<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 2000
REGISTRATION NO. 333-35304
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
WIRELESS, INC.
(Exact name of registrant as specified in its charter)
--------------
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 3663 94-3269426
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
5452 BETSY ROSS DRIVE
SANTA CLARA, CA 95054
(408) 727-8383
(Name and Address, including zip code, and telephone number, including
area code, of the registrant's principal executive offices)
--------------
WILLIAM J. PALUMBO
CHIEF EXECUTIVE OFFICER AND PRESIDENT
WIRELESS, INC.
5452 BETSY ROSS DRIVE
SANTA CLARA, CA 95054
(408) 727-8383
(Address, including zip code, and telephone number, including area code, of
agent for service)
--------------
COPIES TO:
WARREN T. LAZAROW, ESQ.
DAVID G. ODRICH, ESQ. BLAIR W. WHITE, ESQ.
JONATHAN G. SHAPIRO, ESQ. CHRISTINE K. TALARIDES, ESQ.
ANDREW R. HULL, ESQ. BLAIR M. WALTERS, ESQ.
BROBECK, PHLEGER & HARRISON LLP PILLSBURY MADISON & SUTRO LLP
TWO EMBARCADERO PLACE 2550 HANOVER STREET
2200 GENG ROAD PALO ALTO, CA 94304
PALO ALTO, CA 94303 (650) 233-4500
(650) 424-0160
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
--------------
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If 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 earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-----------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
The information contained 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 and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
********************************************************************************
SUBJECT TO COMPLETION, DATED AUGUST 17, 2000
P r o s p e c t u s
8,500,000 SHARES
[WIRELESS LOGO]
COMMON STOCK
$ PER SHARE
--------------
We are selling 8,500,000 shares of our common stock. The underwriters named
in this prospectus may purchase up to 1,275,000 additional shares of our common
stock to cover over-allotments.
This is an initial public offering of our common stock. We currently expect
the initial public offering price of the common stock to be between $8.00 and
$10.00 per share. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol "WLSS" subject to notice of issuance.
--------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------- ------------
<S> <C> <C>
Initial Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Wireless, Inc. (before expenses) $ $
</TABLE>
The underwriters expect to deliver the shares to
purchasers on or about , 2000.
--------------
SALOMON SMITH BARNEY
CIBC WORLD MARKETS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
, 2000
<PAGE>
INSIDE FRONT COVER
In the top left corner of the page on the light blue background is the
Wireless logo, which consists of the word "Wireless" with the first four letters
in black and the last four in blue, multi-colored dots appearing above the "i",
"r" and "e", the capital letters "INC" in the top right corner, the letters "TM"
in the lower right corner and a semi-circular blue line underneath. Below the
Wireless logo are three colored bars with a photograph of a Wireless product
superimposed on each of them. The colors of the bars correspond to the colors of
the headings on the following 2 pages (the gatefold) which illustrate the
architecture of point-to-multipoint, point-to-point and high capacity transport
systems. On the first bar, which is blue, is a photograph of a WaveNet Access
transmitter, above which are words "WaveNet Access." On the middle bar, which is
red, is a photograph of a WaveNet Link system, above which are the words
"WaveNet Link." On the lower bar, which is orange, is a photograph of a WaveNet
Transport system, above which are the words "WaveNet Transport." The word
"WaveNet" is in bold each time it appears.
GATEFOLD
The gatefold consists of three large columns stretching across both pages
of the gatefold. A bar appears above the three columns which is colored blue
over the first column, red over the second column and orange over the third
column. The blue portion of the bar contains the words "Point-to-multipoint",
the red portion of the bar contains the words "Point-to-point" and the orange
portion of the bar contains the words "High-capacity transport". In the upper
left corner of the left page above the bar is the Wireless logo, which consists
of the word "Wireless" with the first four letters in black and the last four in
blue, multi-colored dots appearing above the "i," "r" and "e," the capital
letters "INC." in the top right corner, the letters "TM" in the lower right
corner and a semi-circular blue line underneath.
The first column contains two diagrams, one illustrating the operation of
the WaveNet Access System and one illustrating the operation of the StarPort
System. The first diagram consists of five small buildings, four of which are
labeled "Insurance," "Office Supply," "Bank," "Retailer" and the fifth of which
is not labeled. Red dots emanate from a Wireless product on the top of each
building to a large telephone pole at the right of the column on which a
Wireless device is mounted. Below the diagram are the words "WaveNet Access" in
bold. The second diagram, which appears below the first, consists of four houses
and a personal computer below the first house. There is a personal computer
visible inside the first house as well. Both personal computers are connected to
a small Wireless device. Red dots emanate from a Wireless product within each
building to a large telephone pole at the right of the column on which a
Wireless device is mounted. Below the diagram is the word "StarPort" in bold and
underneath on a yellow background, the words "Under development," and below
"Available for order in Fall 2000 for initial delivery in Spring 2001."
The second column contains a diagram illustrating the operation of the
WaveNet Link system. A line connects the large pole on the right side of the
WaveNet Access diagram in the first column to a large pole on the left side of
the second column on which another Wireless device appears. A caption over the
line connecting the two poles reads "Voice and data traffic" in bold and an
arrow pointing between both poles appears under the caption. A second line
connects the pole on the right side of the StarPort diagram in the first column
to another pole on the left side of the second column. A caption over the line
connecting the two poles reads "Internet traffic" and an arrow pointing between
both poles appears under the caption. Red dots emanate from both poles on the
left side of the second column to two poles on the right side of the second
column, on which are mounted Wireless devices. In the center-right of the second
column are the words "WaveNet Link," in bold.
The third column contains a diagram illustrating the operation of the
WaveNet Transport system. Two lines connect the two poles on the right side of
the second column to a large box on the left side of the third column out of
which a pole emerges with a microwave antenna at the top. Red dots emanate from
the microwave antenna to another similar antenna on top of a building in the
center of the third column. The words "Communication Service Provider" appear
below the building in bold. A thick red line connects the building to the words
"The Internet" in bold. In the center-left of the third column are the words
"WaveNet Transport," in bold.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary...................................................................................... 3
Risk Factors............................................................................................ 7
Forward-Looking Statements.............................................................................. 20
Use of Proceeds......................................................................................... 21
Dividend Policy......................................................................................... 21
Capitalization.......................................................................................... 22
Dilution................................................................................................ 23
Selected Financial Data................................................................................. 24
Management's Discussion and Analysis of Financial Condition and Results of Operations................... 26
Business................................................................................................ 37
Management.............................................................................................. 49
Executive Compensation and Other Information............................................................ 54
Certain Transactions.................................................................................... 61
Principal Stockholders.................................................................................. 66
Description of Capital Stock............................................................................ 69
Material United States Federal Income and Estate Tax Consequences to Non-United States Holders.......... 73
Shares Available for Future Sale........................................................................ 75
Underwriting............................................................................................ 77
Legal Matters........................................................................................... 79
Experts................................................................................................. 79
Additional Information.................................................................................. 79
Index to Financial Statements........................................................................... F-1
</TABLE>
--------------
Until _____________________________ , 2000, all dealers that buy, sell or
trade the common stock, 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.
2
<PAGE>
PROSPECTUS SUMMARY
BECAUSE 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, INCLUDING
"RISK FACTORS," AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO,
BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
OUR COMPANY
We are a provider of high-speed, or broadband, wireless access systems that
enable international and domestic Internet and communications service providers,
telephone operating companies and private network operators to deliver voice and
high-speed data services to their customers. Our systems are designed as an
alternative to fiber optic, copper-based and cable-based communication
transmission methods and allow a service provider to rapidly deliver high-speed
Internet access in a service area. In addition, our wireless systems transport
voice and high-speed data traffic within a service provider's network.
