<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 000-1095478
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
(Exact name of registrant as specified in its charter)
BERMUDA 98-0155633
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
CLARENDON HOUSE, 2 CHURCH STREET
P.O. BOX HM 1022
HAMILTON HM DX, BERMUDA NOT APPLICABLE
(Address of principal executive offices) (Zip code)
(441) 295-5950
(Registrant's telephone number including area code)
------
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
- -
As of May 8, 2000, 46,561,166 shares of Registrant's common stock, no par
value, were outstanding.
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 and June 30, 1999 3
Condensed Consolidated Statements of Operations for the three month and nine month
periods ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine month periods
ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 30
</TABLE>
2
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, 2000 JUNE 30, 1999
----------------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 79,696 $ 3,919
Short-term investments 48,168 --
Receivables, net of allowance of $136 and $ 255
at March 31, 2000 and June 30, 1999, respectively 16,190 6,999
Inventories 6,129 6,339
Prepaid expenses and other current assets 1,368 844
-------------- -------------
Total current assets 151,551 18,101
Property and equipment, net 6,171 5,334
Long-term investments 15,626 --
Intangibles, net, and other assets 4,001 3,133
-------------- -------------
Total assets $177,349 $ 26,568
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,161 $ 2,757
Accrued expenses 2,903 2,354
Convertible notes -- 8,754
Other current liabilities 956 2,628
-------------- -------------
Total current liabilities 11,020 16,493
Other long term liabilities 1,767 1,275
-------------- -------------
Total liabilities 12,787 17,768
Shareholders' equity (deficit):
Convertible preferred shares, $0.83 par value; 56,500,000 shares authorized
at March 31, 2000 and June 30, 1999. Issued and outstanding 20,177,168
shares at June 30, 1999; aggregate liquidation preference of $95,008 at
June 30, 1999. -- 16,747
Common shares, $0.001 par value; 100,000,000 authorized;
Issued and outstanding 46,138,026 and 5,071,921 shares
at March 31, 2000 and June 30, 1999, respectively. 46 5
Additional paid-in capital 312,701 109,712
Deferred stock compensation (8,176) (3,717)
Services receivable from shareholder (4,743) (2,071)
Subscriptions and amounts receivable from shareholders (416) (2,284)
Accumulated other comprehensive income 46 128
Accumulated deficit (134,896) (109,720)
-------------- -------------
Total shareholders' equity 164,562 8,800
-------------- -------------
Total liabilities and shareholders' equity $ 177,349 $ 26,568
============== =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues $ 7,995 $ 4,023 $ 20,401 $ 12,607
Cost of revenues 4,948 3,014 13,101 8,538
------------- ------------- ------------- -------------
Gross profit 3,047 1,009 7,300 4,069
Operating expenses:
Research and development 5,005 3,183 12,765 10,946
Selling, general and
administrative 3,669 1,949 9,041 5,377
Amortization of deferred stock
compensation* 2,135 1,328 7,954 4,085
------------- ------------- ------------- -------------
Total costs and expenses 10,809 6,460 29,760 20,408
------------- ------------- ------------- -------------
Operating loss (7,762) (5,451) (22,460) (16,339)
Interest expense (25) (121) (2,013) (216)
Interest income 1,300 58 1,483 186
Other expense, net (128) (46) (129) (34)
------------- ------------- ------------- -------------
Net loss before income taxes (6,615) (5,560) (23,119) (16,403)
Income tax expense -- -- -- --
------------- ------------- ------------- -------------
Net loss (6,615) (5,560) (23,119) (16,403)
Dividend effect of beneficial
conversion feature to H-1 preferred
shareholders -- -- (2,055) --
------------- ------------- ------------- -------------
Net loss attributable to common
shareholders $ (6,615) $(5,560) $(25,174) $ (16,403)
============= ============= ============= =============
Basic and diluted loss per share $ (.19) $ (1.11) $ (1.65) $ (3.34)
Weighted average common shares
used in computing loss per share 34,231 4,989 15,300 4,914
- ----------------------------------------------------------------------------------------------------------------------
*AMORTIZATION OF DEFERRED
STOCK COMPENSATION:
Cost of revenues $ 275 $ 216 $ 1,008 $ 583
Research and development 1,232 627 4,511 1,791
Selling, general and administrative 628 485 2,435 1,711
------------- ------------- ------------- -------------
Total $ 2,135 $ 1,328 $ 7,954 $ 4,085
============= ============= ============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
2000 1999
(UNAUDITED)
---------------------------------------
<S> <C> <C>
Net cash used in operating activities $(15,984) $(8,417)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (2,768) (1,242)
Investment in licensed technologies (505) (257)
Investment in securities (63,894) 75
------------- ------------
Net cash used in investing activities (67,167) (1,424)
Cash flows from financing activities:
Proceeds from issuance of common stock 116,304 --
Proceeds from issuances of convertible preferred shares
and warrants 41,245 --
Proceeds from issuances of convertible notes and warrants -- 5,095
Principal payments on notes payable (459) (380)
Proceeds from exercise of options 1,821 258
Other -- (24)
------------- ------------
Net cash provided by financing activities 158,911 4,949
------------- ------------
Effect of exchange rate changes on cash and short term investments 17 12
------------- ------------
Net increase (decrease) in cash and cash equivalents 75,777 (4,880)
Cash and cash equivalents at beginning of period 3,919 7,340
------------- ------------
Cash and cash equivalents at end of the period $ 79,696 $ 2,460
============= ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 91 $ 135
Non-cash investing and financing activities:
Conversion of convertible notes for preferred stock $ 10,846 --
Conversion of preferred stock and warrants for common stock $ 23,595
Exchange of warrants in connection with joint sales agreement $ 4,121 --
Dividend effect of beneficial conversion feature to H1
Shareholders $ 2,055 --
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements are unaudited,
but in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary to fairly state the Company's
consolidated financial position, results of operations, and cash flows as of and
for the dates and periods presented. The consolidated financial statements of
the Company are prepared in accordance with generally accepted accounting
principles as adopted in the United States for interim financial information,
the instructions to Form 10-Q and Article 10 of Regulation S-X.
These unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
footnotes included in the Registration Statement on Form F-1 declared effective
by the Securities and Exchange Commission on January 28, 2000. The results of
operations for the three and nine-month periods ended March 31, 2000 are not
necessarily indicative of results for the entire fiscal year ending June 30,
2000.
2. INITIAL PUBLIC OFFERING
On January 28, 2000, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form F-1. Pursuant to this
Registration Statement, the Company completed an initial public offering of
9,775,000 shares of its common stock (including 1,275,000 shares sold pursuant
to the exercise of the Underwriters' over-allotment option) at an initial public
offering price of $13.00 per share ("Offering"). The Offering was managed by
Salomon Smith Barney, Banc of America Securities LLC and SG Cowen. Proceeds to
the Company, after deduction of the Underwriters' discount and commission,
totaled approximately $116.3 million, net of offering costs of approximately
$1.9 million.
Upon completion of the Offering, the Company's preferred stock was
converted into 27,929,269 shares of common stock, and all outstanding shares of
preferred stock were cancelled and retired.
3. COMPREHENSIVE LOSS
The components of the Company's total comprehensive loss were (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
(Unaudited) (Unaudited)
--------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Net loss attributable to common
shareholders $ (6,615) $ (5,560) $ (25,174) $ (16,403)
Foreign currency translation adjustment 56 72 17 13
Accumulated unrealized (loss) on
investments (100) -- (100) --
-------------- ------------- -------------- -------------
Total comprehensive loss $ (6,659) $ (5,488) $ (25,257) $ (16,390)
============== ============= ============== =============
</TABLE>
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
(unaudited)
-------------- -------------
<S> <C> <C>
Work in Process $ 4,164 $ 5,290
Finished goods 882 373
Consignment inventory 1,083 676
-------- --------
$ 6,129 $ 6,339
======== ========
</TABLE>
6
<PAGE>
5. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share is calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" and
SEC Staff Accounting Bulletin ("SAB") No. 98. The denominator used in the
computation of basic and diluted net loss per share is the weighted average
number of common shares outstanding for the respective period. All potentially
dilutive securities were excluded from the calculation of diluted net loss per
share, as the effect would be anti-dilutive. Diluted shares outstanding includes
the assumed conversion of preferred stock.
Pro forma net loss per share has been computed by dividing net loss by the
pro forma weighted average number of shares outstanding. Pro forma weighted
average shares assume the conversion of all preferred shares, which were
ultimately converted to common shares in conjunction with the initial public
offering, as if the conversion occurred at the beginning of the period.
The computations of earnings per share are as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
(Unaudited) (Unaudited)
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss attributable to common shareholders $(6,615) $(5,560) $(25,174) $(16,403)
Weighted average common shares outstanding 34,231 4,984 15,300 4,914
Basic and diluted loss per share $ (.19) $ (1.11) $ (1.65) $ (3.34)
Pro forma basic and diluted EPS:
Pro forma shares outstanding 46,138 24,546 46,138 24,546
Pro forma basic and diluted loss per share $ (0.14) $ (0.23) $ (0.55) $ (0.67)
</TABLE>
6. CASH EQUIVALENTS
Cash equivalents consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
Cash Equivalents (unaudited)
---------------- ---------------
<S> <C> <C>
Cash................................................ $ 125 $ 708
Money market funds.................................. 18,872 2,216
Commercial paper.................................... 60,699 995
-------- -------
$ 79,696 $ 3,919
======== =======
</TABLE>
7
<PAGE>
7. TRANSACTIONS WITH RELATED PARTIES, MAJOR CUSTOMERS AND CONCENTRATION OF
RISK
The Company engaged in business transactions with investors and major
customers resulting in the following revenue, deferred revenue, and trade
receivables (in thousands):
<TABLE>
<CAPTION>
Nine months ended March 31,
2000 1999
(Unaudited)
------------ ----------
<S> <C> <C>
Revenue
Nortel Networks....................................................... $7,014 $6,417
Hutchison Telecommunications.......................................... 4,939 1,032
HangZhou Topper Electric Corporation.................................. 3,444 --
ADC Telecommunications/Microcellular Systems, Ltd.(1)................. 1,317 3,405
</TABLE>
(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.
