................. 23,479,530 $19,488 6,074,019 $ 6 $145,316 $(5,542)
========== ======= ========== ==== ======== =======
<CAPTION>
SUBSCRIPTIONS
AND AMOUNTS ACCUMULATED
RECEIVABLE DEFERRED OTHER TOTAL
FROM STOCK COMPREHENSIVE ACCUMULATED SHAREHOLDERS'
SHAREHOLDER COMPENSATION INCOME DEFICIT EQUITY
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances as of June 30, 1999.................. $(2,284) $ (3,717) $128 $(109,720) $ 8,800
Unaudited activity:
Conversion of the bridge financing to
Series H1 preferred stock and warrants...... -- -- -- -- 10,846
Issuance of Series H1, less issuance cost of
$766........................................ -- -- -- (2,055) 9,244
Exercise of stock options and issuance of
shares for services......................... (132) -- -- -- 251
Cash received from issuance of preferred
stock....................................... 2,000 -- -- -- 2,000
Deferred stock compensation related to stock
option grants............................... -- (11,697) -- -- --
Amortization of deferred stock compensation... -- 3,324 -- -- 3,324
Exchange of Warrants in connection with joint
sales agreement............................. -- -- -- -- 475
Performance of services....................... -- -- -- -- 175
Comprehensive loss
Net loss.................................... -- -- -- (9,470) (9,470)
Foreign currency translation adjustment..... -- -- (77) -- (77)
Total comprehensive loss...................... -- -- -- -- --
------- -------- ---- --------- -------
Balances as of September 30, 1999
(unaudited)................................. $ (416) $(12,090) $ 51 $(121,245) $25,568
======= ======== ==== ========= =======
<CAPTION>
COMPREHENSIVE
LOSS
--------------
<S> <C>
Balances as of June 30, 1999..................
Unaudited activity:
Conversion of the bridge financing to
Series H1 preferred stock and warrants...... --
Issuance of Series H1, less issuance cost of
$766........................................ --
Exercise of stock options and issuance of
shares for services......................... --
Cash received from issuance of preferred
stock....................................... --
Deferred stock compensation related to stock
option grants............................... --
Amortization of deferred stock compensation... --
Exchange of Warrants in connection with joint
sales agreement............................. --
Performance of services....................... --
Comprehensive loss
Net loss.................................... (9,470)
Foreign currency translation adjustment..... (77)
--------
Total comprehensive loss...................... $ (9,547)
========
Balances as of September 30, 1999
(unaudited).................................
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(29,182) $(30,822) $(24,468) $ (5,091) $ (9,470)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 2,505 3,373 3,497 1,017 924
Amortization of deferred stock compensation..... 6,377 7,604 5,254 1,523 3,324
Loss on disposition of property................. 3 79 -- --
Amortization of discount on debt................ -- -- 1,952 -- 1,744
Interest accrued on convertible note payable.... 32 -- 238 -- 170
Value of consulting services received in
exchange for shares........................... 44 -- 2,679 1,596 --
Value of engineering services received in
exchange for shares........................... -- 357 1,072 299 175
Changes in operating assets and liabilities:
Trade receivables............................. (750) (4,193) (1,222) (258) 459
Inventories................................... (2,725) (342) (2,391) (1,470) 993
Prepaid expenses and other current assets..... (118) (371) 1,706 (428) (49)
Accounts payable.............................. (697) 2,363 (1,769) (1,019) 781
Accrued expenses and other current
liabilities................................. 814 854 937 221 1,383
Deferred revenue.............................. 1,736 88 (776) (1,570) (1,666)
-------- -------- -------- -------- --------
Net cash used in operating activities....... (21,961) (21,010) (13,291) (5,180) (1,232)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Sale of short-term investments.................... (4,902) 4,827 75 75
Purchases of property and equipment............... (4,552) (2,540) (1,728) (304) (934)
Investment in licensed technologies............... (36) (937) (314) (128) (47)
Other assets...................................... (509) (1,045) -- 63 --
-------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities................................ (9,999) 305 (1,967) (294) (981)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuances of common shares.......... -- 428 -- -- --
Proceeds from issuances of convertible preferred
shares and warrants............................. 20,049 18,245 -- -- 11,244
Proceeds from issuance of convertible notes and
warrants........................................ -- -- 12,164 -- --
Principal payments on notes payable............... (109) (6,073) (546) (142) (135)
Proceeds from exercise of options................. 85 161 153 8 115
Other long-term liabilities....................... 1,029 388 -- 1,495 135
-------- -------- -------- -------- --------
Net cash provided by financing activities... 21,054 13,149 11,771 1,361 11,359
Effect of exchange rate changes on cash and short
term investments................................ -- 34 66 (67) (77)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (10,906) (7,522) (3,421) (4,180) 9,069
Cash and cash equivalents at beginning of year...... 25,768 14,862 7,340 7,340 3,919
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year............ $ 14,862 $ 7,340 $ 3,919 $ 3,160 $ 12,988
======== ======== ======== ======== ========
</TABLE>
F-7
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during year for interest................ $ 438 $ 788 $ 213 $ 49 $ 35
======== ======== ======== ======== ========
Noncash investing and financing activities:
Licensed technology obtained in exchange for
preferred stock............................... $ -- $ 1,000 $ -- $ -- $ --
Provision of engineering services in exchange
for preferred stock........................... $ -- $ 3,500 $ -- $ -- $ --
Conversion of convertible notes to preferred
stock......................................... $ -- $ -- $ -- $ -- $ 8,754
Exchange of warrants in connection with joint
sales agreement............................... $ -- $ -- $ -- $ -- $ 4,121
Dividend effect of beneficial conversion feature
to H1 shareholders............................ $ -- $ -- $ -- $ -- $ 2,055
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
interWAVE Communications International, Ltd. (the Company) develops,
manufactures and markets compact mobile wireless network solutions for GSM
wireless communications on a global basis. The Company's products are primarily
marketed to communication equipment providers, wireless service providers and
systems integrators.
The Company has a fiscal year that ends on the Friday nearest June 30.
Fiscal 1997 and 1998 were 52 week years. Fiscal 1999 was a 53 week year. For
presentation purposes the accompanying consolidated financial statements and
notes refer to the calendar month-end.
Effective November 1, 1997, the Company sold the assets and liabilities of
its offices in the United Kingdom and China to ADC Telecommunications, Inc. for
$1,016,806 which was substantially equal to the net book value on the date of
sale. All employees of the offices were transitioned to ADC to assist them with
the marketing, sale and service of interWAVE products through their channels. As
part of the sale, the Company modified its purchase/resale agreement with ADC
Telecommunications.
(B) BASIS OF ACCOUNTING AND CONSOLIDATION
The consolidated financial statements of the Company are presented in
conformity with generally accepted accounting principles as adopted in the
United States. The consolidated financial information as of September 30, 1999
and for the three-months ended September 30, 1998 and 1999 is unaudited, but
includes all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for the fair presentation of the financial
position at such dates and the operations and cash flows for the periods then
ended. Operating results for the three-months ended September 30, 1999 are not
necessarily indicative of results that may be expected for the entire year.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries: interWAVE Communications, Inc. (Delaware,
USA); interWAVE Communications B.V. (Netherlands); interWAVE Communications
Solutions Ltd. (United Kingdom); and interWAVE Communications, S.A. (France).
The Company also operates a branch office in Hong Kong. All intercompany
balances and transactions have been eliminated in consolidation.
(C) INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET
In September 1999, the Board of Directors of the Company authorized the
filing of a registration statement with the Securities and Exchange Commission
(SEC) that would permit the Company to sell shares of the Company's common stock
in connection with a proposed initial public offering (IPO). If the offering is
consummated under the terms presently anticipated, all the then outstanding
shares of the Company's Series A-1, Series B-1, Series C-1, Series D,
Series D-1, Series E, Series E-1, Series F-1, Series G-1, Series H and
Series H-1 convertible preferred stock will automatically convert into shares of
common stock on a one-for-one basis upon the closing of the proposed IPO. In
addition, outstanding warrants to purchase 2,000,000 preferred shares and
1,132,874 common shares, will expire upon the closing of the offering, if not
exercised earlier. The Company has received a firm committment from the
preferred warrant holder that they intend to exercise their warrants.
Additionally, the Company has received firm commitments from certain common
warrant holders that they will exercise their warrants to purchase 188,410
common shares prior to the effectiveness of this
F-9
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
offering. The conversion of all convertible preferred shares, the exercise of
warrants for preferred shares and the exercise of warrants for common shares for
which they have obtained a firm commitment that the warrants will be exercised
have been reflected in the accompanying unaudited pro forma balance sheet as if
it had occurred on September 30, 1999. However, the Company has not reflected
the exercise of the common stock warrants for which the warrant holders have not
yet made a firm commitment. The unaudited pro forma balance sheet also reflects
the issuance of 602,256 common shares upon exercise of options subsequent to
September 30, 1999. Series G1 preferred shares shall not automatically convert
into common shares unless the $25,000,000 aggregate offering price is met and
the price is $7.00 per share or greater.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ PRO FORMA ------------------
AS REPORTED ADJUSTMENT PRO FORMA
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Shareholders' equity:
Convertible preferred shares..................... $ 19,488 $(19,488) $ --
Common shares.................................... 6 30 36
Additional paid-in capital....................... 145,316 62,797 208,113
Deferred stock compensation...................... (12,090) -- (12,090)
Services receivable from shareholder............. (5,542) -- (5,542)
Subscriptions and amounts receivable from
shareholders................................... (416) -- (416)
Accumulated other comprehensive.................. 51 -- 51
Accumulated deficit.............................. (121,245) -- (121,245)
--------- -------- --------
Total shareholders' equity....................... $ 25,568 $ 43,339 $ 68,907
========= ======== ========
</TABLE>
- ------------------------
(1) Assumes the conversion of all preferred shares outstanding as of
September 30, 1999.
(2) Assumes the conversion of the shares of Convertible preferred shares as of
September 30, 1999, into common shares; and the exercise of warrants for
2,000,000 preferred shares at $7 per share, which warrants will otherwise
expire on the effectiveness of the IPO.
(3) Assumes the issuance of 3,526,663 shares of Series I-1 preferred shares sold
in November and December 1999.
(4) Includes the exercise of stock options to purchase 602,256 common shares at
an average exercise price of $0.99 that has occurred since September 30,
1999.
(5) Includes the exercise of warrants to purchase 188,410 common shares for
which the Company has received firm commitments that the warrants will be
exercised prior to the effectiveness of this offering.
F-10
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) CURRENCY TRANSLATION
For operations outside of the United States with the local currency as the
functional currency, assets and liabilities are translated at year-end exchange
rates, and statements of operations are translated at the average exchange rates
during the year. Adjustments arising from translation of non-U.S. currency
denominated assets and liabilities for these operations are included as a
component of other comprehensive income in shareholders' equity.
For non-U.S. operations with the U.S. dollar as the functional currency,
non-U.S. currency denominated assets and liabilities are remeasured into U.S.
dollars using historical rates and any measurement gains and losses are included
in the consolidated results of operations and, to date, have not been
significant.
(E) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Investments with an
original maturity of more than three months but less than one year are
classified as short-term investments.
Cash equivalents and short-term investments are classified as
"available-for-sale" under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES.
The amortized cost of available-for-sale securities are adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in net investment income. As required by SFAS No. 115,
available-for-sale securities are recorded at fair value. Unrealized gains and
losses are reported as a separate component of accumulated other comprehensive
income in stockholders' equity. Realized gains and losses and declines in value
judged to be other than temporary on available-for-sale securities are included
in net investment income. The cost of securities sold is based on the specific
identification method. Interest on securities classified as available-for-sale
are included in other income.
(F) CONCENTRATION OF RISK
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, as a majority of the Company's
customers are large, well established companies.
F-11
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table summarizes information relating to the Company's
significant customers with balances greater than 10% of accounts receivable as
of:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------- -------------------
1998 1999 1998 1999
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE
Nortel Networks.............................. 41% 48% 63% 18%
Hutchison Telecommunications Group........... 24% 8% 10% 0%
ADC Telecommunications/Microcellular Systems,
Ltd.(1).................................... 35% 0% 18% 15%
HangZhou Topper Electric Corporation......... 0% 5% 0% 27%
Alcatel...................................... 0% 9% 8% 10%
</TABLE>
- ------------------------
(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.
The following table summarizes information relating to the Company's
significant customers with revenues comprising greater than 10% of revenue:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SEPTEMBER 30,
------------------------------ -------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Nortel Networks........................... 0% 18% 51% 53% 18%
Hutchison Telecommunications Group........ 68% 21% 8% 4% 5%
ADC Telecommunications/Microcellular
Systems, Ltd.(1)........................ 15% 47% 20% 31% 21%
Total Access Communications............... 0% 13% 3% 0% 9%
Electronia................................ 16% 0% 0% 0% 0%
HangZhou Topper Electric Corporation...... 0% 0% 2% 0% 38%
Alcatel................................... 0% 0% 7% 11% 2%
</TABLE>
- ------------------------
(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.
(G) INVENTORIES
Inventories are stated at the lower of average cost or market.
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation,
calculated using the straight-line depreciation method over the estimated useful
lives of the related assets, generally two to five years. Leasehold improvements
are depreciated over the life of the underlying lease or the estimated useful
life, whichever is shorter.