We offer two categories of wireless systems, point-to-point and
point-to-multipoint. A point-to-point wireless system connects two locations,
using two identical pieces of equipment. Each piece of equipment is first
connected to an end-user's or service provider's network by a cable and a
connector and then connected by an antenna cable to an antenna that is usually
mounted on a rooftop or tower. The two antennas are then aimed at one another to
create a wireless connection. A point-to-multipoint wireless system connects
multiple facilities within a relatively small geographic location to a central
hub. Our systems are available in a broad range of frequency assignments,
enabling us to address the different regulatory requirements of multiple
geographic markets.
Our principal product family is called WAVENET and consists of three
categories of systems, LINK, TRANSPORT and ACCESS. Our WAVENET LINK systems are
point-to-point wireless systems that are typically used by Internet service
providers to deliver high-speed Internet access to businesses and residential
buildings. Our WAVENET TRANSPORT systems are point-to-point wireless systems
similar to our WAVENET LINK systems but provide considerably higher data
transmission rates. Our WAVENET TRANSPORT systems are typically used by
communication service providers, cellular network operators and telephone
operating companies to transport high-volume network traffic. Our WAVENET ACCESS
systems are point-to-multipoint wireless systems that are typically used to
facilitate high speed Internet access for small and medium sized businesses. In
partnership with TRW, Inc., we intend to introduce for order in Fall 2000 and
for commercial delivery in Spring 2001 a new point-to-multipoint wireless system
called STARPORT, to target the residential and small office/home office markets.
STARPORT is expected to be well suited for these markets because it is designed
to be easily installed by the consumer and we expect that it will not require a
line of sight between transmission and reception locations.
A substantial portion of our revenues is derived from outside the United
States, as some of our customers have installed and are operating our systems in
Argentina, Brazil, Chile, China, Mexico, Panama, the Philippines and Poland in
addition to the United States. Our international service organization provides
customer support 24 hours per day, 7 days a week and offers network design and
installation services as part of our wireless solution.
Although we are optimistic about our future prospects, we face many
challenges and risks. We have a limited operating history and did not ship our
first wireless access product until Fall 1998. We have not achieved, and may
never achieve, profitability. In addition, we expect to incur net losses in
the future, and these losses may be substantial. Moreover, we have significant
future capital requirements related to the development of our products. If we
are unable to fund these requirements, our business could be seriously harmed.
Over the past decade, the amount of broadband data transmitted across
communications networks has grown significantly due to the increased use of the
Internet and data-intensive applications. The increase in network traffic has,
in turn, created an increase in demand for data transmission capacity, or
bandwidth, and broadband services to support it, including wire line
technologies and wireless technologies. Broadband wireless technology enables
rapid implementation of high-speed network access in a cost-effective manner
relative to wired networks. We believe that wireless network providers will be
able to gain a greater share of the network access market because, unlike
incumbent local telephone companies, such as the regional Bell operating
companies, they are not required by federal law to share their wireless networks
with competing service providers. In addition, a broadband wireless network is
often the best option for high-speed communication in remote areas and in many
developing countries due to the lack of an existing wired infrastructure. In
these regions, wireless technologies provide clear advantages over wired
networks, including lower cost, faster installation, greater flexibility and
increased reliability.
3
<PAGE>
Our goal is to be the broadband wireless access solution of choice, both
domestically and internationally, for Internet and communication service
providers, telephone operating companies and private network operators. Our
strategy for achieving this goal includes the following core elements:
o Introducing new broadband wireless access technologies;
o Leveraging our strategic relationships;
o Expanding our international market presence;
o Emphasizing research and development; and
o Continuing to deliver high-quality customer service and support.
OUR BACKGROUND
Wireless, Inc. was incorporated on May 7, 1997 in California and in August
1998 purchased Multipoint Networks, Inc., or Multipoint, a California
corporation engaged in the manufacturing of point-to-multipoint data products.
Wireless, Inc. reincorporated in Delaware in July 2000. Our principal executive
offices are located at 5452 Betsy Ross Drive, Santa Clara, CA 95054 and our
telephone number is (408) 727-8383. Our web site can be found at
www.wire-less-inc.com. Information contained in our web site does not constitute
a part of this prospectus.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered................................. 8,500,000 Shares
Common stock to be outstanding
after the offering................................... 41,236,665 Shares
Use of proceeds...................................... $2.5 million of the proceeds will be paid to TRW in
connection with the license of certain technology. In
addition, $8.5 million of the proceeds will be paid to
TRW in connection with accrued development costs
incurred through June 30, 2000 and up to $15.0 million
of the proceeds will be paid to TRW in connection with
future development costs. The remainder of the proceeds
will be used for funding cash flow deficits from
anticipated increases in expenses and capital
expenditures, product development expenditures unrelated
to STARPORT and other working capital requirements. We
may also use a portion of the remaining proceeds for
possible acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol............... "WLSS"
</TABLE>
--------------
Unless otherwise indicated all information in this prospectus:
o assumes no exercise of the underwriters' over-allotment option; and
o reflects the conversion of all of our outstanding preferred stock
into common stock upon the consummation of the offering.
See "Description of Capital Stock" and "Underwriting."
EXCEPT WHERE OTHERWISE NOTED, REFERENCES IN THIS PROSPECTUS TO 1998 AND
1999 REFER TO THE TWELVE MONTHS ENDING DECEMBER 31, 1998 AND DECEMBER 31, 1999,
RESPECTIVELY, REFERENCES TO THE PERIOD FROM INCEPTION TO DECEMBER 31, 1997 REFER
TO THE PERIOD BEGINNING MAY 7, 1997 AND ENDING DECEMBER 31, 1997 AND REFERENCES
TO THE FIRST HALF OF 1999 AND 2000 REFER TO THE SIX MONTHS ENDING JUNE 30, 1999
AND 2000, RESPECTIVELY.
--------------
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 ON THE FRONT OF THIS
PROSPECTUS.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following tables set forth our summary financial, operating and balance
sheet data. You should read this information together with the financial
statements and the related notes included elsewhere in this prospectus, as well
as the information set forth under the captions "Selected Financial Data,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The pro forma financial data presented below reflects as of June 30, 2000:
o the conversion of all outstanding shares of preferred stock into
common stock; and
o the exercise of outstanding warrants to purchase 150,000 shares of
common stock at a weighted-average exercise price of $3.00 per share,
which by their terms expire or automatically convert within 30 days of
the completion of this offering.
The pro forma, as adjusted balance sheet data presented below reflects the above
factors as well as the estimated net proceeds from the sale of 8,500,000 shares
of common stock at an assumed initial public offering price of $9.00 per share,
the middle of the filing range, after deducting estimated underwriting discounts
and commissions and our estimated offering expenses. See Note 1 of Notes to
Financial Statements for a detailed explanation of the determination of the
shares used to compute actual and pro forma basic and diluted net loss per
share.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1997
(INCEPTION)
TO
DECEMBER 31, YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------- ---------------------------- -----------------------------
1997 1998 1999 1999 2000
------------- ------------ -------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $ 201 $ 11,172 $ 20,329 $ 9,505 $ 11,851
Gross profit (loss)...................... (220) 2,081 4,972 3,052 2,238
Total operating expenses................. 3,438 9,267 18,411 6,326 33,937
Operating loss........................... (3,658) (7,186) (13,439) (3,275) (31,699)
Net loss................................. $ (3,644) $ (7,476) $ (13,866) $ (3,497) $ (31,686)
============= ============ ============== ============= ==============
Basic and diluted net loss per share..... $ -- $ (6.02) $ (4.18) $ (1.07) $ (3.33)
============= ============ ============== ============= ==============
Basic and diluted weighted average
shares used in computation of net
loss per share........................ 1,242,617 3,316,344 3,269,763 9,513,156
Pro forma basic and diluted net loss per
share................................. $ (0.85) $ (1.06)
============== ==============
Pro forma basic and diluted weighted
average shares used in computation of
net loss per share.................... 16,334,797 29,996,681
<CAPTION>
AS OF JUNE 30, 2000
-------------------------------------
(UNAUDITED)
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
--------- ------------ -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 4,289 $ 4,739 $ 73,334
Working capital...................................................... (3,931) (3,481) 65,114
Total assets......................................................... 31,976 32,426 101,021
Long-term liabilities................................................ 239 239 239
Total stockholders' equity........................................... 12,163 12,613 81,208
</TABLE>
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST
IN SHARES OF OUR COMMON STOCK.