These customers accounted for the following percentages of revenues
comprising greater than 10% of revenue:
<TABLE>
<CAPTION>
Nine months ended March 31,
2000 1999
(Unaudited)
------------ ---------
<S> <C> <C>
Revenue
Nortel Networks....................................................... 34% 51%
Hutchison Telecommunications.......................................... 24% 8%
HangZhou Topper Electric Corporation.................................. 17% --
ADC Telecommunications/Microcellular Systems, Ltd.(1)................. 6% 27%
</TABLE>
(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.
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.
The following table summarizes information relating to the Company's
significant customers with balances greater than 10% of accounts receivable as
of:
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
(unaudited)
--------------- -------------
<S> <C> <C>
Accounts Receivable
Hutchison Telecommunications....................................... 28% 8%
Nortel Networks.................................................... 30% 48%
HangZhou Topper Electric Corp...................................... 20% 5%
ADC Telecommunications/Microcellular Systems, Ltd.(1)............. 8% 0%
</TABLE>
(1) Microcellular Systems, Ltd. Was created by a spin-off from ADC
Telecommunications in May 1999.
8
<PAGE>
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, was due and
payable on December 3, 1999 and automatically converted on September 10, 1999
into 1,872,362 shares of our Series H-1 preferred stock at a price of $7 per
share. As an incentive to participate in the convertible note financing, 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 was preferential in liquidation to all original
preferred stock. As of June 30, 1999, the convertible notes, including accrued
interest of $231,211, amounted to $12,923,041.
9. PREFERRED SHARES AND WARRANTS
In November 1999, the Company completed an offering of 1,526,663 Series I-1
preferred shares to Alcatel for $12,013,304 (net of financing costs $200,000).
The Series I-1 contained an $8 per share liquidation preference and converted to
common shares on a one-to-one basis on the Company's initial public offering. 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 December 1999, the Company sold 2,000,000 Series I-1 preferred shares to
Holodeck Limited for $16 million on similar terms as the November 1999 sale of
shares to Alcatel. The preferred shares converted to common shares on a
one-to-one basis on the Company's initial public offering.
As of March 31, 2000 there were warrants outstanding to purchase 5,802,473
shares of common stock.
10. COMMITMENTS
(a) LEASE FOR REDWOOD CITY PREMISES.
The Company's existing lease for 22,171 square feet for administrative
and engineering facilities in Redwood City expires in September 2002. We
vacated these premises and moved to larger facilities
9
<PAGE>
in Menlo Park in early March 2000. The scheduled lease payments after April 1,
2000 under our existing lease are as follows (in thousands):
<TABLE>
<CAPTION>
Period Ending June 30
---------------------
<S> <C>
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 196
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
-------
Total Minimum Lease Payments $ 2,014
=======
</TABLE>
The 22,171 square feet was subleased during March, 2000 and ends on
September 30, 2002, at the same time that our lease ends. The payments
received from the subleases will cover our proportionate costs to the
landlord under the existing lease.
(b) NEW LEASE FOR ADMINISTRATIVE AND ENGINEERING FACILITIES.
The Company signed a new five-year lease commencing December 15, 1999
for approximately 56,000 square feet in Menlo Park, California for the
relocation for our principal administrative and engineering facilities. We
relocated our administration and engineering departments to Menlo Park in
early March 2000.
Future minimum lease payments for the new lease are as follows for the
fiscal years ending June 30 (in thousands):
<TABLE>
<CAPTION>
Period Ending June 30
---------------------
<S> <C>
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 510
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,062
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,145
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,330
2004 and thereafter. . . . . . . . . . . . . . . . . . . . . 3,704
-------
Total Minimum Lease Payments . . . . . . . . . . . $10,751
=======
</TABLE>
(c) CONTRACT MANUFACTURERS.
The Company generally commits to purchase products from its contract
manufacturers to be delivered within the next 60 days covered by
forecasts with cancellation fees. As of March 31, 2000, the Company had
committed to make purchases totaling $3.5 million from these manufacturers in
the next 60 days. In addition, in specific instances, the Company may agree to
assume risk for limited quantities of specialized components with lead
times beyond this 60-day period.
11. 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
10
<PAGE>
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 are 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.
12. SUBSEQUENT EVENTS
APPROVAL OF JOINT VENTURE AGREEMENT
On April 15, 2000, subsequent to the end of the quarter, the Zhejiang
Provincial People's Government approved the joint venture agreement with
Hangzhou Topper Electric Corporation, Ltd.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements in this Form 10-Q which are not historical facts are
"forward-looking statements" that are subject to known and unknown risks and
uncertainties that could cause the results of interWAVE Communications
International, Ltd. to differ materially from management's current expectations.