F-12
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) REVENUE RECOGNITION
Revenue is recognized when all of the following have occurred: the product
has been shipped, title and risk of loss have passed to the customer (generally
at time of shipment for US shipments and at time of arrival at an international
port for non-US shipments), we have the right to invoice the customer,
collection of the receivable is probable, and we have fulfilled all pre-sale
contractual obligations to the customer. Revenue for installation services is
recognized as the service is performed to the extent of direct installation
costs incurred and the excess is deferred and recognized over the estimated life
of the equipment. Revenue from extended warranty coverage and customer support
is recognized ratably over the period of the service contract. Trial sales made
directly to wireless service providers are not recognized as revenue until the
trial is successfully completed. Trials conducted by communications service
providers and systems integrators are normally shipped from their inventory and
do not result in any incremental revenue to us. Although the Company's products
contain a software component, the software is not sold separately and the
Company is not contractually obligated to provide software upgrades to its
customers.
The Company provides for estimated warranty costs at the time of sale. Sales
agreements include a 12 to 16 month warranty on all hardware and software.
(J) RESEARCH AND DEVELOPMENT COSTS
SFAS No. 86 provides for the capitalization of certain software development
costs once technological feasibility is established subject to an evaluation of
realizability. Capitalized costs are then amortized on a straight-line basis
over the estimated product life or based on the ratio of current revenues to
projected product revenues, whichever is greater. To date, the Company's
products have been available for general release concurrent with the
establishment of technological feasibility; and, accordingly, no development
costs have been capitalized.
(K) INTANGIBLES
The Company capitalizes costs of acquiring licenses from third parties for
technologies that have reached technological feasibility and can be incorporated
into the Company's products. The Company also capitalizes certain external costs
associated with patents and trademarks. Except for the license and technical
information agreement discussed in Note 9(a), the Company amortizes these assets
straight line over four years or based on the ratio of current revenues to
projected revenues whichever is greater. Technology licenses generally contain
provisions for royalty payments to licensors based on the number of units sold.
(L) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets, including certain identifiable
intangibles, for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets might not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by
F-13
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(M) INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
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 in effect for the year in which those temporary differences
are expected to be recovered or settled. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
(N) LOSS PER SHARE
Basic loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted loss per share is computed using
the weighted average number of common and dilutive potential common shares
outstanding during the period, using the as-if-converted method for convertible
preferred shares and the treasury stock method for options and warrants. The
effect of including convertible preferred shares, options and warrants would
have been antidilutive during all periods presented. As a result, such effect
has been excluded from the computation of diluted net loss per share during
those antidilutive periods. The total number of shares excluded from diluted net
loss per share relating to these securities was approximately 20,177,168,
1,939,000, and 3,518,201 shares, respectively, for the fiscal year ended 1999.
Pursuant to SEC Staff Accounting Bulletin No. 98, common shares and convertible
preferred shares issued for nominal consideration and options and warrants
granted for nominal consideration prior to the anticipated effective date of the
initial public offering are included in the calculation of basic and diluted net
loss per share, as if they were outstanding for all periods presented. To date,
the Company has not had any issuances of stock, options or warrants for nominal
consideration.
(O) STOCK-BASED COMPENSATION AND WARRANTS FOR GOODS AND SERVICES
The Company accounts for stock-based awards to employees using the intrinsic
value method. Expense associated with stock-based compensation is being
amortized on an accelerated basis over the vesting period of the individual
award consistent with the method described in Financial Accounting Standards
Board ("FASB") Interpretation No. 28.
Warrants issued for goods or services are valued at the fair value of the
equity instrument or the goods or services received, whichever is more readily
determinable. Promises of future services are recorded as contra-equity until
such time as the services are received.
(P) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
F-14
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(Q) COMPREHENSIVE INCOME
"Other comprehensive income" refers to revenues, expenses, gains and losses
that are not included in net income, but rather are recorded directly in
stockholders' equity. The only component of other comprehensive income for the
years ended June 30, 1997, 1998 and 1999 was cumulative translation adjustments.
(R) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, accounts receivable, accounts
payable and accrued expenses, other current liabilities and convertible notes
approximate fair value due to the short maturity of those instruments. The
carrying value of the notes payable approximate fair value due to the variable
interest rates on these notes.
(2) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents and short-term investments have been classified as
available-for-sale securities and consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
Cash Equivalents ------------------- -------------
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash................................................ $1,637 $ 708 $ 2,312
Money market funds.................................. 2,703 2,216 5,224
Commercial paper.................................... 3,000 995 5,452
------ ------ -------
$7,340 $3,919 $12,988
====== ====== =======
</TABLE>
Short term investments consisted of repurchase agreements as of June 30,
1998. For all investments in commercial paper and repurchase agreements, cost
approximates fair market value.
(3) INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------- -------------
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Work in Process................................. $2,637 $5,290 $3,615
Finished goods.................................. 204 373 400
Consignment inventory........................... 1,108 676 1,331
------ ------ ------
$3,949 $6,339 $5,346
====== ====== ======
</TABLE>
F-15
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------- -------------
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment...................... $ 9,119 $ 10,554 $11,363
Computer equipment........................... 3,093 3,323 3,407
Furniture and fixtures....................... 254 260 277
Leasehold improvements....................... 140 197 221
------- -------- -------
12,606 14,334 15,268
Less accumulated depreciation and
amortization............................... (5,984) (9,000) (9,744)
------- -------- -------
$ 6,622 $ 5,334 $ 5,524
======= ======== =======
</TABLE>
(5) INTANGIBLES
A summary of intangibles is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------- -------------
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Licensed technology............................. $1,268 $1,243 $ 1,243
Patents & trademarks............................ 2,073 2,387 2,483
------ ------ -------
3,341 3,630 3,726
Less accumulated amortization................... (318) (775) (1,004)
------ ------ -------
$3,023 $2,855 $ 2,722
====== ====== =======
</TABLE>
(6) INCOME TAXES
Income tax expense (benefit) for the fiscal years ended June 30, 1997, 1998
and 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
1997:
U.S. Federal....................................... $ 37 $ -- $ 37
Other.............................................. 63 11 74
---- ---- ----
Total............................................ $100 $ 11 $111
==== ==== ====
1998:
U.S. Federal....................................... $ -- $ -- $ --
Other.............................................. 186 34 220
---- ---- ----
Total............................................ $186 $ 34 $220
==== ==== ====
1999:
U.S. Federal....................................... $ -- $ -- $ --
Other.............................................. 114 (1) 113
---- ---- ----
Total............................................ $114 $ (1) $113
==== ==== ====
</TABLE>
F-16
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(6) INCOME TAXES (CONTINUED)
The reconciliation between the amount computed by applying the U.S. Federal
statutory tax rate of 34% to income taxes and the actual provision for income
taxes follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Income tax expense at statutory rate............. $(9,884) $(10,405) $(8,281)
Non-U.S. income taxed at rate other than the U.S.
federal rate................................... (15) (108) (218)
Losses, in a zero tax jurisdiction............... 8,538 6,771 4,035
Net losses and temporary differences for which no
current benefit is recognized.................. 1,456 3,782 4,306
Other............................................ 16 180 271
------- -------- -------
$ 111 $ 220 $ 113
======= ======== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
JUNE 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Technology asset...................................... $ 1,082 $ 916 $ 781
Inventory............................................. 792 1,611 809
Allowance for doubtful accounts....................... -- -- 305
Accruals and reserves................................. 185 428 526
Net operating loss carryforwards...................... 1,128 5,168 9,559
Research and other tax credit carryforwards........... 1,658 2,509 3,481
------- -------- --------
Total gross deferred tax assets..................... 4,845 10,632 15,461
Less valuation allowance.............................. (4,513) (10,550) (15,438)
------- -------- --------
Total deferred tax assets........................... 332 82 23
Deferred tax liabilities - Fixed assets................. (343) (125) (65)
------- -------- --------
Net deferred tax liabilities...................... $ (11) $ (43) $ (42)
======= ======== ========
</TABLE>
The net change in the total valuation allowance from the year ended
June 30, 1998, and 1999 was an increase of approximately $6,037,000 and
$4,888,000, respectively. Management believes that sufficient uncertainty exists
regarding the future realization on deferred tax assets, and, accordingly, a
valuation allowance is required.
F-17
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(6) INCOME TAXES (CONTINUED)
The company has net operating loss carryforwards for federal and California
income tax return purposes of approximately $23,796,000 and $12,738,000,
respectively. The net operating losses expire in the following years in the
following amounts:
<TABLE>
<CAPTION>
U.S. FEDERAL CALIFORNIA
------------ -----------
<S> <C> <C>
Expires in year:
2001 $ -- $ 24,000
2002 -- 599,000
2003 -- 5,716,000
2004 -- 6,399,000
2010 13,000 --
2011 41,000 --
2012 611,000 --
2013 10,905,000 --
2019 12,226,000 --
----------- -----------
$23,796,000 $12,738,000
=========== ===========
</TABLE>
The company also has foreign net operating losses in France of $323,000;
which expires in 2002.
The Company also has research credit carryforwards for U.S. federal and
California income tax return purposes of approximately $1,856,000 and
$1,110,000, respectively. The federal research credit carryforwards will expire
beginning in 2010 through 2019; California research credits carry forward
indefinitely until utilized. The Company also has U.S. federal minimum tax
credits of approximately $36,000, which carryforwards indefinitely until
utilized. The Company also has California manufacturer's investment credit
carryforwards of approximately $479,000, which expire in 2006 through 2009.
(7) EQUIPMENT LINE OF CREDIT
During 1997, the Company obtained a secured equipment line of credit of
$2,500,000. Borrowings bear interest at 6% above the average term Treasury Note
two weeks preceding a drawdown. The Company had $1,589,000 outstanding under the
secured equipment line of credit as of June 30, 1998, of which approximately
$1,074,000 is included in long-term liabilities and $515,374 is included in
current portion of notes payable. As of June 30, 1999, the Company had
$1,073,000 outstanding under the secured equipment line of credit, of which
approximately $486,000 is included in long-term liabilities and $587,000 is
included in current portion of notes payable. The Company does not have the
ability to borrow additional amounts under this facility. Borrowings under the
line of credit are payable monthly with the final payments due in July 2001.
(8) CONVERTIBLE NOTES
In 1999, as part of a bridge financing the Company issued $12,691,830 of
convertible notes payable to a group of its preferred and common shareholders in
exchange for $12,163,965 in cash and a note receivable of $527,865. The
principal amount, together with interest accrued at 8% per annum, will become
due and payable on December 3, 1999 or automatically convert into a new series
of preferred
F-18
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(8) CONVERTIBLE NOTES (CONTINUED)
stock upon the closing of a minimum of $10 million of a new series of preferred
stock to new investors. As a result of the issuance of Series H-1 preferred
shares on September 9, 1999, the notes converted to Series H-1 preferred stock
at a price of $7 per share. As an incentive to participate in the convertible
note financing, current holders of Series A, B, C, D, E, F and G preferred stock
("original preferred stock") who participated at a minimum level based on their
respective ownership percentage were entitled to exchange their original
preferred stock for A-1, B-1, C-1, D-1, E-1, F-1 and G-1 preferred stock,
respectively ("new preferred stock"), whose terms were identical to the original
preferred stock, except that the new preferred stock would be preferential in
liquidation to all original preferred stock. As of June 30, 1999, the
convertible notes, including accrued interest of $231,211, amount to
$12,923,041.
In conjunction with the bridge loan financing, the participants in the
convertible notes were granted a warrant to purchase one share of common stock
for each $2 invested in the convertible notes. As a result, the Company issued
warrants to purchase 6,345,939 shares of common stock at a price of $0.70 per
share, which are exercisable any time for a period of 5 years from date of
issuance. The proceeds from the bridge financing were allocated between the
convertible notes and the warrants based upon their relative fair values. The
amount of $5,592,552 (net of proportionate value of note receivable of $284,466)
ascribed to the warrants was estimated using the Black-Scholes option valuation
model with the following assumptions: no expected dividend yield; risk free
interest rate of 6%; expected volatility 70%; and contractual term of 5 years.
The value of the warrants had been recorded as a discount on the convertible
notes payable and additional paid-in-capital and will be amortized over the term
of the debt.
The note receivable of $527,865 has been recorded as a reduction of the
convertible notes of $243,399 and a reduction of the warrants of $284,466
determined on a basis proportionate to the fair value of the bridge loan and
warrants.
As of June 30, 1999 no warrants have been exercised. Interest expense of
$1,951,567 has been recorded in connection with the amortization of the discount
in fiscal 1999.