RISKS RELATING TO OUR COMPANY
OUR MARKET IS NEW AND RAPIDLY EVOLVING AND WE HAVE ONLY RECENTLY BEGUN SELLING
MOST OF OUR CURRENT PRODUCT LINE, WHICH MAKES IT DIFFICULT FOR US TO ANTICIPATE
TRENDS IN OUR INDUSTRY AND WHICH MAY MAKE IT DIFFICULT FOR YOU TO EVALUATE OUR
BUSINESS AND ASSESS OUR PROSPECTS FOR PROFITABILITY.
The amount of revenue we receive from sales of our products depends, in
part, on the level of demand for broadband wireless access and networking
products. We operate in a new and rapidly evolving market and demand is
difficult to predict. In addition, because we have only recently begun
commercial shipment of wireless systems, we have limited insight into trends
that may emerge in our industry and affect our business. If we fail to respond
to trends and execute our business strategy, we may not be able to achieve
profitability. We were incorporated in May 1997 and did not ship our first
wireless access product or recognize revenue from such products until September
1998. In addition, most of our current systems were introduced within the past
year. Accordingly, we have limited meaningful historical financial data upon
which to base projected revenues and planned operating expenses and upon which
investors may evaluate us and our prospects.
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR
SUSTAIN PROFITABILITY.
We will need to generate significantly higher revenues than we have in the
past to achieve or sustain profitability and we may not be able to generate
these revenues. As of June 30, 2000, we had an accumulated deficit of $56.7
million. We anticipate continuing to incur significant sales and marketing and
general and administrative expenses and significantly increasing our research
and development expenses as a result of products under development. We incurred
net losses of $3.6 million, $7.5 million, $13.9 million and $31.7 million in
1997, 1998, 1999 and the first half of 2000, respectively. We expect to continue
to incur net losses for the foreseeable future.
DUE TO OUR LIMITED OPERATING HISTORY, THE NEW AND RAPIDLY EVOLVING NATURE OF OUR
MARKET, OUR LARGE NUMBER OF FIXED EXPENSES, AND THE RISKS WE MAY ENCOUNTER, OUR
OPERATING RESULTS AND STOCK PRICE ARE LIKELY TO FLUCTUATE.
Our operating results have varied in the past and are likely to vary in the
future due to a variety of factors, including our limited operating history and
variations in the timing and size of orders from a discrete number of current
and potential customers, which makes it difficult for us to estimate trends in
demand. Because our operating expenses for personnel, new system development and
inventory continue to increase, we must continue to generate increased sales to
offset these increased expenses. We have limited ability to reduce expenses
quickly in response to any revenue shortfall. In response to anticipated long
lead times to obtain inventory and materials from our contract manufacturers and
suppliers, we have in the past and may continue to need to order in advance of
anticipated customer demand. Advance ordering has and may continue to result in
higher inventory levels. To sell this increasing inventory, we have depended on
and will continue to depend on an increase in customer demand. We do not know if
our revenues will grow rapidly enough to absorb these costs. Any significant
shortfall in customer demand would harm our quarterly and annual operating
results. Accordingly, it is difficult to predict the quarterly revenues that we
will recognize in any given period. It is possible that our revenues and
operating results may be below the expectations of securities analysts or
investors and if we fail to meet these expectations, the market price of our
stock will likely decrease. If our quarterly operating results decline, because
of these factors or the occurrence of any other risks discussed in this
prospectus, such fluctuation could cause the market price of our common stock to
decline. We do not believe that period-to-period comparisons of our revenues and
operating results are necessarily meaningful. You should not rely on the results
of any one quarter as an indication of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations."
7
<PAGE>
WE CURRENTLY SELL A LIMITED NUMBER OF SYSTEMS AND BECAUSE OUR MARKET IS SUBJECT
TO RAPID TECHNOLOGICAL CHANGE, THESE SYSTEMS MAY BECOME OBSOLETE AND WE MAY NOT
BE ABLE TO ENHANCE EXISTING SYSTEMS AND INTRODUCE NEW SYSTEMS THAT ACHIEVE
MARKET ACCEPTANCE IN A TIMELY AND COST-EFFECTIVE MANNER.
The market for broadband wireless access systems is characterized by
rapidly changing technology and evolving industry standards. If we fail to
introduce and achieve market acceptance of enhancements to our existing systems,
as well as new systems and products, in a timely manner that meets changing
customer requirements and evolving industry standards, or if we are forced to
liquidate or write-off obsolete inventory, our business, operating results and
financial condition will be materially harmed. In addition, our technology or
our systems may become obsolete upon the introduction of alternative
technologies by competitors. Our WAVENET ACCESS 2400, WAVENET ACCESS 2458,
WAVENET LINK, WAVENET TRANSPORT, and RAN SYSTEM and those systems that we resell
are the only systems we have shipped to our customers to date. Following our
acquisition of Multipoint we incurred a charge of approximately $1.2 million in
1999 for inventory obsolescence related to earlier legacy products acquired from
Multipoint. We may incur such charges in the future if our products or those of
companies we acquire become obsolete.
IF WE ARE UNABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT AND COMMERCIALIZATION OF
STARPORT IN A TIMELY AND COST-EFFECTIVE MANNER, OR IF THE SYSTEM FAILS TO
PERFORM TO CUSTOMER EXPECTATIONS, OUR BUSINESS WILL BE SUBSTANTIALLY HARMED.
If we fail to successfully commercialize STARPORT or if the development and
commercialization of STARPORT costs significantly more than we anticipate, our
prospects will be severely diminished. Moreover, if our STARPORT system does not
perform to customer expectations once we complete development, our business will
be substantially harmed. Our current broadband wireless access systems are not
designed for, or easily used in residential and small office/home office
markets, where we believe there is a potentially significant market opportunity
for broadband wireless access systems. Accordingly, we believe our future growth
is dependent on our successfully entering these markets and we are devoting
substantial amounts of money and internal resources to develop and commercialize
our STARPORT system for these markets. STARPORT is currently being field tested
and we have not yet sought orders for this product. Furthermore, the STARPORT
system represents a significant increase in design complexity and sophistication
of operation from our current products and our WAVENET ACCESS 3500 system.
Because our current products are not as complex as STARPORT, we may experience
design or manufacturing difficulties that could delay or prevent our development
or commercialization of the STARPORT system or enhancements to or based on that
system. We have in the past experienced, and may continue to experience, delays
in the development of STARPORT. See "--If we are unable to successfully retain,
allocate and motivate our STARPORT engineering team, our business and growth
opportunities will be substantially harmed," "--If the development of our
STARPORT system is materially delayed, we may lose our exclusive license with
TRW to the STARPORT technology and our business and growth opportunities will be
substantially harmed," "Business--Strategic Relationship with TRW" and "Certain
Transactions--Strategic Relationship with TRW."