These risks and uncertainties include, but are not limited to, the risks
relating to interWAVE's history of losses, the expectation of future losses,
reliance on a small number of customers, reliance on the purchase commitments of
large customers, complexity of products, difficulties in introducing new or
enhanced products, compliance with regulations and evolving industry standards,
long sales cycles, intense competition, sales to China, management of global
operations, the ability to retain and motivate key employees, and the Risk
Factors discussed in the initial public offering prospectus dated January 28,
2000, and in the filings and reports made
11
<PAGE>
from time to time by interWAVE with the Securities and Exchange Commission. We
cannot assure you that future results will be achieved, and actual results could
differ materially from expectations, forecasts and estimates. interWAVE assumes
no obligation to update any forward-looking statements, which speak only as of
their respective dates. Important factors that could cause actual results to
differ materially are discussed in the section "Risk Factors" included in our
prospectus dated January 28, 2000. You are encouraged to review such risk
factors carefully.
OVERVIEW
interWAVE Communications International, Ltd. and subsidiaries (the Company)
provides compact mobile wireless communications systems using GSM, an
international standard for voice and data communications. We have pioneered what
we believe is the only commercially available system that provides all of the
infrastructure equipment and software necessary to support an entire wireless
network within a single, compact enclosure. We have designed our systems to
serve both wireless office networks and small community networks in a
cost-effective manner.
We are a leading provider of compact wireless communications systems in the
Global System for Mobile Communications, or GSM, market. We were incorporated in
June 1994 and recorded our first product sale in May 1997. Our systems were
initially deployed to add capacity and coverage to existing systems, primarily
in Asia. Deployments of community networks began in 1998, primarily in China and
Africa. Trials of our wireless office systems commenced in 1999 in both Europe
and Asia. Prior to May 1997, we had no sales and our operations consisted
primarily of various start-up activities, such as research and development,
recruiting personnel, conducting customer field trials and raising capital.
We generated net revenues of $17.3 million in fiscal year ended June 30,
1999, and $20.4 million in the nine months ended March 31, 2000. We incurred net
losses of $24.5 million in fiscal 1999 and $25.2 million in the nine months
ended March 31, 2000. As of March 31, 2000, we had an accumulated deficit of
$134.9 million.
We generate net revenues from sales of our systems and, in connection with
our direct sales activity, from installation, maintenance contracts and support
of those systems. Revenue derived from systems sales, comprised of unit sales of
our WAVEXpress base station and base station controller, our WAVEXchange, our
Network In A Box and our WAVEView management system, constituted 88% of net
revenues in fiscal 1999 and 96% in the nine months ended March 31, 2000.
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. The components of sales by providers are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
MARCH 31, 2000 JUNE 30, 1999
---------------------- ----------------------
<S> <C> <C>
Communication equipment providers................................. 37% 61%
System integrators................................................ 36% 23%
Direct sales to wireless providers................................ 27% 16%
</TABLE>
12
<PAGE>
Net revenues outside the United States represented approximately 37% and
26% of total net revenues for the nine months ended March 31, 2000 and 1999,
respectively. We believe that the majority of our products sold in the United
States are ultimately installed by the purchasers outside the United States. We
have derived and expect to continue to derive a majority of our revenues from
products installed outside the U.S. by both non-U.S. and U.S. based
communications equipment providers, systems integrators and wireless service
providers, subjecting our revenue stream to risks from economic uncertainties,
currency fluctuations, political instability and uncertain cultural and
regulatory environments.
Since our inception, we have used share option programs for key employees
as compensation to attract strong business and technical talent. We have
recorded compensation expense for our option grants. The expense is equal to the
excess of the fair market price on the date of grant or sale over the option
exercise price. Of the total deferred compensation, approximately $8.0 million
and $4.1 million was amortized in the nine months ended March 31, 2000 and 1999,
respectively. The balance in deferred compensation of $8.2 million at March 31,
2000 is being amortized on an accelerated basis over the vesting period of the
applicable options, which is typically four years.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated our results of
operations expressed as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
(Unaudited) (Unaudited)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 61.9 74.9 64.2 67.7
----------- ------------ ------------ ------------
Gross Margin 38.1 25.1 35.8 32.3
----------- ------------ ------------ ------------
Operating Expenses:
Research and development 62.6 79.1 62.6 86.8
Selling, general and administrative 45.9 48.5 44.3 42.7
Amortization of deferred stock
compensation 26.7 33.0 39.0 32.4
----------- ------------ ------------ ------------
Operating loss (97.1) (135.5) (110.1) (129.6)
Interest and other expense 14.4 (2.7) (3.2) (0.5)
Dividend effect to preferred shareholders -- -- (10.1) --
----------- ------------ ------------ ------------
Net loss attributable to common shareholders (82.7)% (138.2)% (123.4)% (130.1)%
=========== ============ ============ ============
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET REVENUES
Total revenues increased 98.7% from $4.0 million in the third quarter of
fiscal 1999 to $8.0 million in the third quarter of fiscal 2000. This
increase was due to increased sales to wireless service providers, which
increased from $0.8 million in the third quarter of fiscal 1999 to $1.7
million in the third quarter of fiscal 2000, increased sales to
communications systems providers which increased from $2.4 million to $4.1
million, and increased sales to systems integrators which increased from $.8
million to $2.2 million.