A summary of the convertible notes is as follows (in thousands):
<TABLE>
<S> <C>
Convertible notes, plus accrued interest.................... $12,923
Less unamortized discount on term loan in connection with
the issuance of warrants.................................. (3,926)
Less: proportionate value of note receivable................ (243)
-------
Convertible notes........................................... $ 8,754
=======
</TABLE>
F-19
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(9) PREFERRED AND COMMON SHARES
(A) CONVERTIBLE PREFERRED SHARES
A summary of outstanding convertible preferred stock is as follows (in
thousands, except share data):
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
----------------------------------------------------- -------------------------
1998 1999 1999 (UNAUDITED)
------------------------- ------------------------- -------------------------
SHARES LIQUIDATION SHARES LIQUIDATION SHARES LIQUIDATION
SERIES OUTSTANDING PREFERENCE OUTSTANDING PREFERENCE OUTSTANDING PREFERENCE
- ------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
A......................... 3,400,000 $ 2,822 -- $ -- -- $ --
A-1....................... -- -- 3,400,000 2,822 3,400,000 2,822
B......................... 2,670,000 3,204 -- -- -- --
B-1....................... -- -- 2,670,000 3,204 2,670,000 3,204
C......................... 1,000,000 1,500 -- -- -- --
C-1....................... -- -- 1,000,000 1,500 1,000,000 1,500
D......................... 4,680,000 14,040 41,000 123 41,000 123
D-1....................... -- -- 4,639,000 13,917 4,639,000 13,917
E......................... 2,567,167 25,672 109,200 1,072 109,200 1,072
E-1....................... -- -- 2,457,967 24,600 2,457,967 24,600
F......................... 1,500,000 17,250 -- -- -- --
F-1....................... -- -- 1,500,000 17,250 1,500,000 17,250
G......................... 3,714,286 26,000 -- -- -- --
G-1....................... -- -- 3,714,286 26,000 3,714,286 26,000
H......................... -- -- 360,000 2,520 360,000 2,520
H-1....................... -- -- 285,715 2,000 3,588,077 25,116
---------- ------- ---------- ------- ---------- --------
19,531,453 $90,488 20,177,168 $95,008 23,479,530 $118,124
========== ======= ========== ======= ========== ========
</TABLE>
The liquidation preferences of the holders of authorized preferred shares
are as follows:
<TABLE>
<CAPTION>
SERIES
------------------------------------------------------------------------------------------------
A1 B1 C1 D D1 E E1 F1 G1
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liquidation preference
per share(a)................. $0.83 $1.20 $1.50 $3.00 $3.00 $10.00 $10.00 $11.50 $7.00
<CAPTION>
SERIES
-------------------
H H1
-------- --------
<S> <C> <C>
Liquidation preference
per share(a)................. $7.00 $7.00
</TABLE>
- ------------------------
(a) Plus accrued and unpaid dividends. If the assets and funds
distributed among the holders of preferred stock are insufficient to
permit payment of these amounts, then such assets and funds shall be
distributed to the holders of preferred shares in proportion to the
respective preferential amounts fixed for each series. Any remaining
assets shall be distributed among the holders of common shares on a
pro rata basis. A consolidation or merger of the Company involving
transfer of more than 50% of the voting power shall be deemed a
liquidation except in specific circumstances.
Each holder of preferred shares is entitled to receive, when and if declared
by the Board of Directors, noncumulative dividends at a rate of $0.05 per share.
As of June 30, 1999, no dividends have been declared.
F-20
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(9) PREFERRED AND COMMON SHARES (CONTINUED)
Each holder of preferred shares is entitled to one vote per share.
Each preferred share is convertible into common shares, at the option of the
holder, at any time, on a one-for-one basis subject to adjustment for
antidilution events as defined, and will automatically convert into common
shares in the event of the consummation of an underwritten initial public
offering of not less than $25,000,000. Series G1 preferred shares shall not
automatically convert into common shares unless the $25,000,000 aggregate
offering price is met and the price is $7.00 per share or greater.
On March 27, 1998 and April 29, 1998, the Company issued an aggregate of
3,714,286 shares of Series G preferred stock and a warrant to purchase 2,000,000
Series G preferred shares at $7.00 per share to Nortel Networks for an aggregate
purchase price of $22,744,000 (net of financing costs of $1,756,000), which
consideration consisted of a $20,000,000 cash payment and licensed technology
valued at $1,000,000, and a technical information agreement valued at
$3,500,000. The amount of $4,629,000 ascribed to the warrants was estimated
using the Black-Scholes option valuation model with the following assumptions:
no expected dividend yield; risk free interest rate of 5.5%; expected volatility
of 70%; and contractual term of 3 years. The warrants expire on March 27, 2001
or upon the effectiveness of an initial public offering, whichever is first,
unless previously exercised.
The licensed technology is being amortized over a five year term. If the
license is terminated in less than five years, the Company will receive a
prorata refund equal to 20% of the amount paid for the license for each
remaining year. The refund may be paid in cash or Series G preferred shares, at
the option of the payor, at their original value. The license technology
agreement is for one year and automatically renews for the duration of the
underlying patents. The technical information agreement provides for the Company
to have access to Nortel Network's technical assistance and testing services and
other documentation and support. The agreement further provides for a refund as
a percentage of the original value as per the following schedule:
<TABLE>
<S> <C>
March 16, 1999.............................................. 65%
March 16, 2000.............................................. 45%
March 16, 2001.............................................. 30%
March 16, 2002.............................................. 15%
March 16, 2003.............................................. 0%
</TABLE>
The Company has recorded this agreement as a contra equity and is amortizing
the value on a basis consistent with their ability to receive a refund.
On September 10, 1999, the Company completed an offering of 1,715,715 shares
of Series H-1 preferred shares and issued warrants to purchase an aggregate of
240,000 shares of common stock at $1 per share to a group of investors in
exchange for $12,010,000 (before financing costs of $766,000). The Series H-1
contains a $7 per share liquidation preference and converts to common shares on
a one-to-one basis. The warrants valued at $1,340,000 expire three years from
the issuance date, or upon the effectiveness of an initial public offering,
whichever comes first, unless previously exercised. The fair value of the H-1
preferred and common shares at time of issuance of Series H-1 was deemed to be
$7.50 per share, resulting in recognition of a dividend at the time of issuance
(a beneficial conversion) of $2,055,000. The sale of Series H-1 preferred shares
met the minimum $10 million new financing described in footnote 8, and resulted
in the automatic conversion of the convertible notes and interest
F-21
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(9) PREFERRED AND COMMON SHARES (CONTINUED)
accrued thereon into 1,872,362 shares of Series H-1 and the issuance of warrants
to purchase 253,874 shares of common stock for $1 per share to the noteholders.
The warrants expire three years from the issuance date, or upon the
effectiveness of an initial public offering, whichever comes first, unless
previously exercised.
In September 1999, the Company entered into a memorandum of understanding
expiring in August 2000 with an investor to distribute and manufacture the
investor's products and for the investor to market the company's products in
Canada. The Company expects to enter into a four-year distribution agreement. In
conjunction with the memorandum of understanding the Company issued a warrant to
purchase 615,000 common shares at an exercise price of $1 per share and received
a warrant to purchase 225,225 shares of the investor's publicly traded common
shares at $3.3125 per share expiring in August 2002. The warrant to purchase the
Company's common shares expires on the earlier of September 1, 2002, or the
effectiveness of an initial public offering. The warrant is fully vested,
nonforfeitable and exercisable on the date that the Company and the investor
executed the warrant agreement.
The amount of $475,650 ascribed to the warrants received by the Company was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 6%; expected
volatility of 81%; and contractual term of 3 years. The warrant received was
recorded in other assets as of September 30, 1999.
The amount of $4,120,500 ascribed to the warrants issued to the investor was
estimated using the Black-Scholes option valuation model with the following
assumptions: no expected dividend yield; risk free interest rate of 6%; expected
volatility of 70%; and contractual term of 3 years. The warrant has been
recorded as other paid in capital. The amount of $3,645,500 ascribed to the
services to be received from the investor was determined as the difference in
value between the warrants exchanged. This amount has been recorded as contra
equity and will be amortized to expense over the four year term of the
distribution agreement.
(B) SHARE OPTION PLAN
In fiscal 1995, the Board of Directors adopted the 1994 Share Plan (the
Plan) providing for the issuance of common share options to employees and
consultants of the Company. The share options are a combination of both
incentive and non-statutory share options.
Incentive share options may be granted at not less than 100% of the fair
market value per share, and non-statutory share options may be granted at not
less than 85% of the fair market value per share at the date of grant as
determined by the Board of Directors or committee thereof, except for options
granted to a person owning greater than 10% of the total combined voting power
of all classes of shares of the Company, for which the exercise price must not
be less than 110% of the fair market value. Share option plan shares generally
vest 25% after one year, with the remainder vesting monthly over the following
three years. Additional options granted to existing employees after July 28,
1998 are in general vesting monthly over four years.
The Company uses the intrinsic value method to account for the 1994 plans.
Accordingly compensation cost has been recognized for its stock options in the
accompanying financial statements if, on the date of grant, the current market
value of the underlying common stock exceeded the exercise price of the stock
options at the date of grant.
F-22
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(9) PREFERRED AND COMMON SHARES (CONTINUED)
During fiscal 1997, 1998 and 1999, the Company granted options with a
weighted-average exercise price of $1.07, $1.15 and $0.90 respectively, compared
to the weighted-average fair value of approximately $8.80, $6.37 and $3.03 for
the same respective periods.
Options generally have 10 year terms. However, options granted to an
optionee who, at the time the option is granted, owns stock representing more
than 10% of the voting power of all classes of stock of the Company, generally
have 5 year terms.
The Company has reserved 10,730,000 common shares for issuance under the
Plan. A summary of the Company's share option plan activity is as follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
---------------------------------------------------------------------- (UNAUDITED)
1997 1998 1999 1999
--------------------- --------------------- ---------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year................. 2,857,524 $0.27 3,007,986 $0.52 3,265,867 $0.74 4,304,811 $0.77
Granted................ 1,177,200 1.07 1,044,500 1.15 2,417,100 0.90 1,973,750 1.45
Exercised.............. (334,963) 0.25 (447,807) 0.23 (278,174) 0.55 (993,098) 0.37
Canceled............... (691,775) 0.51 (338,812) 0.72 (1,099,982) 1.09 (154,954) 1.01
--------- ----- --------- ----- ---------- ----- --------- -----
Outstanding at
year-end............. 3,007,986 0.52 3,265,867 0.74 4,304,811 0.77 5,130,509 1.10
========= ===== ========= ===== ========== ===== ========= =====
Options exercisable at
year-end............. 1,109,432 $0.30 1,362,648 $0.46 2,026,902 $0.61 1,325,013 $0.85
========= ===== ========= ===== ========== ===== ========= =====
</TABLE>
The following table summarizes information about share options outstanding
and exercisable under the Plan as of June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
RANGE OF REMAINING
EXERCISE NUMBER CONTRACTUAL LIFE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.08 160,188 5.13 $0.08 160,188 $0.08
0.12 158,522 5.64 0.12 158,053 0.12
0.30 816,139 6.21 0.30 774,743 0.30
0.70 1,258,163 9.74 0.70 159,442 0.70
1.00 342,003 7.26 1.00 225,462 1.00
1.15 1,569,795 8.75 1.15 549,014 1.15
--------- ---- ----- --------- -----
4,304,810 8.19 $0.77 2,026,902 $0.61
========= ==== ===== ========= =====
</TABLE>
Under SFAS No. 123, Accounting for Stock-Based Compensation, the Company is
required to disclose the pro forma effects on net loss and net loss per share as
if the Company had elected to use the fair value approach to account for all of
its employee stock-based compensation plans. Had compensation cost for the
Company's plans been determined consistently with the fair value approach
described in SFAS No. 123, the Company's pro forma net loss and pro forma net
loss per share for the
F-23
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(9) PREFERRED AND COMMON SHARES (CONTINUED)
years ended June 30, 1997, 1998 and 1999, would have been changed as indicated
below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported.................................. $(29,182) $(30,822) $(24,468)
Pro forma.................................... $(33,132) $(35,485) $(26,417)
Net loss per share
As reported.................................. $ (7.12) $ (6.68) $ (4.96)
Pro forma.................................... $ (8.08) $ (7.69) $ (5.35)
</TABLE>
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Weighted average risk-free rate...................... 5.56% 5.56% 5.29%
Expected life (years)................................ 5 5 5
Volatility........................................... 70% 70% 70%
Dividend yield....................................... 0 0 0
</TABLE>
(10) TRANSACTIONS WITH RELATED PARTIES AND MAJOR CUSTOMERS
For the years ended June 30, 1997, 1998, and 1999, the Company engaged in
business transactions with investors and major customers resulting in the
following revenue, deferred revenue, and trade receivables: (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Nortel Networks................................. $ -- $ 2,392 $ 8,797
Hutchison Telecommunications Group.............. 1,251 2,754 1,409
ADC Telecommunications.......................... 279 6,099 3,449
Total Access Communications..................... 8 1,750 505
------ ------- -------
$1,538 $12,995 $14,160
====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred Revenue:
Nortel Networks........................................... $1,531 $1,508
Hutchison Telecommunications Group........................ 374 144
Total Access Communications............................... 693 56
------ ------
$2,598 $1,708
====== ======
</TABLE>
F-24
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(10) TRANSACTIONS WITH RELATED PARTIES AND MAJOR CUSTOMERS (CONTINUED)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Trade Receivables:
Nortel Networks........................................... $2,382 $3,669
Hutchinson Telecommunications Group....................... 1,352 509
ADC Telecommunications.................................... 2,042 --
------ ------
$5,776 $4,178
====== ======
</TABLE>
(11) COMMITMENTS
(A) OPERATING LEASE COMMITMENTS
The Company leases its facilities under noncancelable operating leases.