IF WE ARE UNABLE TO SUCCESSFULLY RETAIN, ALLOCATE AND MOTIVATE OUR STARPORT
ENGINEERING TEAM, OUR BUSINESS AND GROWTH OPPORTUNITIES WILL BE SUBSTANTIALLY
HARMED.
Our STARPORT system is being developed under an agreement with TRW that
requires TRW to provide most of the engineering personnel necessary for its
completion. To complete the development and commercialization of STARPORT, TRW
must maintain a significant staff of qualified engineers. There is intense
competition for qualified engineers in our industry and if TRW loses the
engineers currently developing STARPORT they may not be able to find suitable
replacements. In addition, our engineers may not have sufficient knowledge of
the STARPORT technology to effectively replace any lost TRW engineers.
Furthermore, although we manage the engineers provided by TRW for the
development of STARPORT, we do not have direct control over the allocation of
such engineers and since these engineers work for TRW, our ability to maintain
their motivation and focus on developing STARPORT is limited. If TRW does not
allocate their engineers in an efficient manner and effectively motivate them to
complete the development of STARPORT on a timely basis, our future growth will
be substantially harmed. See "--If we are unable to successfully complete
development and commercialization of STARPORT in a timely and cost-effective
manner, or if the system fails to perform to customer expectations, our business
will be substantially harmed," "--If the development of our STARPORT system is
materially delayed, we may lose our exclusive license with TRW to the STARPORT
technology and our business and growth opportunities will be substantially
harmed," "Business--Strategic Relationship with TRW" and "Certain
Transactions--Strategic Relationship with TRW."
8
<PAGE>
IF THE DEVELOPMENT OF OUR STARPORT SYSTEM IS MATERIALLY DELAYED, WE MAY LOSE OUR
EXCLUSIVE LICENSE WITH TRW TO THE STARPORT TECHNOLOGY AND OUR BUSINESS AND
GROWTH OPPORTUNITIES WILL BE SUBSTANTIALLY HARMED.
We obtained an exclusive license from TRW in January 2000 to use the
technology employed by our STARPORT system in base stations configured for
outdoor use. The STARPORT system is still under development and will require
significant resources to complete and commercialize. If the commercial release
of the STARPORT system is materially delayed and we do not offer a commercial
version of a product containing the STARPORT technology for sale by July 14,
2001, unless the delay is the fault of TRW or attributable to specified reasons,
we will lose our exclusivity with respect to the TRW license. We have in the
past experienced, and may continue to experience delays in the development of
STARPORT. If we were to lose our exclusive license to the STARPORT technology,
competitors could also utilize the technology and our business and growth
opportunities would be substantially harmed. See "--If we are unable to
successfully complete development and commercialization of STARPORT in a timely
and cost-effective manner, or if the system fails to perform to customer
expectations, our business will be substantially harmed," "If we are unable to
successfully retain, allocate and motivate our STARPORT engineering team, our
business and growth opportunities will be substantially harmed,"
"Business--Strategic Relationship with TRW" and "Certain Transactions--Strategic
Relationship with TRW."
IF EITHER OUR CURRENTLY AVAILABLE BROADBAND WIRELESS ACCESS SYSTEMS OR THOSE
UNDER DEVELOPMENT DO NOT FUNCTION WELL, OR DO NOT MEET CUSTOMER EXPECTATIONS, WE
COULD LOSE SALES OPPORTUNITIES, SUFFER INJURY TO OUR REPUTATION, OR EXPERIENCE
WARRANTY CLAIMS.
Our broadband wireless access systems, including those under development,
are extremely complex and once deployed may exhibit unanticipated operational
inconsistencies when used in varying networks and physical environments. Factors
that may cause such inconsistencies include:
o software design flaws;
o improper customer installation; and
o inclement weather
If any of our current or future broadband wireless access systems fail, or
do not function adequately for our customers' needs, we could experience:
o delays in, or losses of, sales opportunities;
o diversion of development resources;
o injury to our reputation; and
o increased service, warranty and replacement costs.
IF ANY OF OUR SYSTEMS FAIL TO COMPLY WITH INDUSTRY SPECIFICIATIONS OR ARE NOT
COMPATIBLE WITH OTHER PRODUCTS, WE COULD EXPERIENCE LOST SALES OPPORTUNITIES OR
DEVELOPMENT DELAYS WHICH WOULD SUBSTANTIALLY HARM OUR BUSINESS.
We design our current products and those under development to comply with
identified and known industry specifications for radio and networking
operations. Our products are sometimes used by our customers with products
manufactured by other companies, or with products that are not primarily
intended for use in broadband wireless applications. Our current and future
products may not be fully compatible, or may not remain operational when used in
conjunction with other products. Failure of our current systems, or planned
systems such as WAVENET ACCESS 3500 and STARPORT, to operate as expected could
delay or prevent their adoption.
IF WE ARE UNABLE TO EXPAND OR SUCCESSFULLY MANAGE OUR DOMESTIC DIRECT SALES
OPERATION AND OUR DOMESTIC DISTRIBUTION CHANNEL, OUR ABILITY TO INCREASE OUR
REVENUES WILL BE HARMED.
Historically, we have relied primarily on a small direct sales organization
and on a limited number of distributors to sell our systems domestically. We may
not be able to successfully expand our direct sales organization or to
successfully manage a significantly larger direct sales organization and the
expenses associated with an expanded sales organization may exceed the revenue
generated. As sales opportunities for wireless broadband access systems increase
in the United States, we anticipate that we will need to increase the size and
9
<PAGE>
scope of our domestic direct sales organization and distributor network in order
to capitalize on these opportunities. We will incur significant expenses to
hire, train and manage a large direct sales organization and distribution
network. There is intense competition for qualified personnel in our industry to
support direct sales organizations and distributor networks. To the extent that
we are successful in expanding our direct sales organization, we still may not
be able to compete successfully against the significantly larger, well-funded
sales and marketing operations of many of our current and potential competitors.
Moreover, direct sales organizations are more difficult to manage on a larger
scale due to increased staffing requirements, the number of field offices and
the increased level of internal support necessary for sales operations. In
addition, if we fail to develop relationships with significant distributors, or
if these distributors are not successful in their sales or marketing efforts,
sales of our systems may decrease and our business could be significantly
harmed.
WE DEPEND ON A LIMITED NUMBER OF THIRD-PARTY DISTRIBUTORS, RESELLERS AND OTHER
CHANNEL PARTNERS TO MARKET, SELL AND SUPPORT OUR SYSTEMS IN INTERNATIONAL
MARKETS, AND IF WE ARE UNABLE TO ATTRACT AND RETAIN THESE RELATIONSHIPS ON
REASONABLE TERMS OUR ABILITY TO GENERATE REVENUES FROM INTERNATIONAL SALES MAY
BE REDUCED.
We derive a substantial portion of our revenues from sales to customers in
international markets, where it is more cost effective for us to use third-party
distributors, resellers and other channel partners to market, sell and support
our systems. If we are unable to develop relationships with quality
distributors, resellers and channel partners because our competitors are already
using them, or are unable to maintain existing relationships on reasonable
terms, we will incur increased expenses selling our systems directly in the
affected countries. Additionally, if these parties are not successful in their
marketing, sales and support efforts, sales of our products would decrease. In
many of the countries in which we sell our systems there are a limited number of
quality third-party distributors, resellers and channel partners available. Many
of our competitors have significantly greater resources than us, and may have
already secured or may be able in the future to secure exclusive relationships
with those distributors, resellers and channel partners.