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GROSS MARGIN
Gross margin increased to 38.1% in the third quarter of fiscal 2000 from
25.1% in the third quarter of fiscal 1999, due to reduced fixed costs and
more efficient absorption of manufacturing overhead due to higher overall
revenue levels.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 57.2% to $5.0 million in the
third quarter of fiscal 2000 from $3.2 million in the third quarter of fiscal
1999. The increase in the third quarter of fiscal 2000 is primarily due to an
increase in the number of employees engaged in development activities as well
as increased facilities expenses.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 88.2% to $3.7
million in the third quarter of fiscal 2000 compared to $1.9 million in the
comparable period in the prior year. The increases were due to strengthened
executive management, additional personnel, increases in rent expense, legal
expenses, one time moving expenses, public and investor relation expenses and
non-cash amortization charges ascribed to warrants issued in September 1999
in conjunction with a distribution agreement.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation increased 60.7% to $2.1 million
in the third quarter of fiscal 2000 from $1.3 million in the third quarter of
fiscal 1999. During the third quarter of fiscal 2000, options to purchase
786,000 common shares were granted at an average exercise price of $12.29,
resulting in no additional deferred stock compensation.
JOINT VENTURE CONTRACT WITH HANGZHOU TOPPER ELECTRIC CORPORATION, LTD.
On February 15, 2000 interWAVE and Hangzhou Topper Electric Corporation,
Ltd. signed a Joint Venture Agreement and a Joint Venture Technology Transfer
Agreement. The English name of the joint venture will be C*Link Communications,
Ltd. The venture will manufacture GSM wireless communications systems. interWAVE
will invest about $1.8 million in exchange for 45% of the equity in the joint
venture. On April 15, 2000, subsequent to the end of the quarter, the Zhejiang
Provincial People's Government approved the joint venture.
INTEREST INCOME
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We had interest income in the third fiscal quarter of $1.3 million as a
result of investing the proceeds of our initial public offering.
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
CONTRACTS WITH ALCATEL AND HUTCHISON
On October 27, 1999 we entered into a distribution and Original Equipment
Manufacturer ("OEM") agreement with Alcatel Business Systems ("Alcatel") of
France. Under the agreement, Alcatel 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
made minimum purchase commitments through December 2001, and intends to resell
our products primarily to their corporate office customers. We agreed to modify
our products to contain certain features by various product development
milestone dates. Alcatel agreed to purchase minimum amounts of goods and
services according to defined specifications in each successive 6-month period
beginning January 1, 2000. If we do not meet our product development
obligations, the purchase commitments from Alcatel may be lowered or removed
entirely, and Alcatel may elect to receive a manufacturing license from us for a
fee.
On December 20, 1999 Holodeck Ltd., an affiliate of Hutchison
Telecommunications Group ("Hutchison"), entered into an agreement with us in
which Holodeck agreed to purchase our goods and services in Sri Lanka according
to defined specifications. We estimate that Hutchison will purchase about $6.7
million of our products under this agreement in Sri Lanka. In connection with
this agreement, we agreed not to sell our WAVEXchange and WAVExpress products to
any party other than Hutchison's affiliate in Sri Lanka for three years, and in
Mumbai, India until March 31, 2000. If by that date we receive an order from
Hutchison for at least $6 million, then we will not supply these products to any
third party for three years in Mumbai. 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.
The agreement between us and Hutchison's affiliate may be immediately
terminated 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.
In connection with these agreements, Alcatel purchased 1,536,663 of our
Series I-1 preferred shares for $12,013,304 in net proceeds and Holodeck Ltd.
purchased 2,000,000 of our Series I-1 preferred shares for proceeds of
$16,000,000.
NET REVENUES
Total revenues increased 62% from $12.6 million in the first nine months of
fiscal 1999 to $20.4 million in the first nine months of fiscal 2000. This
increase was primarily due to increased sales to wireless service providers and
systems integrators, which increased from $1.3 million and $3.4 million
respectively in the third quarter of fiscal 1999 to $5.4 million and $7.4
million respectively in the third quarter of fiscal 2000. Sales to
communications systems providers decreased from $7.9 million to $7.6 million.