These leases expire at various dates ranging from December 1998 to March 2005.
Future minimum lease payments as of June 30, 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30
- -------------------
<S> <C>
2000.................................................... $1,068
2001.................................................... 1,106
2002.................................................... 1,128
2003.................................................... 489
2004.................................................... 94
Thereafter.............................................. 83
------
Total minimum lease payments.................... $3,968
======
</TABLE>
Rent expense was approximately $775,000, $822,000, and $960,951 for the
years ended June 30, 1997, 1998, and 1999, respectively.
(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 10, 1999, the Company had
committed to make purchases totaling $2.7 million from these manufacturers in
the next 60 days. In addition, in specific instances, the Company may agree to
assume liability for limited quantities of specialized components with lead
times beyond this 60-day period.
(12) LITIGATION
On June 28, 1999, the Company filed a complaint against JetCell Corporation
in United States District Court alleging misappropriation of trade secrets and
patent infringement. The complaint seeks injunctive relief and damages. On
July 19, 1999, JetCell filed an answer to the complaint and a series of
counterclaims against the Company. The answer denied the allegations made in the
complaint and the counterclaims included allegations against the Company of
unfair trade practices, unfair
F-25
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(12) LITIGATION (CONTINUED)
competition, defamation, and patent misuse. The answer and counterclaims seek
injunctive relief, damages, invalidation of the Company's patents and a
dismissal of the complaint. The Company is unable to predict the outcome of the
lawsuit and does not expect it to be resolved in the near future. However, if
the Company is 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 the Company. If the outcome is adverse to the Company, they would
experience more competition in the Company's markets and may be required to
license technology required for the Company's products, either of which could
harm the Company's business and financial results.
(13) EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) defined contribution benefit plan that covers
all U.S. employees who have attained the age of at least 20.5 years. This plan
allows employees to defer up to 20% of their pretax salary in certain
investments at the discretion of the employee. The Company has the option to
make discretionary employer matching contributions. The Company did not make any
matching contributions to the plan during the years ended June 30, 1997, 1998
and 1999.
(14) 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.
The following table presents information about the Company by geographic
area: (in thousands)
<TABLE>
<CAPTION>
1997
---------------------------------------------
UNITED
STATES ASIA EUROPE CONSOLIDATED
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Total net revenues.................................. $ 1,229 $ 1,639 $ 344 $ 3,212
Less: intercompany sales............................ (919) (452) -- (1,371)
Reported net revenues............................... 310 1,187 344 1,841
Net loss............................................ (24,248) (2,215) (2,719) (29,182)
Property & equipment, net........................... 6,265 637 512 7,414
Percentage of reported net revenue.................. 16.84% 64.48% 18.68% 100.00%
</TABLE>
F-26
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FISCAL YEARS ENDED JUNE 30, 1997, 1998 AND 1999
(14) GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998
---------------------------------------------
UNITED
STATES ASIA EUROPE CONSOLIDATED
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Total net revenues.................................. $ 9,342 $ 6,460 $ 4,191 $ 19,993
Less: intercompany sales............................ (2,765) (1,567) (2,666) (6,998)
Reported net revenues............................... 6,577 4,893 1,525 12,995
Net loss............................................ (24,501) (4,484) (1,837) (30,822)
Property & equipment, net........................... 6,039 450 133 6,622
Percentage of reported net revenue.................. 50.61% 37.65% 11.74% 100.00%
<CAPTION>
1999
---------------------------------------------
UNITED
STATES ASIA EUROPE CONSOLIDATED
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Total net revenues.................................. $ 13,697 $ 4,930 $ 2,847 $ 21,474
Less: intercompany sales............................ (1,620) (2,561) -- (4,181)
Reported net revenues............................... 12,077 2,369 2,847 17,293
Net loss............................................ (19,593) (3,927) (948) (24,468)
Property and equipment, net......................... 4,709 502 123 5,334
Percentage of reported net revenue.................. 69.84% 13.70% 16.46% 100.00%
</TABLE>
(15) SUBSEQUENT EVENTS (UNAUDITED)
In November 1999, the Company completed an offering of 1,526,663 Series I-1
preferred shares to Alcatel in exchange for $12,013,304 (net of financing costs
of $200,000). The Series I-1 contains an $8 per share liquidation preference and
converts to common shares on a one-to-one basis. In connection with the sale of
Series I-1 preferred shares, the Company and Alcatel entered into a purchase and
distribution agreement whereby Alcatel will market the Company's wireless office
network products through their enterprise solutions division.
In November 1999 the Company received a commitment from a financial
institution for a revolving line of credit in the amount of $5,000,000 for a one
year term subject to advances against eligible accounts receivable.
The Company has recently signed a lease for approximately 56,000 square feet
in Menlo Park, California for our principal administrative and engineering
facilities. The five-year lease commences December 15, 1999. The Company expects
to sublet the premises in Redwood City following its relocation in early 2000
until the expiration of our Redwood City lease in 2002. Future minimum lease
payments for the new lease are as follows for the fiscal years ending June 30:
<TABLE>
<S> <C>
2000........................................................ $ 878,582
2001........................................................ 2,062,117
2002........................................................ 2,144,604
2003........................................................ 2,330,393
2004 and thereafter......................................... 3,703,768
-----------
$11,019,464
</TABLE>
In December 1999, the Company sold 2,000,000 Series I-1 preferred shares to
Holodeck for $16 million on similar terms as the November 1999 sale of shares to
Alcatel.
F-27
<PAGE>
- ---------------------------------------------------------
- ---------------------------------------------------------
8,500,000 SHARES
INTERWAVE COMMUNICATIONS
INTERNATIONAL, LTD.
COMMON SHARES
[LOGO]
------
P R O S P E C T U S
, 2000
---------
SALOMON SMITH BARNEY
BANC OF AMERICA SECURITIES LLC
SG COWEN
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by us in connection with the sale of the
common shares being registered. All of the amounts shown are estimates except
for the SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 30,967
NASD Filing Fee............................................. 12,230
Nasdaq National Market Listing Fee.......................... 90,000
Blue Sky Qualification Fees and Expenses.................... 10,000
Printing and Engraving Expenses............................. 350,000
Legal Fees and Expenses..................................... 350,000
Accounting Fees and Expenses................................ 300,000
Transfer Agent and Registrar Fees........................... 25,000
Miscellaneous............................................... 181,803
----------
Total................................................... $1,350,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Bye-laws provide as follows:
The Directors, Secretary and other Officers for the time being of the
Company and the liquidator or trustees (if any) for the time being acting in
relation to any of the affairs of the Company and every one of them, and their
heirs, executors and administrators, shall be indemnified and secured harmless
out of the assets of the Company from and against all actions, costs, charges,
losses, damages and expenses which they or any of them, their heirs, executors
or administrators, shall or may incur or sustain by or by reason of any act
done, concurred in or omitted in or about the execution of their duty, or
supposed duty, or in their respective offices or trusts, and none of them shall
be answerable for the acts, receipts, neglects or defaults of the others of them
or for joining in any receipts for the sake of conformity, or for any bankers or
other persons with whom any moneys or effects belonging to the Company shall or
may be lodged or deposited for safe custody, or for insufficiency or deficiency
of any security upon which any moneys of or belonging to the Company shall be
placed out on or invested, or for any other loss, misfortune or damage which may
happen in the execution of their respective offices or trusts, or in relation
thereto, PROVIDED THAT this Indemnity shall not extend to any matter in respect
of any fraud or dishonesty which may attach to any of said persons.
The Company carries liability insurance which provides for coverage for
officers and directors of the Company and its subsidiaries, subject to certain
deductibles.
In December 1999, the Registrant will enter into indemnification agreements
with its directors and officers providing for limitations on a director's and
officer's liability for judgments, settlements, penalties, fines, and expenses
of defense (including attorneys' fees, bonds and costs of investigation) arising
out of or in any way related to acts of omissions as a director or an officer,
or in any other capacity in which services are rendered to the Registrant. The
Registrant believes its indemnification agreements will assist it in attracting
and retaining qualified individuals to serve as directors and officers. The
agreements provide that a director or officer is not entitled to indemnification
under such agreements among other cases (i) if the director or officer is not
relieved of liability under applicable law, (ii) for violations of certain
securities laws, or (iii) for certain claims initiated by the officer or
director. In addition, indemnification may not be available to directors or
officers under Bermuda law if any act or omission by a director or officer
amounted to a failure to act honestly and in good faith
II-1
<PAGE>
with a view to the best interests of the Company. Due to the lack of applicable
case law, it is not clear whether indemnification is available in the case of a
breach of securities laws of the United States.
Insofar as indemnification for liabilities arising under the U.S. Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the United States Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the last
three years preceding the date hereof involving sales of the Company's
securities that were not registered under the Securities Act:
- In March 1997, the Registrant sold a total of 1,500,000 Series F preferred
shares at a price of $11.50 per share to UCOM Company International
Limited for an aggregate purchase price of $17,250,000 net of financing
costs of $0. Each Series F preferred share is convertible into one common
share at the option of the holder, and will automatically convert into
common shares at the consummation of Registrant's initial public offering.
These shares were exempt from registration under Rule 506 of the
Securities Act since the sale was to a corporation, which is defined as an
accredited investor under Rule 501(a)(3) of the Securities Act.
- Beginning in March 1998, the Registrant sold a total of 3,714,286
Series G preferred shares and a warrant to purchase 2,000,000 Series G
preferred shares at a price of $7.00 per share to Nortel Networks
Corporation for an aggregate purchase price of $22,744,000 net of
financing costs of $1,756,000 paid substantially to Goldman
Sachs & Co., Inc. The consideration consisted of a $20,000,000 cash
payment and the execution of a license agreement and a technical
information agreement. The warrant expires on the earlier of March 27,
2001, the consummation of an initial public offering or a sale of
substantially all of the assets of the Registrant. Each Series G preferred
share is convertible into one common share. In April 1999, the Registrant
granted Nortel Networks Corporation a warrant to purchase 24,000 common
shares at a purchase price of $1.15 per share. This warrant expires on
April 22, 2002, upon consummation of an initial public offering or a sale
of substantially all of the assets of the Registrant. These shares were
exempt from registration under Rule 506 of the Securities Act since the
sale was to a corporation, which is defined as an accredited investor
under Rule 501(a)(3) of the Securities Act.
- In March 1999, the Registrant entered into a convertible note and warrant
agreement with 106 investors, all of which were existing shareholders of
the Registrant. Pursuant to these note financings, the Registrant borrowed
at 8% annual interest an aggregate amount of $12,691,830 and issued
warrants to purchase 6,345,931 common shares at a purchase price of $0.70
per share. These warrants expire on March 3, 2004. On September 10, 1999,
these notes along with accrued interest converted according to their terms
into 1,872,335 Series H1 preferred shares, and the Registrant granted the
investors additional warrants to purchase 253,874 common shares at a
purchase price of $1.00 per share. These warrants expire on the earlier of
September 10, 2002, the consummation of an initial public offering or a
sale of substantially all of the assets of the Registrant. Each Series H1
preferred share is convertible into one common share. The note financings
were exempt from registration under Rule 506 of the Securities Act since
the sale was to 106 accredited investors, as defined and Rule 501 of the
Securities Act.
- Beginning in July 1999, the Registrant sold a total of 1,715,715
Series H1 preferred shares and warrants to purchase 240,000 common shares
at a price of $7.00 per share to three investors. The warrants expire on
the earlier of three years from the issuance date or upon the consummation
of an initial public offering. Each Series H1 preferred share is
convertible into
II-2
<PAGE>
one common share. The shares were exempt from registration under Rule 506
of the Securities Act since the sales were to three corporations, which
are defined as accredited investors under Rule 501(a)(3) of the Securities
Act.
- In November and December 1999, the Registrant sold a total of 3,526,663
Series I1 preferred shares at a price of $8.00 per share to Alcatel USA,
Inc. and Holodeck Limited for an aggregate purchase price of $28,013,304
net of financing costs of $200,000. Each Series I1 preferred share is
convertible into one common share. These shares were exempt from
registration under Rule 506 of the Securities Act since the sale was to a
corporation, which is defined as an accredited investor under
Rule 501(a)(3) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S> <C>
1.1 Form of underwriting agreement
3.1** Bye-laws of the Registrant with amendments
3.2** Form of Amended and Restated Bye-laws of the Registrant to
be filed and effective upon completion of this offering
3.3** Memorandum of Association
4.1** Form of the Registrant's common share certificates
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, a professional
corporation
10.1** Form of indemnification agreement
10.2** 1994 Stock Plan and form of stock option agreement and
restricted stock purchase agreement
10.3** 1999 Option Plan and form of subscription agreement
10.4** 1999 Share Purchase Plan and form of subscription agreement
10.5** Lease between Marina Investments, Inc. and interWAVE
Communications Inc., dated February 15, 1999
10.6** OEM purchase agreement between Registrant and Nortel
Networks Corporation, dated March 27, 1998
10.7+** Purchase / resale agreement between Registrant and ADC
Telecommunications, Inc., dated February 27, 1997
10.8** Assignment agreement among ADC Telecommunications, Inc.,
Microcellular Systems, Ltd. and the Registrant, dated
May 13, 1999
10.9** Joint development agreement between Registrant and ADC
Telecommunications Inc., dated September 4, 1998
10.10** Offer of employment between Registrant and Ian V. Sugarbroad
10.11** Offer of employment between Registrant and Thomas W. Hubbs
10.13** Amended and Restated Rights Agreement by and among
Registrant and certain shareholders, dated in August 1999
10.14** Form of warrant by and between Registrant and Intasys
Corporation
10.15** Form of warrant by and between Registrant and MediaTel
Capital
10.16** Form of warrant by and between Registrant and Nortel
Networks Corporation
10.17** Patent license agreement by and between Registrant and
Nortel Networks Corporation
10.18** Technical information agreement by and between Registrant
and Nortel Networks Corporation
10.19** Value-added services agreement between Registrant and
PEMSTAR, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S> <C>
10.20+** Distribution and OEM agreement by and between Registrant and
Alcatel, dated October 27, 1999
10.21** Lease between Tyco Electronics Corporation and interWAVE
Communications, Inc., dated November 24, 1999
10.22** Base Station System Agreement by and between Registrant and
Lanka Cellular Services (PVT) Limited, dated
December 1999
21.1** List of Subsidiaries
23.1 Consent of KPMG LLP, independent public accountants
23.2** Consent of counsel (included in exhibit 5.1)
24.1** Power of attorney (See page II-5)
27.1* Financial data schedule
</TABLE>
- ------------------------
* To be filed by amendment
** Previously filed
+ Confidential treatment has been requested for portions of this exhibit.