OUR BUSINESS MODEL DEPENDS UPON OBTAINING AND PROTECTING OUR INTELLECTUAL
PROPERTY, AND IF WE FAIL TO PROTECT OUR PROPRIETARY RIGHTS, OUR BUSINESS COULD
BE HARMED.
If we are not successful in protecting our intellectual property, our
business could be substantially harmed. Our ability to compete depends
substantially upon our internally developed technology, and, in particular, upon
our ability to obtain and preserve patent and other intellectual property rights
covering our systems and development and testing tools. Our efforts to obtain
and maintain patent, trade secret, copyright and other intellectual property
protection in connection with our products are likely to be expensive, may not
be effective and may have unpredictable consequences.
OUR PENDING PATENTS MAY NEVER BE ISSUED, AND EVEN IF ISSUED, MAY PROVIDE
US WITH LITTLE PROTECTION.
We regard the protection of patentable inventions as important to our
future opportunities, although we may not be able to receive patent protection
for all of our technology. We currently hold two U.S. patents and have two
patent applications pending before the U.S. Patent and Trademark Office relating
to our point-to-multipoint wireless networking technology. We also share
ownership of two patent applications pending before the U.S. Patent and
Trademark Office, obtained under a purchase and license agreement with TRW,
relating to our STARPORT point-to-multipoint wireless networking technology. In
addition, under our purchase and license agreement with TRW, we obtained rights
in technology in the field of wireless communications systems that may lead to
additional patent applications. However, a significant number of our sales are
made internationally and none of our technology is patented outside of the
United States nor do we currently have any international patent applications
pending. In addition, any of the following events could significantly harm our
business:
o patents may not be issued to us from our currently pending or future
applications;
o our existing patents or any new patents may not be sufficient in scope to
provide meaningful protection or any commercial advantage to us;
o an issued patent may be successfully challenged by one or more third
parties, resulting in our loss of the right to prevent others from
exploiting the inventions claimed in the patents;
o foreign intellectual property laws may not adequately protect our
intellectual property rights, if at all; and
10
<PAGE>
o others may independently develop similar or superior products, duplicate
our products or design around any patents issued to us.
TO PROTECT OUR PROPRIETARY RIGHTS, WE RELY UPON TRADEMARKS, COPYRIGHTS,
TRADE SECRETS AND CONFIDENTIALITY AGREEMENTS WHICH ARE ONLY OF LIMITED
VALUE.
We rely on a combination of laws, such as copyright, trademark and trade
secret laws, and contractual restrictions, such as confidentiality agreements
and licenses, to establish and protect our proprietary rights. However, our
proprietary rights may not be sufficient to protect our technology and if we
lose or are unable to obtain such protection our business would be substantially
harmed. The establishment of trade secrets, proprietary know-how and copyright
rights used in our business relies upon confidentiality and other provisions in
agreements with employees, consultants and other contracting parties. These
parties may not comply with the terms of their agreements with us and we may not
be able to adequately enforce our rights or, if enforceable, our remedies may be
inadequate. In contracts with our suppliers, customers and others, we usually
include indemnification provisions concerning intellectual property matters. Any
indemnification that we receive may not adequately compensate us and any
indemnification that we give may impose a significant liability on us that could
harm our business.
We currently have registered trademarks for the marks "WAVENET," and "RAN"
and applications pending before the U.S. Patent and Trademark Office for
additional marks, including "BROADBAND WITHOUT BOUNDARIES" and the Wireless
logo. We have also filed two applications for the mark "STARPORT," one covering
services and one covering goods we intend to offer under that mark. Our
application covering goods we intend to offer using the name "STARPORT" was
deemed abandoned by the U.S. Patent and Trademark Office in February 2000. We
filed a petition to revive this application in May 2000 and are awaiting
approval from the U.S. Patent and Trademark Office. If the petition for revival
is not granted or the application is subsequently denied, or if our other
pending applications are denied, we may have to adopt new marks for these
products in order to acquire federal registrations. It would be expensive and
time consuming to identify, protect and introduce new brands into the
marketplace and if we had to adopt new marks, our business and future growth
opportunities could be substantially harmed. None of our trademarks are
registered outside of the United States, nor do we have any trademark
applications pending outside of the United States. Moreover, despite any
precautions we have taken:
o laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technology or deter others from developing
similar technologies;
o other companies may claim common law trademark rights based upon state or
foreign law which precede our federal registration of such marks; and
o policing unauthorized use of our systems and trademarks is difficult,
expensive and time-consuming and, therefore, we are unable to determine
the extent to which piracy of our systems and trademarks may occur,
particularly overseas.
See "Business--Intellectual Property and Proprietary Rights."
WE MAY BECOME INVOLVED IN COSTLY AND TIME CONSUMING LITIGATION OVER PROPRIETARY
RIGHTS WHICH COULD DELAY OR PREVENT SALES OF OUR CURRENT AND FUTURE PRODUCTS.
Substantial litigation regarding intellectual property rights exists in our
industry. Intellectual property rights are uncertain and involve complex legal
and factual questions. Any litigation, brought by us or others, regardless of
the outcome, could result in the expenditure of significant financial resources
and the diversion of management's time and efforts. In addition, litigation in
which we are accused of infringement may cause product shipment delays, require
us to develop non-infringing technology or require us to enter into royalty or
license agreements even before the issue of infringement has been decided on the
merits. If any litigation were not to be resolved in our favor, we could become
subject to substantial damage claims and be enjoined from the continued use of
the technology at issue without a royalty or license agreement. These royalty or
license agreements, if required, might not be available on acceptable terms, or
at all, and could harm our business. If a successful claim of infringement were
made against us and we could not develop non-infringing technology or license
the infringing or similar technology on a timely and cost-effective basis, our
business could be significantly harmed.
We expect that software and hardware in our industry may be increasingly
subject to third-party infringement claims as the number of competitors grows
and the functionality of products in different industry segments overlaps.
11
<PAGE>
Third parties may currently have, or may eventually be issued, patents that
would be infringed by our products or technology. Any of these third parties
could make a claim of infringement against us with respect to our products and
technology.
In particular, our STARPORT system under development relies upon a
technology known as direct sequence spread spectrum technology, a technique that
combines signals to produce a signal significantly greater in bandwidth than the
original information signal with improved interference resistance. There are a
number of patents relating to this technology held by different companies which
may impact our STARPORT system. If our STARPORT system
infringes any of these patents and we are unable to negotiate a license, then we
may be required to redesign the STARPORT system or we may not be able to sell
it.
OUR RELIANCE ON INTERNATIONAL OPERATIONS EXPOSES US TO ADDITIONAL RISKS UNIQUE
TO THOSE MARKETS.
Our reliance on international operations exposes us to numerous risks,
which could harm our results of operations. Revenues from customers outside the
United States accounted for 87% and 83% of our total revenues for 1999 and for
the first half of 2000, respectively. During 1999 and the first half of 2000, a
significant portion of our revenues was derived from system sales to a limited
number of customers in Mexico and the Philippines. We anticipate that revenues
from customers outside the United States will continue to account for a
significant portion of our total revenues for the foreseeable future. Risks
which we have encountered in the past or are likely to encounter in the future
in our international operations include:
o changes in foreign communications standards, exchange
rates, trading policies, tariffs and other barriers, which can reduce our
revenue or ability to sell our products in the affected country or
region;
o longer customer payment cycles and greater difficulties in collecting
accounts receivable, which can reduce our cash flow, increase the costs
associated with collections, and cause us to write-off revenues if we are
unable to make such collections;
o the ability or willingness of foreign legal systems to enforce our
contractual rights with foreign customers, which can affect the
enforceability of agreements we enter into with these customers; and
o political and economic instability in volatile countries or regions
where we do, and hope to do, significant business, such as Poland,
Mexico, Russia, Latin America and Southeast Asia, which could disrupt
or force us to cease operations in the affected country or region.