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GROSS MARGIN
Gross margin increased to 35.8% in the first nine months of fiscal 2000
from 32.3 % in the first nine months of fiscal 1999, primarily due to the
increased portion of revenue generated from wireless service providers and
system integrators.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development increased 16.6% to $12.8 million in the first nine
months of fiscal 2000 compared to $10.9 million in the comparable period for
fiscal 1999. Increases in expenses were primarily due to additional employees
engaged in research and development for current period over the preceding fiscal
year as well as increased facilities expenses.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 68.1% to $9.0
million in the first nine months of fiscal 2000 compared to $5.4 million in
the comparable period in the prior year. The increase was due to strengthened
executive management, additional personnel, increases in the allowance for
doubtful accounts, rent and moving expenses, legal fees, public and investor
relations expenses and non-cash amortization charges ascribed to warrants
issued in September 1999 in conjunction with a distribution agreement also
increased selling, general and administrative expenses.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation increased 94.7% to $8.0 million
in the first nine months of fiscal 2000 from $4.1 million in the first nine
months of fiscal 1999. During the first nine months of fiscal 2000, options to
purchase 3,646,000 common shares were granted at an average exercise price of
$5.04, resulting in an addition to deferred stock compensation of $12.4 million.
INTEREST INCOME
We had interest income in the first nine months of fiscal 2000 of $1.6
million as a result of investing the proceeds of our initial public offering
in the third fiscal quarter.
INTEREST EXPENSE
Interest expense totaled $2.0 million in the first nine months of fiscal
2000 as compared to $216,000 in the first nine months of fiscal 1999. The
increase in fiscal 2000 was due to amortization of the discount ascribed to
warrants issued in conjunction with the fiscal 1999 bridge loan financing. The
bridge loan notes were converted to Series H1 preferred shares as of September
10, 1999 and the unamortized remaining discount was charged to additional paid
in capital.
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LIQUIDITY AND CAPITAL RESOURCES
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. In January 2000, we completed the initial public offering of
9,775,000 common shares (including 1,275,000 shares sold pursuant to the
exercise of the Underwriters' over-allotment option), which generated net
proceeds of $116.3 million.
Net cash used in operating activities was $16.0 million for the first nine
months of fiscal 2000, and $8.4 million for the same period during fiscal 1999.
Net cash used in operating activities increased in the first nine months of
fiscal 2000 due to increase in net loss before deferred compensation expenses
of $4.9 million plus usage of networking capital additions.
Net cash used in investing activities was $67.2 million for the first
nine months of fiscal 2000 and $1.4 million for the same period in the prior
year. The increase was primarily attributable to investment in securities
purchased during the first nine months of fiscal 2000.
Net cash provided by financing activities was $158.9 million for the first
nine months of fiscal 2000 and $4.9 million for the same period during fiscal
1999. In the first nine months of fiscal 2000, our financing activities
primarily consisted of the issuance of 5.0 million preferred shares for $38.2
million of net proceeds and 9.8 million common shares for $116.3 million of net
proceeds through a Initial Public Offering January 28, 2000. The preferred
shares converted into common shares on a one-to-one basis in conjunction with
the January 2000 initial public offering.
On September 10, 1999 we completed an offering of 1,715,715 shares of 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
$11,244,000, net of financing costs of $766,000. The warrants, valued at
$1,340,000, were exercised on our initial public offering for 240,000 shares of
common stock. The sale of Series H-1 preferred stock resulted in the automatic
conversion of our convertible notes and interest into 1,872,362 shares of Series
H-1 preferred stock, and the issuance of warrants to purchase 253,874 shares of
common stock at $1 per share. The Series H-1 preferred shares converted on a
one-to-one basis, and the warrants were exercised, on our initial public
offering.
In September 1999 we issued a warrant to purchase 615,000 common shares at
an exercise price of $1 per share to Intasys Corp. and received a warrant to
purchase 225,225 shares of Intasys common shares at $3.3125 per share, expiring
in August 2002. Intasys exercised the warrant on our initial public offering.
In November 1999, we 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 converted on a one-to-one basis on our initial
public offering. In connection with the sale of Series I-1 preferred shares, we
entered into a purchase and distribution agreement wherein Alcatel will market
our wireless office network products through their enterprise solutions
division.
In December 1999, we sold 2,000,000 Series I-1 preferred shares to
Holodeck, an affiliate of Hutchison Telecommunications, for $16 million on
similar terms as the November
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1999 sale of shares to Alcatel. The Series I-1 preferred shares converted on a
one-to-one basis on our initial public offering.
In the first nine months of fiscal 1999, our financing activities
consisted primarily of issuance of $5.1 million in convertible notes and
warrants.
Although we had no material commitments for capital expenditures as of
March 31, 2000, management anticipates continuing increases in our capital
expenditures and working capital requirements consistent with our anticipated
growth in operations. Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we allocate to the
continuing development of new products, marketing and selling of our products
and other factors. We currently anticipate that we will continue to experience
growth in our operating expenses for the foreseeable future and that operating
expenses will be a material use of our cash resources.
RISK FACTORS
Set forth below and elsewhere in this Form 10-Q and in the other documents
that we file with the Securities and Exchange Commission are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this
quarterly report. Investing in our common shares involves a high degree of risk.