These portions have been filed separately with the SEC.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the Consolidated Financial Statements
or the Notes thereto.
ITEM 17. UNDERTAKINGS
(a) The Registrant hereby undertakes to provide to the underwriter at
the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as at the time it was declared effective; and
(ii) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
the time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the U.S. Securities Act of 1933, as amended
(the U.S. Securities Act), the Registrant certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form F-1
and has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Redwood
City, California, on the 27th day of January, 2000.
<TABLE>
<S> <C> <C>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
By /s/ PRISCILLA M. LU
-----------------------------------------
Priscilla M. Lu
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
We, the undersigned officers and directors of InterWAVE Communications
International, Ltd., do hereby constitute and appoint Priscilla M. Lu and
Thomas W. Hubbs, and each of them, our true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him and his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Registration Statement and any and all related registration statements
filed under Securities and Exchange Commission Rule 462, and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the U.S. Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chief Executive Officer and
/s/ PRISCILLA M. LU Chairman of the Board
------------------------------------------- (Principal Executive January 27, 2000
Priscilla M. Lu Officer)
Executive Vice President,
/s/ THOMAS W. HUBBS Chief Financial Officer
------------------------------------------- (Principal Financial and January 27, 2000
Thomas W. Hubbs Accounting Officer)
/s/ PASCAL DEBON
------------------------------------------- Director January 27, 2000
Pascal Debon
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KEVIN FONG
------------------------------------------- Director January 27, 2000
Kevin Fong
/s/ WILLIAM J. HARDING
------------------------------------------- Director January 27, 2000
William J. Harding
/s/ JAMES LOH
------------------------------------------- Director January 27, 2000
James Loh
/s/ MOSES TSANG
------------------------------------------- Director January 27, 2000
Moses Tsang
/s/ LORK SANG CHOW
------------------------------------------- Director January 27, 2000
Lork Sang Chow
/s/ ANDREW WANG
------------------------------------------- Director January 27, 2000
Andrew Wang
/s/ PRISCILLA M. LU
------------------------------------------- Authorized Representative January 27, 2000
Priscilla M. Lu
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------------------- --------
<C> <S> <C>
1.1 Form of underwriting agreement
3.1** Bye-laws of the Registrant with amendments
3.2** Form of Amended and Restated Bye-laws of the Registrant to
be filed and effective upon completion of this offering
3.3** Memorandum of Association
4.1** Form of the Registrant's common share certificates
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, a professional
corporation
10.1** Form of indemnification agreement
10.2** 1994 Stock Plan and form of stock option agreement and
restricted stock purchase agreement
10.3** 1999 Option Plan and form of subscription agreement
10.4** 1999 Share Purchase Plan and form of subscription agreement
10.5** Lease between Marina Investments, Inc. and interWAVE
Communications Inc., dated February 15, 1999
10.6** OEM purchase agreement between Registrant and Nortel
Networks Corporation, dated March 27, 1998
10.7+** Purchase / resale agreement between Registrant and ADC
Telecommunications, Inc., dated February 27, 1997
10.8** Assignment agreement among ADC Telecommunications, Inc.,
Microcellular Systems, Ltd. and the Registrant, dated
May 13, 1999
10.9** Joint development agreement between Registrant and ADC
Telecommunications Inc., dated September 4, 1998
10.10** Offer of employment between Registrant and Ian V. Sugarbroad
10.11** Offer of employment between Registrant and Thomas W. Hubbs
10.13** Amended and Restated Rights Agreement by and among
Registrant and certain shareholders, dated in August 1999
10.14** Form of warrant by and between Registrant and Intasys
Corporation
10.15** Form of warrant by and between Registrant and MediaTel
Capital
10.16** Form of warrant by and between Registrant and Nortel
Networks Corporation
10.17** Patent license agreement by and between Registrant and
Nortel Networks Corporation
10.18** Technical information agreement by and between Registrant
and Nortel Networks Corporation
10.19** Value-added services agreement between Registrant and
PEMSTAR, Inc.
10.20+** Distribution and OEM agreement by and between Registrant and
Alcatel, dated October 27, 1999
10.21** Lease between Tyco Electronics Corporation and interWAVE
Communications, Inc., dated November 24, 1999
10.22** Base Station System Agreement by and between Registrant and
Lanka Cellular Services (PVT) Limited, dated
December 1999
21.1** List of Subsidiaries
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------------------- --------
<C> <S> <C>
23.1 Consent of KPMG LLP, independent public accountants
23.2** Consent of counsel (included in exhibit 5.1)
24.1** Power of attorney (See page II-5)
27.1* Financial data schedule
</TABLE>
- ------------------------
* To be filed by amendment
** Previously filed
+ Confidential treatment has been requested for portions of this exhibit.
These portions have been filed separately with the SEC.
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, INC.
8,500,000 Shares (a)
Common Stock
($.001 par value)
Underwriting Agreement
New York, New York
January, 2000
Salomon Smith Barney Inc.
Banc of America Securities LLC
SG Cowen Securities Corporation
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
interWAVE Communications International, Inc., a corporation
organized under the laws of Bermuda (the "Company"), proposes to sell to the
several underwriters named in Schedule I hereto (the "Underwriters"), for whom
you (the "Representatives") are acting as representatives, 8,500,000 shares of
Common Stock, $.001 par value ("Common Stock") of the Company (said shares to be
issued and sold by the Company being hereinafter called the "Underwritten
Securities"). The Company also proposes to grant to the Underwriters an option
to purchase up to 1,275,000 additional shares of Common Stock to cover
over-allotments (the "Option Securities"; the Option Securities, together with
the Underwritten Securities, being hereinafter called the "Securities"). To the
extent there are no additional Underwriters listed on Schedule I other than you,
the term Representatives as used herein shall mean you, as Underwriters, and the
terms Representatives and Underwriters shall mean either the singular or plural
as the context requires. Certain terms used herein are defined in Section 17
hereof.
As part of the offering contemplated by this Agreement,
Salomon Smith Barney Inc. ("Salomon Smith Barney") has agreed to reserve out of
the Securities set forth opposite its name on the Schedule II to this Agreement,
up to 1,500,000 Securities, for sale to the Company's employees, officers, and
directors and other parties associated with the Company (collectively,
"Participants"), as set for the in the Prospectus under the heading
"Underwriting" (the "Directed Share Program"). The Securities to be sold by
Salomon Smith Barney pursuant to the Directed Share Program (the "Directed
Shares") will be sold by Salomon Smith Barney pursuant to this Agreement at the
public offering price. Any Directed Shares not orally confirmed for purchase
- ------------------
(a) Plus an option to purchase from the Company, up to 1,275,000
additional Securities to cover over-allotments.
<PAGE>
by any Participants by the end of the business day on which this Agreement is
executed will be offered to the public by Salomon Smith Barney as set forth in
the Prospectus.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to, and agrees with, each Underwriter as set forth below in this
Section 1.
(a) The Company has prepared and filed with the Commission a
registration statement (file number 333-92967) on Form F-1, including a
related preliminary prospectus, for registration under the Act of the
offering and sale of the Securities. The Company meets all the
requirements for filing on Form F-1 The Company may have filed one or
more amendments thereto, including a related preliminary prospectus,
each of which has previously been furnished to you. The Company will
next file with the Commission either (1) prior to the Effective Date of
such registration statement, a further amendment to such registration
statement (including the form of final prospectus) or (2) after the
Effective Date of such registration statement, a final prospectus in
accordance with Rules 430A and 424(b). In the case of clause (2), the
Company has included in such registration statement, as amended at the
Effective Date, all information (other than Rule 430A Information)
required by the Act and the rules thereunder to be included in such
registration statement and the Prospectus. As filed, such amendment and
form of final prospectus, or such final prospectus, shall contain all
Rule 430A Information, together with all other such required
information, and, except to the extent the Representatives shall agree
in writing to a modification, shall be in all substantive respects in
the form furnished to you prior to the Execution Time or, to the extent
not completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior to
the Execution Time, will be included or made therein.
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which Option Securities are purchased, if such date
is not the Closing Date (a "settlement date"), the Prospectus (and any
supplements thereto) will, comply in all material respects with the
applicable requirements of the Act and the rules thereunder; on the
Effective Date and at the Execution Time, the Registration Statement
did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and,
on the Effective Date, the Prospectus, if not filed pursuant to Rule
424(b), will not, and on the date of any filing pursuant to Rule 424(b)
and on the Closing Date and any settlement date, the Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the Company makes no representations or warranties as to
the information contained in or omitted from the Registration
Statement, or the Prospectus (or any supplement thereto) in reliance
upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion in the Registration Statement or the
Prospectus (or any supplement thereto).
2.
<PAGE>
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized with full corporate power and authority to own or lease, as
the case may be, and to operate its properties and conduct its business
as described in the Prospectus, and is duly qualified to do business as
a foreign corporation and is in good standing under the laws of each
jurisdiction which requires such qualification except where the failure
to be so qualified would not have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole (a
"Material Adverse Effect"), whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated
in the Prospectuses;
(d) All the outstanding shares of capital stock of each
Subsidiary (as defined below) have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as otherwise
set forth in the Prospectus, all outstanding shares of capital stock of
the Subsidiaries are owned by the Company either directly or through
wholly owned subsidiaries free and clear of any perfected security
interest or any other security interests, claims, liens or
encumbrances;
(e) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable; the
Securities have been duly and validly authorized, and, when issued and
delivered to and paid for by the Underwriters pursuant to this
Agreement, will be fully paid and nonassessable; the Securities are
duly listed, and admitted and authorized for trading, subject to
official notice of issuance and evidence of satisfactory distribution,
on the Nasdaq National Market System; the certificates for the
Securities are in valid and sufficient form; the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive
or other rights to subscribe for the Securities; and, except as set
forth in the Prospectus, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or rights to
convert any obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company are outstanding;
(f) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectus
under the headings "Taxation," "Government Regulation," "Certain
Bermuda Law Considerations" and "Legal Proceedings" fairly summarize
the matters therein described.
(g) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms.
(h) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectus, will
3.
<PAGE>
not be an "investment company" as defined in the Investment Company Act
of 1940, as amended.
(i) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection
with the transactions contemplated herein, except such as have been
obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated herein and in the Prospectus.
(j) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, (i) the charter or by-laws of the Company or any of its
subsidiaries, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company or any of its subsidiaries is a party or bound or to which its
or their property is subject, or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to the Company or any
of its subsidiaries of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its
or their properties.
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement.
(l) The consolidated historical financial statements and
schedules of the Company and its consolidated subsidiaries included in
the Prospectus and the Registration Statement present fairly in all
material respects the financial condition, results of operations and
cash flows of the Company as of the dates and for the periods
indicated, comply as to form in all material respects with the
applicable accounting requirements of the Act and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as otherwise
noted therein). The selected financial data set forth under the caption
"Selected Financial Information" in the Prospectus and Registration
Statement fairly present, on the basis stated in the Prospectus and the
Registration Statement, the information included therein.
(m) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its subsidiaries or its or their property is pending
or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a material adverse effect on the
performance of this Agreement or the consummation of any of the
transactions contemplated hereby or (ii) could reasonably be expected
to have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto).
4.
<PAGE>
(n) Each of the Company and each of its subsidiaries owns or
leases all such properties as are necessary to the conduct of its
operations as presently conducted except where any failure to own or
lease any such property would not have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or completed in the prospectuses.
(o) Neither the Company nor any subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms
of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its
property is subject, or (iii) any statute, law, rule, regulation,
judgment, order or decree of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or such subsidiary or any of its
properties, as applicable except, in the case of clauses (ii) and (iii)
above, where any such violation or default would not have a Material
Adverse Effect, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in
the Prospectuses.