WE DEPEND ON A LIMITED NUMBER OF CONTRACT MANUFACTURERS AND SOLE-SOURCE
SUPPLIERS. IF THESE MANUFACTURERS OR SUPPLIERS ARE UNABLE TO FILL OUR ORDERS ON
A TIMELY BASIS, WE MAY BE UNABLE TO DELIVER PRODUCTS TO MEET CUSTOMER ORDERS.
We depend on a limited number of contract manufacturers and sole-source
suppliers to manufacture our broadband wireless access systems. Our
manufacturers and suppliers have in the past and may in the future be unable or
unwilling to manufacture our products and supply necessary components in
required volumes to fulfill customers orders. In the event of a reduction or
interruption of supply or a degradation of quality of products or components we
would either need to delay or cancel the sale and delivery of the affected
systems or identify and train acceptable alternate manufacturers, which could
take as long as six months and could cause us to lose or delay the sales
opportunity. We operate on a purchase order basis and do not have long-term
supply contracts with our contract manufacturers. Our contract manufacturers may
terminate their contracts with us at any time. We manufacture only small
quantities of products at our own facilities. In addition, many of our key
components have long lead times, are purchased from sole-source vendors for
which alternate sources are not currently available, and are complex to
manufacture. It is possible that a sole-source supplier may not be available
when needed, and we may not be able to satisfy our production requirements at
acceptable prices and on a timely basis, if at all.
Our reliance on a limited group of contract manufacturers and sole-source
vendors involves several risks, including our dependence on them to obtain an
adequate supply of required components and systems and our reduced control over
the price, timely delivery, reliability and quality of such components and
systems. Any significant interruption in supply would affect the allocation of
our systems to customers, which in turn could cause us to lose customers and
harm our business.
12
<PAGE>
A MAJORITY OF OUR SALES ARE DERIVED FROM A RELATIVELY SMALL NUMBER OF CUSTOMERS
AND THE LOSS OF ANY SUCH CUSTOMER COULD SIGNIFICANTLY REDUCE OUR REVENUES.
We expect that for the foreseeable future the majority of our sales will be
to fewer than 20 customers and the loss of any large customer, without acquiring
a similar replacement customer, could significantly reduce our revenues.
Although our customers are geographically dispersed, a relatively small number
of them have accounted for more than half of our revenues. Three customers in
Mexico represented $4.4 million, or 36.8% of total revenues for the first half
of 2000, each representing in excess of 10% of revenues for the first half of
2000. In 1999, one customer, Celular de Telefonia, accounted for approximately
$3.0 million or 14.5% of our revenues. Although no other customer represented
over 10% of revenues in 1999, approximately 57.4% of our revenues were derived
from ten customers in 1999.
BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS WITH MOST OF OUR CUSTOMERS, THEY MAY
CEASE PURCHASING OUR SYSTEMS AT ANY TIME.
We do not have long-term contracts with the majority of our customers. As a
result, most of our agreements with our customers do not provide any assurance
of future sales. Our customers can stop purchasing our systems at any time
without penalty and are free to purchase systems from our competitors. Several
customers in the past have failed to make repeat purchases from us. Since we
depend on a limited number of customers, if our current customers were to cease
purchasing our systems and we were unable to replace these lost customers with
new ones, our business and operating results would be significantly harmed.
MANY NETWORKS THAT INCLUDE OUR SYSTEMS REQUIRE SYSTEM INTEGRATION EXPERTISE AND
THIRD-PARTY FINANCING, WHICH WE ARE UNABLE TO PROVIDE. IF SOURCES FOR SYSTEM
INTEGRATION OR FINANCING CANNOT BE OBTAINED AS NEEDED, OUR ABILITY TO GROW OUR
BUSINESS MAY BE LIMITED.
We have been unable in the past and could be unable in the future to
identify distributors and system integrators that are able to provide
integration services or financing to our customers on our behalf. When and if we
or our distributors are required to provide these services, we will be unable to
compete for the business of customers that require these additional services,
harming our business. Some customers using our systems purchase them as a part
of a larger network installation program that can require capital expenditures
in the hundreds of millions of dollars. In some circumstances, these customers
require their equipment vendors to integrate equipment into these larger
networks and to finance the installation. For example, in South America, we are
presently competing for business in an environment where our customers demand,
and our competitors routinely provide, systems integration and third-party
financing. Unless we are able to identify partners that can provide systems
integration and third-party financing, we may be unable to grow our business in
this market.
WE HAVE EXPANDED AND CONTINUE TO EXPAND OUR OPERATIONS WHICH STRAINS OUR
RESOURCES, AND IF NOT MANAGED EFFECTIVELY COULD SERIOUSLY HARM OUR BUSINESS AND
FINANCIAL CONDITION.
We have expanded our operations in recent years and we anticipate that
further expansion will be required to address potential growth in our customer
base and market opportunities. If we are unable to manage growth effectively,
our business, financial condition and results of operations could be harmed. Our
expansion has placed, and future expansion is expected to place, a significant
strain on our management, technical, operational, administrative and financial
resources. We have recently hired new employees, including a number of key
managerial and operations personnel, who have not yet been fully integrated into
our operations. Our current and planned expansion of personnel, systems,
procedures and controls may be inadequate to support our future operations. We
may be unable to manage further growth in our relationships with our
distributors and other third parties.
GOVERNMENT AGENCIES RETAIN BROAD AUTHORITY TO DESIGNATE THE PERMISSIBLE USES FOR
VARIOUS RADIO FREQUENCY ALLOCATIONS AND IF THE RADIO FREQUENCY ALLOCATION IN
WHICH OUR WAVENET ACCESS 3500 SYSTEM IS DESIGNED TO OPERATE IS REASSIGNED, OUR
BUSINESS WILL BE SUBSTANTIALLY HARMED.
Various governing bodies and regulatory agencies have the right to reassign
a radio frequency allocation to a different use if they deem that their current
use does not best meet public needs. If the 3.5 GHz frequency band were
reassigned to services other than broadband wireless access applications, our
business would be significantly harmed. We have expended significant resources
to design our WAVENET ACCESS 3500 system to operate in the
13
<PAGE>
3.5 GHz frequency band. This frequency band was reassigned for broadband
wireless access applications within the last five years and it could be
reassigned for another use in the future. In particular, if a significant market
for broadband wireless access applications operating in this frequency band does
not develop, or if another application is developed for this frequency,
governing agencies could reassign the 3.5 GHz frequency band for a use other
than broadband wireless access applications.
CONTROL BY OUR EXISTING STOCKHOLDERS COULD DISCOURAGE POTENTIAL ACQUISITIONS OF
OUR BUSINESS THAT OTHER STOCKHOLDERS MAY CONSIDER FAVORABLE.
Upon completion of this offering, our executive officers, directors and 5%
or greater stockholders and their affiliates will beneficially own 21,279,528
shares or approximately 51.6% of the outstanding shares of common stock. Acting
together, these stockholders would be able to control all matters requiring
approval by stockholders, which could have the effect of delaying or preventing
a change in our control or otherwise discouraging a potential acquirer from
attempting to obtain control of us. This in turn could harm the market price of
our common stock or prevent our stockholders from realizing a premium over the
market price for their shares of common stock.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DISCOURAGE POTENTIAL
ACQUISITIONS OF OUR BUSINESS BY THIRD PARTIES THAT STOCKHOLDERS MAY CONSIDER
FAVORABLE AND THIS MAY REDUCE THE PRICE OF OUR COMMON STOCK.