If any of the 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 March 31, 2000, we had an accumulated deficit of $134.9 million. We
incurred net losses of approximately $24.5 million and $25.2 million in the
fiscal year ended June 30, 1999 and the nine months ended March 31, 2000,
respectively. We expect to continue to incur net losses and these losses may be
substantial. Furthermore, we expect to generate significant negative cash flow
in the future. We will need to generate substantially higher revenues to achieve
and sustain profitability and positive cash flow. Our ability to generate future
revenues
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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 sustain profitability. If we are
unable to achieve or sustain 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;
- 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.
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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 nine months ended March 31, 2000 and March 31, 1999
were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
2000 1999
(UNAUDITED)
<S> <C> <C>
Nortel Networks................................................... 34% 51%
Hutchison Telecommunications (Hong Kong).......................... 24% 8%
HangZhou Topper Electric Corporation.............................. 17% 0%
ADC Telecommunications/Microcellular Systems, Ltd. (1)............ 6% 27%
</TABLE>
(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.
Nortel Networks is one of our principal shareholders, and a Nortel Networks
employee is a member of our board of directors. ADC Telecommunications and the
corporate parent of Hutchison Telecommunications 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 could decline due to the reduction in sales.
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 on these commitments in making our
manufacturing commitments each quarter. We have also committed to Nortel
Networks and Alcatel that we will maintain quality, delivery, performance and
design standards for our systems. As a result, we bear the risk of carrying
excess inventory if Nortel Networks and Alcatel fail to meet their commitments
or if we fail to meet ours. From time to time, we have renegotiated 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 in the future. Failure of Nortel
Networks or Alcatel to meet minimum purchase commitments could cause our sales,
revenues and operating results to decline.
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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 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 sales, revenues and
our future growth prospects would all 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 nine months could be required before we
would begin receiving adequate supplies from other suppliers. Supply
interruptions could delay product shipments, causing our sales, 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.
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
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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 calendar 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.
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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 the third generation 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 third generation standard is adopted, any delays in our
introduction of third generation products could impair our ability to grow
revenues in the future. As a result, we will be unable to achieve or sustain
profitability if we do not comply with evolving industry standards.
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 the Global System for Mobile
Communications, or GSM, standard. There are other competing standards including
code division multiple access, or CDMA, and time division multiple 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 GSM WIRELESS MARKET COULD PREVENT US FROM INCREASING
OR SUSTAINING REVENUES OR ACHIEVING OR SUSTAINING PROFITABILITY.
The GSM wireless market is rapidly evolving and highly competitive. We
cannot assure you that we will have the financial resources, technical expertise
or marketing, manufacturing,
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<PAGE>
distribution and support capabilities to compete successfully in the future. 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. In some market applications, we
also compete with our customers Alcatel and Nortel Networks. All of the major
GSM communications equipment providers have broad product lines that include at
least partial GSM solutions that address our target markets.
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 PEOPLE'S REPUBLIC
OF CHINA. FUTURE SALES IN CHINA WILL BE SUBJECT TO ECONOMIC AND POLITICAL RISK.
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In the nine months ended March 31, 2000, sales to HangZhou Topper Electric,
which is located in the People's Republic of China, accounted for 17% of our
revenues. 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 or the results of our 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 may
need to expand our principal U.S. facilities in the next nine to 12 months and
we have moved our offices to a different location. Additional expansion 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.
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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 protect our proprietary rights as fully as in the United States. Failure to
protect our proprietary rights could worsen 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 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. An adverse
outcome could have a material adverse affect on our financial position. If the
outcome is adverse to us, we could also experience more competition or could be
required to license our technology, either of which could harm our business and
financial results, and have a material adverse affect on our financial position.
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 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. We have not received any notice from any third
parties that our proprietary assets conflict with or infringe upon the rights of
others.
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IF WE, OUR SUPPLIERS OR OUR CUSTOMERS FAIL TO BE YEAR 2000 COMPLIANT, OUR
BUSINESS COULD BE SEVERELY DISRUPTED.
On and after January 1, 2000, we have experienced no material disruptions
of our operations as a result of year 2000 problems. In addition, we are not
aware of any difficulties with our products or services, nor have we experienced
any material problems related to products or services provided by critical
external parties for our use. We have no reason to believe that year 2000
failures will seriously affect us in the future. However, given the possibility
of latent year 2000 defects, we cannot yet be sure that we will not experience
year 2000 failures or be affected by third-party year 2000 failures. We will
continue to monitor the operations of our computers and micro-processor-based
devices for any Year 2000 related problems
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.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
FOREIGN EXCHANGE
Our financial market risk includes risks associated with international
operations and related foreign currencies. We anticipate that international
sales will continue to account for a significant portion of our consolidated
revenue. Our international sales are in U.S. dollars and therefore are not
subject to foreign currency exchange risk. Expenses of our international
operations are denominated in each country's local currency and therefore are
subject to foreign currency exchange risk. Through March 31, 2000, we have not
experienced any significant negative impact on our operations as a result of
fluctuations in foreign currency exchange rates. We do not engage in any hedging
activity in connection with our international business or foreign currency risk.