(p) KPMG Peat Marwick LLP, who have certified certain
financial statements of the Company and its consolidated subsidiaries
and delivered their report with respect to the audited consolidated
financial statements and schedules included in the Prospectus, are
independent public accountants with respect to the Company within the
meaning of the Act and the applicable published rules and regulations
thereunder.
(q) There are no transfer taxes or other similar fees or
charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the Company
or sale by the Company of the Securities.
(r) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement thereto)
and has paid all taxes required to be paid by it and any other
assessment, fine or penalty levied against it, to the extent that any
of the foregoing is due and payable, except for any such assessment,
fine or penalty that is currently being contested in good faith or as
would not have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto).
(s) No labor problem or dispute with the employees of the
Company or any of its subsidiaries exists or is threatened or imminent,
and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or its subsidiaries'
principal suppliers, contractors or customers, that could have a
Material Adverse Effect, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated
in the Prospectus (exclusive of any supplement thereto).
5.
<PAGE>
(t) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; all material policies of
insurance and fidelity or surety bonds insuring the Company or any of
its subsidiaries or their respective businesses, assets, employees,
officers and directors are in full force and effect; the Company and
its subsidiaries are in compliance with the terms of such policies and
instruments in all material respects; and there are no material claims
by the Company or any of its subsidiaries under any such policy or
instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause; neither the Company nor
any such subsidiary has been refused any insurance coverage sought or
applied for; and neither the Company nor any such subsidiary has any
reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(u) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such subsidiary's capital stock, from
repaying to the Company any loans or advances to such subsidiary from
the Company or from transferring any of such subsidiary's property or
assets to the Company or any other subsidiary of the Company, except as
described in or contemplated by the Prospectus.
(v) The Company and its subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the
appropriate federal, state or foreign regulatory authorities reasonably
necessary to conduct their respective businesses, and neither the
Company nor any such subsidiary has received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a
Material Adverse Effect, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated
in the Prospectus (exclusive of any supplement thereto).
(w) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(x) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the
6.
<PAGE>
Exchange Act or otherwise, in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.
(y) The Company and its subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received and are in
compliance with all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and (iii) have not received notice of any actual or
potential liability for the investigation or remediation of any
disposal or release of hazardous or toxic substances or wastes,
pollutants or contaminants, except where such non-compliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals, or liability would not, individually or in the
aggregate, have a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Prospectus (exclusive of any supplement
thereto). Except as set forth in the Prospectus, neither the Company
nor any of the subsidiaries has been named as a "potentially
responsible party" under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
(z) In the ordinary course of its business, the Company
periodically reviews the effect of Environmental Laws on the business,
operations and properties of the Company and its subsidiaries, in the
course of which it identifies and evaluates associated costs and
liabilities (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws, or any permit, license or approval, any
related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company
has reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a Material Adverse Effect,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(aa)Each of the Company and its subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302
of the United States Employee Retirement Income Security Act of 1974
("ERISA") and the regulations and published interpretations thereunder
with respect to each "plan" (as defined in Section 3(3) of ERISA and
such regulations and published interpretations) in which employees of
the Company and its subsidiaries are eligible to participate and each
such plan is in compliance in all material respects with the presently
applicable provisions of ERISA and such regulations and published
interpretations. The Company and its subsidiaries have not incurred any
unpaid liability to the Pension Benefit Guaranty Corporation (other
than for the payment of premiums in the ordinary course) or to any such
plan under Title IV of ERISA.
(bb)The subsidiaries listed on Annex A attached hereto are the
only significant subsidiaries of the Company as defined by Rule 1-02 of
Regulation S-X (individually, a "Subsidiary," and collectively, the
"Subsidiaries").
7.
<PAGE>
(cc)The Company and its subsidiaries own, possess, license or
have other rights to use, on reasonable terms, all patents, patent
applications, trade and service marks, trade and service mark
registrations, trade names, copyrights, licenses, inventions, trade
secrets, technology, know-how and other intellectual property
(collectively, the "Intellectual Property") necessary for the conduct
of the Company's business as now conducted or as proposed in the
Prospectus to be conducted. Except as set forth in the Prospectus under
the caption "Business--Proprietary Rights," (a) to the best knowledge
of the Company, there are no rights of third parties to any such
Intellectual Property; (b) to the best knowledge of the Company, there
is no material infringement by third parties of any such Intellectual
Property; (c) there is no pending or to the best knowledge of the
Company, threatened action, suit, proceeding or claim by others
challenging the Company's rights in or to any such Intellectual
Property, and the Company is unaware of any facts which would form a
reasonable basis for any such claim; (d) there is no pending or to the
best knowledge of the Company, threatened action, suit, proceeding or
claim by others challenging the validity or scope of any such
Intellectual Property, and the Company is unaware of any facts which
would form a reasonable basis for any such claim; (e) there is no
pending or to the best knowledge of the Company, threatened action,
suit, proceeding or claim by others that the Company infringes or
otherwise violates any patent, trademark, copyright, trade secret or
other proprietary rights of others, and the Company is unaware of any
other fact which would form a reasonable basis for any such claim; (f)
to the best knowledge of the Company, there is no U.S. patent or
published U.S. patent application which contains claims that dominate
or may dominate any Intellectual Property described in the Prospectus
as being owned by or licensed to the Company or that interferes with
the issued or pending claims of any such Intellectual Property; and (g)
there is no prior art of which the Company is aware that may render any
U.S. patent held by the Company invalid or any U.S. patent application
held by the Company unpatentable which has not been disclosed to the
U.S. Patent and Trademark Office.
(dd)The statements contained in the Prospectus under the
captions "Risk Factors - Our intellectual property and proprietary
rights may be insufficient to protect our competitive position," "Risk
Factor - Claims that we infringe third-party intellectual property
rights could result in significant expenses and restrictions on our
ability to sell our products in particular markets," "Risk Factor - We
may not be able to license necessary third-party technology or it may
be expensive to do so" and "Business - Proprietary Information,"
insofar as such statements summarize legal matters, agreements,
documents, or proceedings discussed therein, are accurate and fair
summaries in all material respects of such legal matters, agreements,
documents or proceedings.
(ee)Except as disclosed in the Registered Statement and the
Prospectus, the Company (i) does not have any material lending or other
relationship with any bank or lending affiliate of Salomon Smith Barney
Holdings Inc. and (ii) does not intend to use any of the proceeds from
the sale of the Securities hereunder to repay any outstanding debt owed
to any affiliate of Salomon Smith Barney Holding Inc.
8.
<PAGE>
(ff)The Company and its subsidiaries have implemented a
comprehensive, detailed program to analyze and address the risk that
their computer hardware and software may be unable to recognize and
properly execute date-sensitive functions involving certain dates prior
to and any dates after December 31, 1999 (the "Year 2000 Problem") and
has determined that their computer hardware and software are and will
be able to process all date information prior to and after December 31,
1999 without any errors, aborts, delays or other interruptions in
operations associated with the Year 2000 Problem; and the Company
believes, after due inquiry, that each supplier, vendor, customer or
financial service organization used or serviced by the Company and its
subsidiaries has remedied or will remedy on a timely basis the Year
2000 Problem, except to the extent that a failure to remedy by any such
supplier, vendor, customer or financial service organization would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole. The Company is in compliance with the Commission
Release No. 33-7558 related to Year 2000 compliance.
(gg)Neither the Company nor any of its subsidiaries nor any of
its or their properties or assets has any immunity from the
jurisdiction of any court or from any legal process (whether through
service or notice, attachment prior to judgment, attachment in aid of
execution or otherwise) under the laws of Bermuda.
Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in connection
with the offering of the Securities shall be deemed a representation and
warranty by the Company, as to matters covered thereby, to each Underwriter.
Furthermore, the Company represents and warrants to Salomon
Smith Barney that (i) the Registration Statement, the Prospectus and any
preliminary prospectus comply, and any further amendments or supplements thereto
will comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
and that (ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental instrumentality or
court, other than such as have been obtained, is necessary under the securities
laws and regulations of foreign jurisdictions in which the Directed Shares are
offered outside the United States.
The Company has not offered, or caused the Underwriters to
offer, Securities to any person pursuant to the Directed Share Program with the
specific intent to unlawfully influence (i) a customer or supplier of the
Company to alter the customer's or supplier's level or type of business with the
Company, or (ii) a trade journalist or publication to write or publish favorable
information about the Company or its products.
2. PURCHASE AND SALE. (a) Subject to the terms and conditions
and in reliance upon the representations and warranties herein set
forth, the Company agrees to sell to each Underwriter, and each
Underwriter agrees, severally and not jointly, to purchase from the
Company, at a purchase price of $_________ per share, the amount of
the Underwritten Securities set forth opposite such Underwriter's name
in Schedule I hereto.
9.
<PAGE>
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby
grants an option to the several Underwriters to purchase, severally and
not jointly, up to 1,275,000 Option Securities at the same purchase
price per share as the Underwriters shall pay for the Underwritten
Securities. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Securities by the Underwriters. Said
option may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of the Prospectus
upon written or telegraphic notice by the Representatives to the
Company setting forth the number of shares of the Option Securities as
to which the several Underwriters are exercising the option and the
settlement date. The number of Option Securities to be purchased by
each Underwriter shall be the same percentage of the total number of
shares of the Option Securities to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten
Securities, subject to such adjustments as you in your absolute
discretion shall make to eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
February ___, 2000, or at such time on such later date not more than three
Business Days after the foregoing date as the Representatives shall designate,
which date and time may be postponed by agreement between the Representatives
and the Company or as provided in Section 9 hereof (such date and time of
delivery and payment for the Securities being herein called the "Closing Date").
Delivery of the Securities shall be made to the Representatives for the
respective accounts of the several Underwriters against payment by the several
Underwriters through the Representatives of the purchase price thereof to or
upon the order of the Company by wire transfer payable in same-day funds to an
account specified by the Company. Delivery of the Underwritten Securities and
the Option Securities shall be made through the facilities of The Depository
Trust Company unless the Representatives shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
the Option Securities (at the expense of the Company) to the Representatives, at
388 Greenwich Street, New York, New York, on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Company by wire transfer payable in
same-day funds to an account specified by the Company. If settlement for the
Option Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
10.
<PAGE>
5. AGREEMENTS. The Company agrees with the several
Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of
the Registration Statement or supplement to the Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement thereto to
be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The Company
will promptly advise the Representatives (1) when the Registration
Statement, if not effective at the Execution Time, shall have become
effective, (2) when the Prospectus, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule
424(b) or when any Rule 462(b) Registration Statement shall have been
filed with the Commission, (3) when, prior to termination of the
offering of the Securities, any amendment to the Registration Statement
shall have been filed or become effective, (4) of any request by the
Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any
supplement to the Prospectus or for any additional information, (5) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (6) of the receipt
by the Company of any notification with respect to the suspension of
the qualification of the Securities for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such
stop order or the suspension of any such qualification and, if issued,
to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the rules thereunder, the Company
promptly will (1) notify the Representatives of any such event, (2)
prepare and file with the Commission, subject to the second sentence of
paragraph (a) of this Section 5, an amendment or supplement which will
correct such statement or omission or effect such compliance; and (3)
supply any supplemented Prospectus to you in such quantities as you may
reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
11.
<PAGE>
(d) The Company will furnish to the Representatives and
counsel for the Underwriters signed copies of the Registration
Statement (including exhibits thereto) and to each other Underwriter a
copy of the Registration Statement (without exhibits thereto) and, so
long as delivery of a prospectus by an Underwriter or dealer may be
required by the Act, as many copies of each Preliminary Prospectus and
the Prospectus and any supplement thereto as the Representatives may
reasonably request.
(e) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may designate and will maintain
such qualifications in effect so long as required for the distribution
of the Securities; provided that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any action that would subject it to service
of process in suits, other than those arising out of the offering or
sale of the Securities, in any jurisdiction where it is not now so
subject.
(f) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, contract to sell, pledge, or
otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to
cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of
the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act, any other shares of Common
Stock or any securities convertible into, or exercisable, or
exchangeable for, shares of Common Stock; or publicly announce an
intention to effect any such transaction, for a period of 180 days
after the date of the Underwriting Agreement, PROVIDED, HOWEVER, that
the Company may issue and sell Common Stock pursuant to any employee
stock option plan, stock ownership plan or dividend reinvestment plan
of the Company in effect at the Execution Time and the Company may
issue Common Stock issuable upon the conversion of securities or the
exercise of warrants outstanding at the Execution Time.
(g) The Company will not, without the prior written consent of
Solomon Smith Barney Inc., release any of its option holders from
lock-ups with the Company for a period of 180 days after the date of
this Underwriting Agreement.
(h) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(i) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction
and filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary
Prospectus, the Prospectus, and each amendment or supplement to any of
them; (ii) the printing (or reproduction) and delivery (including
postage, air freight
12.