Some provisions of our certificate of incorporation and bylaws and of
Delaware law may discourage, delay or prevent a merger or acquisition that
stockholders may consider favorable. This may reduce the market price of our
common stock. A summary of these provisions is included in "Description of
Capital Stock--Anti-Takeover Effects of Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law."
OUR HEADQUARTERS AND MANY OF OUR CONTRACT MANUFACTURERS ARE LOCATED IN NORTHERN
CALIFORNIA WHERE NATURAL DISASTERS AND POWER OUTAGES MAY OCCUR AND WE DO NOT
HAVE REDUNDANT SITE CAPACITY IF A DISASTER OR POWER OUTAGE DISRUPTS OUR
OPERATIONS.
Currently, our corporate headquarters and many of our contract
manufacturers are located in Northern California. Northern California
historically has been vulnerable to natural disasters such as earthquakes, fires
and floods, which at times have disrupted the local economy and posed physical
risks to our and our manufacturers' property. We presently do not have redundant
site capacity in the event of a natural disaster. In addition, California has
increasingly experienced power shortages due to an inadequate electricity
infrastructure. If any of these events were to occur, our business would suffer.
WE MAY HAVE LIABILITY FOR OPTIONS WE GRANTED AND STOCK WE ISSUED IN VIOLATION OF
SECURITIES LAWS.
We granted stock options to various individuals between June 1997 and April
2000 under our 1997 stock option/stock issuance plan. A substantial portion of
the shares of our common stock that are subject to the grants were not qualified
or exempted under applicable state securities laws and therefore the options may
have been granted in violation of these laws. As a result, we may have potential
liability under state securities laws to the individuals and entities to whom
the options were granted or who purchase shares of our common stock upon the
exercise of those options. Any liability to the option holders will be in the
form of a rescission offer to them in which they will have the opportunity to
rescind their option grants in return for a cash payment from us based upon a
percentage of the exercise price payable under their options, and any liability
to individuals or entities who actually purchase shares under the options will
be in the form of an offer from us to repurchase those shares for a cash amount
equal to the exercise price paid for the shares, together with interest due to
both the option holders and the stock purchasers who accept the offers which is
to accrue from the date of the option grant and the date of the option exercise,
respectively. We are currently analyzing this matter and cannot, at this time,
ascertain the extent of our potential liability, if any. Nevertheless, the
exercise prices in effect for the options granted prior to this offering range
from $0.05 to $5.74 per share, and accordingly, we expect our maximum potential
liability associated with these option grants to be no more than $275,000 in the
aggregate.
14
<PAGE>
RISKS RELATING TO OUR INDUSTRY
THE WIRELESS ACCESS MARKET IS NEW AND RAPIDLY EVOLVING AND IF IT DOES NOT GROW
AS WE EXPECT OUR OPERATING RESULTS WILL BE SIGNIFICANTLY HARMED.
Our future operating results depend upon the continued growth and increased
availability and acceptance of advanced radio-based wireless communications
products and services in the United States and internationally. The markets for
these wireless communications products and services may not continue to grow. If
the market for our systems fails to grow, or grows more slowly than anticipated,
our revenue will also fail to grow, harming our results of operations. Because
these markets are relatively new, predicting which market segments will develop
and at what rate they will grow is difficult. We believe that any failure of the
market to grow as we expect could be caused or exacerbated by factors, some of
which are beyond our control, such as the introduction of wired broadband access
technology that is more cost-effective or better performing in comparison to
wireless broadband access technologies or a decline in use of the personal
computer rather than other devices, such as mobile phones, personal digital
assistants and television sets, as a means of accessing the Internet.
SOME OF OUR SYSTEMS HAVE LONG SALES CYCLES, WHICH WILL LIKELY CAUSE OUR RESULTS
OF OPERATIONS AND STOCK PRICE TO FLUCTUATE.
Some of our systems have sales cycles that are long and unpredictable.
Accordingly, our revenues will likely fluctuate from quarter to quarter and fail
to correspond with our expenses and as a result our operating results and stock
price will likely fluctuate. In addition, the delays inherent in our sales cycle
raise additional risks of customer decisions to cancel or change their product
plans. Our business could be harmed if a significant customer reduces or delays
orders or chooses not to install networks incorporating our systems. Our
customers typically perform numerous tests and extensively evaluate our systems
before incorporating them into networks. The time required for testing,
evaluation, design and integration of our systems into a customer's network
typically ranges from two to six weeks. If a customer decides to supply
commercial service using our systems, it can take an additional six to twelve
months before it can commence installation of our products. Some additional
factors that affect the length of our sales cycle include:
o acquisition of roof rights;
o installation and planning of network infrastructure;
o complexity of a given network;
o scope of a given project;
o availability of radio frequency; and
o regulatory issues.
SOME OF OUR COMPETITORS AND POTENTIAL COMPETITORS ARE LARGE, WELL CAPITALIZED
FIRMS WITH SIGNIFICANT RESOURCES AND INTENSE COMPETITION IN THE MARKET FOR
COMMUNICATIONS EQUIPMENT COULD PREVENT US FROM INCREASING OR SUSTAINING REVENUES
OR ACHIEVING OR SUSTAINING PROFITABILITY.
The market for high-speed, wireless, point-to-point and point-to-multipoint
communications equipment is rapidly evolving, highly competitive and requires
significant investments in product development and marketing. We may not have
sufficient resources to make these investments or we may not be able to make the
technological advances necessary to be competitive. As a result, we may not be
able to compete effectively against our competitors. 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 harm
our business. As a provider of high-speed wireless communications equipment, we
compete with a number of large, well capitalized communications equipment
suppliers in the point-to-multipoint market, including Adaptive Broadband
Corporation, BreezeCOM Ltd., Floware Wireless Systems Ltd., Lucent Technologies,
Inc and Netro Corporation, as well as with smaller start-up companies. We also
compete with communications equipment suppliers, such as BreezeCOM, Digital
Microwave Corporation, Lucent and P-Com, Inc., in the point-to-point market. In
addition, well-capitalized companies such as Cisco Systems Inc., Ericsson, Inc.,
Motorola, Inc., Nokia Corporation, QUALCOMM Corporation and Siemens AG are
potential entrants into either market. Our broadband wireless access technology
15
<PAGE>
also competes with wired solutions such as cable, DSL, fiber optic systems and
high-speed lines leased from communication service providers, such as T-1 lines.
Our larger competitors and potential competitors may have resources to
develop competing products that offer superior performance or lower prices to
ours, which may prevent us from competing in various markets. We expect our
competitors to continue to improve the performance of their current systems and
to introduce new systems or new technologies that may supplant or provide lower
cost alternatives to our systems. To be competitive, we must continue to invest
significant resources in research and development, sales and marketing and
customer support and we may not have sufficient resources to make these
investments. See "Business -- Competition."
WE EXPECT AVERAGE SELLING PRICES OF OUR BROADBAND WIRELESS ACCESS SYSTEMS TO
DECREASE WHICH WOULD REDUCE GROSS MARGINS OR REVENUES.