INTEREST RATES
27
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We invest our cash in financial instruments, including commercial paper,
and repurchase agreements, and in money market funds. These investments are
denominated in U.S. dollars. Cash balances in foreign currencies overseas are
operating balances and are only invested in short term deposits of the local
operating bank.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their market value adversely impacted because of a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations because of changes in interest rates. We may suffer losses in
principal if forced to sell securities, which have seen a decline in market
value because of changes in interest rates. We are primarily vulnerable to
changes in short-term U.S. prime interest rates.
Short-term investments consist of maturities greater than 90 days but less
than one year; long-term investments consist of securities with maturities
greater than one year. Our investments are made in accordance with an investment
policy approved by the Board of Directors.
28
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings
On June 28, 1999, we filed a complaint against JetCell Inc. in the United
States District Court for the Northern District of California (interWAVE
Communications International Ltd., v. JetCell Inc., Case No. C99-3125) alleging
misappropriation of trade secrets and infringement of United States Patent Nos.
5,734,979 and 5,818,824. Two of the founders of JetCell are former employees of
interWAVE. The complaint seeks injunctive relief and damages. On July 19, 1999,
JetCell filed an answer to the complaint and counterclaims against us. The
answer denied the allegations made in the complaint and the counterclaims
included allegations against us of unfair trade practices, unfair competition,
defamation, patent misuse and patent invalidity. The answer and counterclaims
seek injunctive relief, damages, invalidation of our patents and a dismissal of
the complaint. On August 9, 1999, we filed an answer to JetCell's counterclaims
denying the allegations made in the counterclaims. We are unable to predict the
outcome of the litigation and do not expect it to be resolved in the near
future. However, if we are unable to settle these proceedings in a satisfactory
manner, the legal proceedings may be time consuming and expensive and the
outcome could be adverse to us. An adverse outcome could have a material adverse
affect on our financial position. If the outcome is adverse to us, we would also
experience more competition in our markets and may be required to license
technology required for our products, either of which could harm our business
and financial results, and have a material adverse affect on our business and
results of operations.
We may from time to time become a party to various legal proceedings
arising in the ordinary course of our business. However, other than as described
above, we are not currently involved in any material legal proceedings.
ITEM 2. Changes in Securities and Use of Proceeds
(a) CONVERSION OF PREFERRED STOCK.
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, was due and
payable on December 3, 1999 and automatically converted on September 10, 1999
into Series H-1 preferred stock at a price of $7 per share. The preferred stock
converted into common shares on a one-to-one basis on the initial public
offering on January 28, 2000.
(b) RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of transactions by the Company during the nine
months ended March 31, 2000 involving sales of the Company's securities that
were not registered under the Securities Act:
- In November and December 1999, we 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 was
convertible into one common share and all Series I1 preferred shares
converted on our initial public offering. These shares were
29
<PAGE>
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.
(c) USE OF PROCEEDS
Our registration statement on Form F-1 for our initial public offering
became effective on January 28, 2000. In the offering, we sold an aggregate
9,775,000 shares of our common stock (including 1,275,000 shares sold pursuant
to the exercise of the Underwriters' over-allotment option) at an initial public
offering price of $13.00 per share ("Offering"). Net proceeds from the offering
totaled approximately $116.3 million, net of offering costs of approximately
$1.9 million.
We intend to use the proceeds of the offering primarily for additional
working capital and other general corporate purposes, including increased
research and development, sales and marketing, and general and administrative
expenditures.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
None.
Exhibit 27. Financial Data Schedule
(b) REPORTS ON FORM 8-K. None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized,
May 9, 2000 interWAVE Communications International, Ltd.
By /s/ Thomas W. Hubbs
------------------------------
Thomas W. Hubbs
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. FORM 10Q FOR THE PERIOD ENDED MARCH
31, 2000.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 79,696
<SECURITIES> 48,168
<RECEIVABLES> 16,326
<ALLOWANCES> 136
<INVENTORY> 6,129
<CURRENT-ASSETS> 151,551
<PP&E> 17,102
<DEPRECIATION> 10,931
<TOTAL-ASSETS> 177,349
<CURRENT-LIABILITIES> 11,020
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 164,516
<TOTAL-LIABILITY-AND-EQUITY> 177,349
<SALES> 20,401
<TOTAL-REVENUES> 20,401
<CGS> 13,101
<TOTAL-COSTS> 13,101
<OTHER-EXPENSES> 30,132
<LOSS-PROVISION> 329
<INTEREST-EXPENSE> 2,013
<INCOME-PRETAX> (25,174)
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<INCOME-CONTINUING> (25,174)
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<NET-INCOME> (25,174)
<EPS-BASIC> (1.65)
<EPS-DILUTED> (1.65)
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