<PAGE>
charges and charges for counting and packaging) of such copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus,
and all amendments or supplements to any of them, as may, in each case,
be reasonably requested for use in connection with the offering and
sale of the Securities; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the
Securities, including any stamp or transfer taxes in connection with
the original issuance and sale of the Securities; (iv) the printing (or
reproduction) and delivery of this Agreement, any blue sky memorandum
and all other agreements or documents printed (or reproduced) and
delivered in connection with the offering of the Securities; (v) the
registration of the Securities under the Exchange Act and the listing
of the Securities on the Nasdaq National Market; (vi) any registration
or qualification of the Securities for offer and sale under the
securities or blue sky laws of the several states (including filing
fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such registration and qualification); (vii)
any filings required to be made with the National Association of
Securities Dealers, Inc. (including filing fees and the reasonable fees
and expenses of counsel for the Underwriters relating to such filings);
(viii) the transportation and other expenses incurred by or on behalf
of Company representatives in connection with presentations to
prospective purchasers of the Securities; (ix) the fees and expenses of
the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company; and (x) all
other costs and expenses incident to the performance by the Company of
its obligations hereunder.
(j) In connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Salomon Smith Barney will
notify the Company as to which Participants will need to be so
restricted. The Company will direct the removal of such transfer
restrictions upon the expiration of such period of time.
(k) The Company agrees to pay all fees and disbursements of
counsel incurred by the Underwriters in connection with the Directed
Share Program and stamp duties, similar taxes or duties or other taxes,
if any incurred by the Underwriters in connection with the Directed
Share Program.
Furthermore, the Company covenants with Salomon Smith Barney
that the Company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy in all
material respects of the representations and warranties on the part of the
Company contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy in all material
respects of the statements of the Company made in any certificates pursuant to
the provisions hereof, to the
13.
<PAGE>
performance in all material respects by the Company of its obligations hereunder
and to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time on the date of
determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus,
or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Wilson Sonsini
Goodrich & Rosati PC, counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to
the Representatives, to the effect that:
(i) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding by or before
any court or governmental agency, authority or body or any
arbitrator involving the Company or any of its subsidiaries or
its or their property of a character required to be disclosed
in the Registration Statement which is not adequately
disclosed in the Prospectus, and there is no franchise,
contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to
be filed as an exhibit thereto, which is not described or
filed as required; and the statements included in the
Prospectus under the headings "Taxation" and "Legal
Proceedings" fairly summarize the matters therein described;
(ii) the Registration Statement has become
effective under the Act; any required filing of the
Prospectus, and any supplements thereto, pursuant to Rule
424(b) has been made in the manner and within the time period
required by Rule 424(b); to the knowledge of such counsel, no
stop order suspending the effectiveness of the Registration
Statement has been issued, no proceedings for that purpose
have been instituted or threatened and the Registration
Statement and the Prospectus (other than the financial
statements and other financial information contained therein,
as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements
of the Act and the rules thereunder; and such counsel has no
reason to believe that on the Effective Date or at the
Execution Time the Registration Statement contained any untrue
statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as of
its date and on the Closing Date included or includes any
untrue statement of a material fact or omitted or omits to
state a material fact necessary to make the statements
therein, in the light of the circumstances under
14.
<PAGE>
which they were made, not misleading (in each case, other than
the financial statements and other financial information
contained therein, as to which such counsel need express no
opinion);
(iii) the Company is not and, after giving effect
to the offering and sale of the Securities and the application
of the proceeds thereof as described in the Prospectus, will
not be, an "investment company" as defined in the Investment
Company Act of 1940, as amended;
(iv) no consent, approval, authorization, filing
with or order of any court or governmental agency or body is
required in connection with the transactions contemplated
herein, except such as have been obtained under the Act and
such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution
of the Securities by the Underwriters in the manner
contemplated in this Agreement and in the Prospectus and such
other approvals (specified in such opinion) as have been
obtained; and
(v) no holders of securities of the Company have
rights to the registration of such securities under the
Registration Statement, except for such rights as have been
validly waived.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
laws of Bermuda or the Federal laws of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion of
other counsel of good standing whom they believe to be reliable and who
are satisfactory to counsel for the Underwriters and (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and public officials. References to the
Prospectus in this paragraph (b) include any supplements thereto at the
Closing Date.
(c) The Company shall have requested and caused Conyers Dill &
Pearmon, Bermuda counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to
the Representatives, to the effect that:
(i) each of the Company and interWAVE
Communications, Inc., a Delaware corporation, has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction in which it is
chartered or organized, with full corporate power and
authority to own or lease, as the case may be, and to operate
its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction which requires such qualification; and interWAVE
Communications International S.A. is duly qualified to do
business as a foreign corporation and is in good standing
under the laws of each jurisdiction which requires such
qualification;
(ii) all the outstanding shares of capital stock
of the Subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable,
15.
<PAGE>
and, except as otherwise set forth in the Prospectus, all
outstanding shares of capital stock of the Subsidiaries are
owned by the Company either directly or through wholly owned
subsidiaries free and clear of any perfected security interest
and, to the knowledge of such counsel, after due inquiry, any
other security interest, claim, lien or encumbrance;
(iii) the Company's authorized equity
capitalization is as set forth in the Prospectus; the capital
stock of the Company conforms in all material respects to the
description thereof contained in the Prospectus; the
outstanding shares of Common Stock have been duly and validly
authorized and issued and are fully paid and nonassessable;
the Securities have been duly and validly authorized, and,
when issued and delivered to and paid for by the Underwriters
pursuant to this Agreement, will be fully paid and
nonassessable; the Securities are duly listed, and admitted
and authorized for trading, subject to official notice of
issuance and evidence of satisfactory distribution, on the
Nasdaq National Market System; the certificates for the
Securities are in valid and sufficient form; the holders of
outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the
Securities; and, except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or
other obligations to issue, or rights to convert any
obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company are
outstanding;
(iv) this Agreement has been duly authorized,
executed and delivered by the Company; and
(v) neither the issue and sale of the Securities,
nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation of or
imposition of any lien, charge or encumbrance upon any
property or assets of the Company or its subsidiaries pursuant
to, (i) the charter or by-laws of the Company or its
subsidiaries, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement
or other agreement, obligation, condition, covenant or
instrument to which the Company or its subsidiaries is a party
or bound or to which its or their property is subject, or
(iii) any statute, law, rule, regulation, judgment, order or
decree applicable to the Company or its subsidiaries of any
court, regulatory body, administrative agency, governmental
body, arbitrator or other authority having jurisdiction over
the Company or its subsidiaries or any of its or their
properties.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
laws of Bermuda or the Federal laws of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion of
other counsel of good standing whom they believe to be reliable and who
are satisfactory to counsel for the Underwriters and (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and public
16.
<PAGE>
officials. References to the Prospectus in this paragraph (b) include
any supplements thereto at the Closing Date.
(d) The Company shall have requested and caused Baker &
McKenzie, counsel for interWAVE Communications, S.A., a French
corporation, to have furnished to the Representatives its opinions,
dated the Closing Date and addressed to the Representatives,
substantially in the form attached hereto as EXHIBIT B.
(e) The Company shall have requested and caused KPMG Peat
Marwick, counsel for interWAVE Communications, B.V., a Netherlands
corporation, to have furnished to the Representatives its opinions,
dated the Closing Date and addressed to the Representatives,
substantially in the form attached hereto as EXHIBIT C.
(f) The Company shall have requested and caused Beyer &
Weaver, LLP, patent counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to
the Representatives, substantially in the form attached hereto as
EXHIBIT D.
(g) The Representatives shall have received from Brobeck,
Phleger & Harrison LLP, counsel for the Underwriters, such opinion or
opinions, dated the Closing Date and addressed to the Representatives,
with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectus (together with any supplement
thereto) and other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them
to pass upon such matters.
(h) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectus, any supplements to the Prospectus and this Agreement and
that:
(i) the representations and warranties of the
Company in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company has complied with
all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing
Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no Material Adverse
Effect, whether or not arising from transactions in the
ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement
thereto).
17.
<PAGE>
(i) The Company shall have requested and caused KPMG Peat
Marwick LLP to have furnished to the Representatives, at the Execution
Time and at the Closing Date, letters, dated respectively as of the
Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the
applicable rules and regulations adopted by the Commission thereunder
and that they have performed a review of the unaudited interim
financial information of the Company for the three-month period ended
September 30, 1999, and as of September 30, 1999, in accordance with
Statement on Auditing Standards No. 71 and stating in effect that:
(i) in their opinion the audited financial
statements and financial statement schedules and pro forma
financial statements included in the Registration Statement
and the Prospectus and reported on by them comply as to form
in all material respects with the applicable accounting
requirements of the Act and the related rules and regulations
adopted by the Commission;
(ii) on the basis of a reading of the latest
unaudited financial statements made available by the Company
and its subsidiaries; their limited review, in accordance with
standards established under Statement on Auditing Standards
No. 71, of the unaudited interim financial information for the
three-month period ended September 30, 1999, and as of
September 30, 1999, as indicated in their report dated June
30, 1999; carrying out certain specified procedures (but not
an examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the
stockholders, directors, audit and compensation committees of
the Company and the Subsidiaries; and inquiries of certain
officials of the Company who have responsibility for financial
and accounting matters of the Company and its subsidiaries as
to transactions and events subsequent to June 30,1999, nothing
came to their attention which caused them to believe that:
(1) any unaudited financial statements
included in the Registration Statement and the
Prospectus do not comply as to form in all material
respects with applicable accounting requirements of
the Act and with the related rules and regulations
adopted by the Commission with respect to
registration statements on Form F-1; and said
unaudited financial statements are not in conformity
with generally accepted accounting principles applied
on a basis substantially consistent with that of the
audited financial statements included in the
Registration Statement and the Prospectus;
(2) with respect to the period subsequent
to September 30,1999, there were any changes, at a
specified date not more than five days prior to the
date of the letter, in the long-term debt of the
Company and its subsidiaries or capital stock of the
Company, decreases in the shareholders' equity of the
Company or decreases in working capital of the
Company and its subsidiaries as compared with the
amounts shown on
18.
<PAGE>
the September 30, 1999 consolidated balance sheet
included in the Registration Statement and the
Prospectus, or for the period from October 1, 1999 to
such specified date there were any decreases, as
compared with September 30, 1998 in net loss before
income taxes or in total or per share amounts of net
loss of the Company and its subsidiaries, except in
all instances for changes or decreases set forth in
such letter, in which case the letter shall be
accompanied by an explanation by the Company as to
the significance thereof unless said explanation is
not deemed necessary by the Representatives; or
(3) the information included in the
Registration Statement and Prospectus in response to
Form 20-F, Item 8 (Selected Financial Data), Item 11
(Executive Compensation) is not in conformity with
the applicable disclosure requirements of Form 20-F.
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and its subsidiaries) set forth in the Registration
Statement and the Prospectus, including the information set
forth under the captions "Summary Consolidated Financial Data"
and "Selected Consolidated Financial Data" in the Prospectus,
agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation;
and
(iv) References to the Prospectus in this
paragraph (g) include any supplement thereto at the date of
the letter.
The Company shall have received from KPMG Peat Marwick LLP
(and furnished to the Representatives) a report with respect to a
review of unaudited interim financial information of the Company for
the eight quarters ending September 30, 1999, in accordance with
Statement on Auditing Standards No. 71.
(j) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change or
decrease specified in the letter or letters referred to in paragraph
(e) of this Section 6 or (ii) any change, or any development involving
a prospective change, in or affecting the condition (financial or
otherwise), earnings, business or properties of the Company and its
subsidiaries taken as a whole, whether or not arising from transactions
in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto)
the effect of which, in any case referred to in clause (i) or (ii)
above, is, in the sole judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the
Registration Statement (exclusive of any amendment thereof) and the
Prospectus (exclusive of any supplement thereto).
19.
<PAGE>
(k) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates
and documents as the Representatives may reasonably request.
(l) The Securities shall have been listed and admitted and
authorized for trading on the Nasdaq National Market System, and
satisfactory evidence of such actions shall have been provided to the
Representatives.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company in
writing or by telephone or facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Brobeck, Phleger & Harrison, LLP, counsel for the
Underwriters, at One Market, Spear Tower, San Francisco, CA 94105, on the
Closing Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally through Salomon Smith Barney on demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Securities.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees
to indemnify and hold harmless each Underwriter, the directors, officers,
employees and agents of each Underwriter and each person who controls any
Underwriter within the meaning of either the Act or the Exchange Act against
any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act, the Exchange Act
or other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement for the registration of the Securities as originally filed or in
any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or
in any amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and agrees to reimburse each such indemnified party, as incurred,
for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; PROVIDED, HOWEVER, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out
of or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein
20.
<PAGE>
in reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion therein. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
The Company agrees to indemnify and hold harmless Salomon
Smith Barney and each person who controls Salomon Smith Barney within the
meaning of either the Act or the Exchange Act ("Salomon Smith Barney Entities"),
from and against any and all losses, claims, damages and liabilities to which
they may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) insofar as
such losses, claims, damages or liabilities (or actions in respect thereof) (i)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the prospectus wrapper material prepared by or
with the consent of the Company for distribution in foreign jurisdictions in
connection with the Direct Share Program attached to the Prospectus or any
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein, when considered in conjunction with
the Prospectus or any applicable preliminary prospectus, not misleading; (ii)
caused by the failure of any Participant to pay for and accept delivery of the
shares which immediately following the Effective Date of the Registration
Statement, were subject to a properly confirmed agreement to purchase; or (iii)
related to, arising out of, or in connection with the Direct Share Program,
provided that, the Company will not be liable in any such case to the extent
that any such losses, claim, damage or liability arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of Salomon Smith Barney
specifically for inclusion therein .
(b) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, and each person who controls the
Company within the meaning of either the Act or the Exchange Act, to the same
extent as the foregoing indemnity from the Company to each Underwriter, but only
with reference to written information relating to such Underwriter furnished to
the Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any Underwriter may otherwise have. The Company acknowledges that the statements
set forth in the last paragraph of the cover page regarding delivery of the
Securities and, under the heading "Underwriting" or "Plan of Distribution", (i)
the list of Underwriters and their respective participation in the sale of the
Securities, (ii) the sentences related to concessions and reallowances and (iii)
the paragraph related to stabilization, syndicate covering transactions and
penalty bids in any Preliminary Prospectus and the Prospectus constitute the
only information furnished in writing by or on behalf of the several
Underwriters for inclusion in any Preliminary Prospectus or the Prospectus.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the
21.
<PAGE>
indemnifying party (i) will not relieve it from liability under paragraph (a) or
(b) above unless and to the extent it did not otherwise learn of such action and
such failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any event, relieve the indemnifying
party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a) or (b) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and expenses
of any separate counsel retained by the indemnified party or parties except as
set forth below); PROVIDED, HOWEVER, that such counsel shall be satisfactory to
the indemnified party. Notwithstanding the indemnifying party's election to
appoint counsel to represent the indemnified party in an action, the indemnified
party shall have the right to employ separate counsel (including local counsel),
and the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 7(a) hereof in respect of such
action or proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any local counsel)
for Salomon Smith Barney, the directors, officers, employees and agents of
Salomon Smith Barney and all persons, if any, who control Salomon Smith Barney
within the meaning of either the Act or the Exchange Act for the defense of any
losses, claims, damages and liabilities arising out of the Direct Share Program.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Underwriters severally
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Company
and one or more of the Underwriters may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and by the Underwriters on the other from the offering of the Securities;
PROVIDED, HOWEVER, that in no case shall any Underwriter (except as
22.
<PAGE>
may be provided in any agreement among underwriters relating to the offering of
the Securities) be responsible for any amount in excess of the underwriting
discount or commission applicable to the Securities purchased by such
Underwriter hereunder. If the allocation provided by the immediately preceding
sentence is unavailable for any reason, the Company and the Underwriters
severally shall contribute in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and of the Underwriters on the other in connection with the statements
or omissions which resulted in such Losses as well as any other relevant
equitable considerations. Benefits received by the Company shall be deemed to be
equal to the total net proceeds from the offering (before deducting expenses)
received by it, and benefits received by the Underwriters shall be deemed to be
equal to the total underwriting discounts and commissions, in each case as set
forth on the cover page of the Prospectus. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by the Company on the one hand or
the Underwriters on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee and
agent of an Underwriter shall have the same rights to contribution as such
Underwriter, and each person who controls the Company within the meaning of
either the Act or the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
9. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; PROVIDED, HOWEVER, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its
23.
<PAGE>
liability, if any, to the Company and any nondefaulting Underwriter for damages
occasioned by its default hereunder.
10. TERMINATION. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if at any
time prior to such time (i) trading in the Company's Common Stock shall have
been suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on such Exchange or the Nasdaq National Market, (ii) a banking
moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war, or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the sole judgment of the Representatives, impractical or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Prospectus (exclusive of any supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors, employees, agents or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the Securities.
The provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel
(fax no.: (212) 816-7912) and confirmed to the General Counsel, Salomon Smith
Barney Inc., at 388 Greenwich Street, New York, New York, 10013, Attention:
General Counsel; or, if sent to the Company, will be mailed, delivered or
telefaxed to Tom Hubbs (fax no.: (650) 482-2196) and confirmed to it at 656 Bair
Island Road, Suite 108, Redwood City, CA, 94063-2704, attention of the Legal
Department.
13. SUCCESSORS. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
24.
<PAGE>
16. HEADINGS.. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New York
City.
"Commission" shall mean the Securities and Exchange
Commission.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at
the Execution Time, in the form in which it shall become effective)
and, in the event any post-effective amendment thereto or any Rule
462(b) Registration Statement becomes effective prior to the Closing
Date, shall also mean such registration statement as so amended or such
Rule 462(b) Registration Statement, as the case may be. Such term shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.
25.
<PAGE>
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
26.
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate
hereof, whereupon this letter and your acceptance shall represent a
binding agreement among the Company and the several Underwriters.
Very truly yours,
interWAVE Communications,
International, Ltd.
By:
-------------------------------
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
Salomon Smith Barney Inc.
Banc of America Securities LLC
SG Cowen Securities Corporation
By: Salomon Smith Barney Inc.
By:
-------------------------
Name:
Title:
For themselves and the other several Underwriters named in Schedule I to the
foregoing Agreement.
27.
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITTEN
SECURITIES TO BE
UNDERWRITERS PURCHASED
----------------------
<S> <C>
Salomon Smith Barney Inc.............
Banc of America Securities LLC.......
SG Cowen Securities Corporation......
--------------
Total..............
--------------
--------------
</TABLE>
Schedule I-1
<PAGE>
EXHIBIT A
interWAVE Communications, Inc.
Public Offering of Common Stock
____________, 1999
Salomon Smith Barney Inc.
Banc of America Securities LLC
SG Cowen Securities Corporation
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), between
interWAVE Communications, Inc., a Bermuda corporation (the "Company"), and each
of you as representatives of a group of Underwriters named therein, relating to
an underwritten public offering of Common Stock, $.001 par value (the "Common
Stock"), of the Company.
In order to induce you and the other Underwriters to enter
into the Underwriting Agreement, the undersigned will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to sell,
pledge or otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 180 days after the
date of the Underwriting Agreement, other than shares of Common Stock disposed
of as bona fide gifts approved by Salomon Smith Barney Inc.
If for any reason the Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the Underwriting Agreement),
the agreement set forth above shall likewise be terminated.
Yours very truly,
-----------------------------------
Name:
------------------------------
Exhibit A - 1
<PAGE>
EXHIBIT B
Form of Opinion of Counsel to the French Subsidiary
(1) The Company has been duly organized and is validly existing under the
laws of France and has the corporate power and authority to own, lease
and operate its properties and to conduct its business within its
corporate purpose (objet social) as set forth in Section 2 of its
STATUS;
(2) As of November 8, 1999, no receiver, administrator, liquidator or
similar officer has been appointed in relation to the Company;
(3) All of the shares of capital stock of the Company have been duly and
validly issued but paid only up t 50% of their nominal value. The
balance must be paid up by June 3, 2001;
(4) The 2,500 shares of capital stock composing the share capital of the
Company are currently held as follows:
<TABLE>
<S> <C>
interWAVE Communications B.V. 2,494 shares
interWAVE Communications, Inc. 1 share
Priscilla Marilyn Lu 1 share
Abed Safi 1 share
Michele Hogan 1 share
Constance Cheung 1 share
Thomas Hubbs 1 share
</TABLE>
(5) The 2,500 shares of capital stock composing the share capital of the
Company are free and clear of any perfected security interest (SURETE
OPPOSABLE AUX TIERS) and, to our knowledge, any other security
interest, claim, lien or encumbrance..
Exhibit B - 1
<PAGE>
EXHIBIT C
Form of Opinion of Counsel to the Dutch Subsidiary
(1) The Subsidiary has been duly incorporated and is validly existing under
the laws of The Netherlands as a private company with limited liability
("besloten vennootschap met beperkte aansprakelijkheid");
(2) The business of the Subsidiary as set forth in the Commercial Register
of the Amsterdam Chamber of Commerce consists of the development,
production and sale (wholesale trade) of micro cellular network
equipment (the "Business"). The Subsidiary has the power to carry out
the Business;
(3) The Subsidiary has full corporate power and authority within the
constraints of its objects, as defined in the articles of association,
to own or lease, as the case may be, and to operate its properties and
conduct the Business;
(4) All shares of the issued share capital of the Company have been duly
and validly authorized, are properly issued and fully paid up and are
registered in the name of the Company;
(5) All shares of the issued share capital of the Subsidiary are free and
clear of any pledge and/or usufruct;
(6) By law, the Company, as holder of fully paid-up stock, is not, by
virtue solely of that capacity, obliged to pay more than its original
investment in the shares, nor does such obligation follow from the
articles of association of the Subsidiary.
Exhibit C - 1
<PAGE>
EXHIBIT D
Form of Patent Opinion
Such counsel are familiar with the general field of technology
used by the Company in its business (i.e., GSM) as disclosed in the patents and
patent applications identified in the Form F-1 Registration Statement, and have
read the Form F-1 Registration Statement, including particularly the portions of
the Form F-1 Registration Statement referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
(i) The Company is listed in the records of the United States Patent
and Trademark Office as the holder of record of the patents listed on a
schedule to such opinion (the "Patents") and each of the applications
listed on a schedule to such opinion (the "Applications"). To the
knowledge of such counsel, there are no claims of third parties to any
ownership interest or lien with respect to any of the Patents or
Applications. Such counsel is not aware of any material defect in form
in the preparation or filing of the Applications on behalf of the
Company. To the knowledge of such counsel, the Applications are being
pursued by the Company. To the knowledge of such counsel, the Company
owns as its sole property the Patents and pending Applications;
(ii) To the best knowledge of such counsel, the Company is the sole
owner of the foreign patents listed on a schedule to such opinion (the
"Foreign Patents") and each of the applications listed on a schedule to
such opinion (the "Foreign Applications"). Such counsel knows of no
claims of third parties to any ownership interest or lien with respect
to the Foreign Patents or Foreign Applications. Such counsel is not
aware of any material defect of form in the preparation or filing of
the Foreign Applications on behalf of the Company. To the knowledge of
such counsel, the Foreign Applications are being pursued by the
Company. To the knowledge of such counsel, the Company owns as its sole
property the Foreign Patents and pending Foreign Applications;
(iii) Such counsel knows of no reason why the Patents or Foreign
Patents are not valid as issued. Such counsel has no knowledge of any
reason why any patent to be issued as a result of any Application or
Foreign Application would not be valid or would not afford the Company
useful patent protection with respect thereto;
(iv) As to the statements under the captions "Risk Factors -- Our
intellectual property and proprietary rights may be insufficient to
protect our competitive position" and "Risk Factors -- Claims that we
infringe third-party intellectual property rights could result in
significant expenses and restrictions on our ability to sell our
products in particular markets" and "Risk Factors -- We may not be able
to license necessary third-party technology or it may be expensive to
do so" and "Business -- Proprietary Rights," nothing has come to the
attention of such counsel which caused them to believe that the
above-mentioned sections of the Registration Statement and any
amendment or supplement thereto, to the extent that they are made
available to and reviewed by such counsel, at the time the Registration
Statement became effective and at all times subsequent thereto up to
and on the Closing Date and on any later date on which Option Stock are
to be purchased, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the
Exhibit C - 1
<PAGE>
statements therein, in light of the circumstances under which they were
made, not misleading; and
(v) Except for the Jetcell Litigation alleging infringement by Jetcell
Corporation of the Company's U.S. Patent Nos. 5,734,979 and 5,818,824
and the asserted affirmative defenses and counterclaims thereto, and
the pending patent license agreement with Nortel Networks, such counsel
knows of no other material action, suit, claim or proceeding relating
to patents, patent rights or licenses, trademarks or trademark rights,
copyrights, collaborative research, licenses or royalty arrangements or
agreements or trade secrets, know-how or proprietary techniques,
including processes and substances, owned by or affecting the business
or operations of the Company which are pending or threatened against
the Company or any of its officers or directors.
Exhibit C - 2
<PAGE>
ANNEX A
List of Subsidiaries Pursuant to 1(bb)
interWAVE Communications, Inc., a Delaware corporation
interWAVE Communications, S.A., a French corporation
interWAVE Communications, B.V., a Netherlands corporation
Annex A - 1
<PAGE>
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
January 26, 2000
interWAVE Communications International, Ltd.
656 Bair Island Road, Suite 108
Redwood City, CA 94063
RE: REGISTRATION STATEMENT ON FORM F-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form F-1 filed by you
with the Securities and Exchange Commission (the "Commission") on or about
December 17, 1999 (as such may be further amended or supplemented, the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of up to 9,775,000 of your
Common Shares (the "Shares"). The Shares, which include up to 1,275,000 Common
Shares issuable pursuant to an over-allotment option granted to the underwriters
(the "Underwriters"), are to be sold to the Underwriters as described in such
Registration Statement for sale to the public. As your counsel in connection
with this transaction, we have examined the proceedings proposed to be taken by
you in connection with the issuance and sale of the Shares.
Based on the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Shares and upon completion of the proceedings taken
in order to permit such transactions to be carried out in accordance with the
securities laws of various states where required, the Shares, when issued and
sold in the manner described in the Registration Statement, will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
which has been approved by us, as such may be further amended or supplemented,
or incorporated by reference in any Registration Statement relating to the
prospectus filed pursuant to Rule 462(b) of the Act.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
InterWAVE Communications International, Ltd.
We consent to the use of our report included herein, and to the references
to our firm under the headings "Experts" and "Selected Consolidated Financial
Data" in the prospectus.
San Francisco, California
January 24, 2000