The market for broadband wireless access systems is characterized by
declining average selling prices resulting from factors such as increased
competition, the introduction of new products and systems and competitive
pressures from traditional wired broadband network access technologies. We
anticipate that average selling prices will continue to decrease in the future
in response to product and system introductions by competitors, or in response
to other factors, including pricing pressures from significant customers. For
example, one of our competitors offers products at lower prices than ours. While
we believe that our products have features that would command a higher price, to
win new business we have occasionally reduced our selling prices in response to
this competitor. Additionally, because lower prices are typically charged on
sales made through indirect channels, increased indirect sales could adversely
affect our average selling prices and result in lower gross margins. We must
continue to develop and introduce on a timely basis new systems that incorporate
features that can be sold at higher average selling prices or reduce the cost of
manufacturing our products to offset the cost of declining average selling
prices. Failure to do so would cause our revenues and gross margins to decline,
which would significantly harm our business.
WE MUST REDUCE OUR SYSTEM COSTS IN ORDER TO PRICE OUR SYSTEMS COMPETITIVELY.
We may be unable to reduce the cost of our systems sufficiently to enable
us to compete with others. In order to win new business, we are often required
to price our product at prices close to our current cost. In order for us to
derive profits from this strategy in the future, we must reduce our
manufacturing costs to increase our profit margin. Nevertheless, our cost
reduction efforts may not allow us to keep pace with competitive pricing
pressures or lead to improved gross margins. In order to be competitive, we must
continually reduce the cost of manufacturing our systems through design and
engineering changes. We may not be successful in redesigning our systems or
delivering our systems to market in a timely manner. Any redesign may not yield
sufficient cost reductions to allow us to reduce the price of our systems to be
competitive or improve our gross margin. We must also increase our sales volume
in order to take advantage of economies of scale. We may be unable to achieve
the necessary level of sales volume to achieve cost reduction.
A MAJORITY OF SERVICE PROVIDERS THAT USE WIRELESS TECHNOLOGIES SUCH AS OURS ARE
EMERGING COMPANIES WITH UNPROVEN BUSINESS MODELS, AND IF THEY DO NOT REMAIN IN
BUSINESS OR DO NOT GENERATE SUFFICIENT REVENUES, THEY WILL NOT BE ABLE TO
PURCHASE OUR PRODUCTS AND OUR BUSINESS WOULD BE HARMED.
Many of our customers are emerging wireless service providers with a
limited degree of success in the broadband wireless access industry. These
service providers may therefore become under-capitalized and may not be able to
remain in business for a substantial period of time. The broadband wireless
access market is intensely competitive, and the service providers typically are
forced to reduce the monthly access charges they impose upon their subscribers
in order to attract and retain additional subscribers. The reduction in monthly
access charges reduces the amount of capital available for service providers to
invest in additional wireless infrastructure. The failure or loss of these
service providers as customers would significantly harm our business.
SYSTEMS WE DESIGN FOR SALE IN THE UNITED STATES MUST COMPLY WITH THE REGULATORY
REQUIREMENTS OF THE FEDERAL COMMUNICATIONS COMMISSION AND ANY FAILURE TO COMPLY
WITH SUCH REGULATIONS COULD PREVENT SALES IN THE UNITED STATES AND HARM OUR
BUSINESS.
Our systems that are sold for use in the United States are subject to the
rules and regulations of the Federal Communications Commission, or FCC, which
determines the rules, regulations and procedures under which radio
16
<PAGE>
transmission products sold in the United States must be certified. If we fail or
are unable to comply with the rules and regulations of the FCC, we would be
unable to sell and install the non-complying systems in the United States and
our business could be harmed.
The FCC is also responsible for establishing which frequency bands can be
allocated for use by systems that are intended to provide broadband wireless
access and networking systems. In the United States, operation of unlicensed
radio communications equipment is subject to the conditions that no harmful
interference is caused to authorized users of the band, and that interference,
including interference that may cause undesired operation, must be accepted from
all other users of the band. This includes other unlicensed operators,
authorized operators such as amateur licensees, industrial, scientific and
medical equipment, and U.S. Government operations. Unlicensed operators that
cause harmful interference to authorized users, or that exceed permitted radio
frequency emission levels, may be required to cease operations until the
condition causing the harmful interference or excessive emissions has been
corrected. If any of our systems interfere with these authorized operators, or
if any authorized operators cause interference resulting in undesired operation,
we may be prevented from operating these systems or we may need to redesign our
systems at significant expense and our business may be harmed.
It is technically difficult, expensive and time consuming to design systems
that comply with all required rules, regulations and frequency requirements,
particularly when the requirements differ from those in other countries where we
sell our products or when a change in regulatory requirements forces us to
redesign an existing system. Although in the past our systems have not been
affected by FCC rule changes, the FCC has changed its requirements for other
types of communications equipment, requiring equipment providers to change their
equipment in order to comply with the revised rules. If the FCC were in the
future to change the regulatory requirements for frequencies our systems employ,
we may be unable to cost-effectively design or redesign our systems to meet all
the necessary requirements and as a result we may be unable to sell and obtain
revenue from these systems. See "Business--Government Regulation."
SYSTEMS WE DESIGN FOR SALE OUTSIDE THE UNITED STATES MUST COMPLY WITH THE
REGULATORY REQUIREMENTS OF THE HOST COUNTRY AND ANY FAILURE TO COMPLY WITH SUCH
REGULATIONS COULD PREVENT SALES IN SUCH COUNTRY AND HARM OUR BUSINESS.
Outside of the United States, our products are subject to the rules and
regulations as set forth by the governing bodies for radio transmission and
telecommunications of the host country. Failure to meet a host country's rules
and regulations would prevent us from marketing or selling our products in that
country. In most cases, the rules and regulations differ substantially between
countries, and radio design is therefore significantly affected. We do not
presently have radio technology that meets the local rules and regulations for
all countries. If significant market opportunities were to develop in countries
where our products do not meet the local rules and regulations, we would lose
sales opportunities in those countries until such time as we could meet the
local rules and regulations. We may not be able to redesign our systems to meet
all local rules and regulations or such redesigns may cause us to incur
significant expenses and our business could be harmed. It is technically
difficult, expensive and time consuming to design systems that comply with all
required rules, regulations and frequency requirements, particularly when such
requirements differ from those in other countries where we sell our products or
when a change in regulatory requirements forces us to redesign an existing
system. For example, we have been delayed in marketing and selling one of our
products to countries in Western Europe as a direct result of not having
received certification from relevant governing bodies. We may in the future be
unable to cost-effectively design or redesign our systems to meet all the
necessary requirements and as a result may be unable to sell and obtain revenue
from such systems. See "Business--Government Regulation."
THERE MAY BE POTENTIAL HEALTH AND SAFETY RISKS RELATED TO OUR BROADBAND WIRELESS
ACCESS SYSTEMS WHICH COULD NEGATIVELY AFFECT SALES.
There has been recent public concern regarding the potential health and
safety risks of electromagnetic emissions. Our broadband wireless access systems
intentionally emit electromagnetic radiation. If safety or health issues do
arise, our system sales could decline or cease or we may be required to modify
our technology, which could be expensive and time consuming, if possible at all.
Even if safety concerns ultimately prove to be without merit, negative publicity
could materially harm our ability to market our systems. In addition, we may be
subject to litigation, with or without basis in fact, alleging that we are
responsible for injuries or illnesses relating to this radiation. If this
litigation were not resolved in our favor, our results of operation could be
materially harmed.
17
<PAGE>
Moreover, even if the litigation were resolved in our favor, the costs of
litigating or of settlement could be significant.
BECAUSE OF INTENSE COMPETITION, WE MAY NOT BE ABLE TO RECRUIT OR RETAIN
QUALIFIED PERSONNEL NECESSARY TO DEVELOP OUR PRODUCTS AND ACCOMPLISH OUR
BUSINESS OBJECTIVES.
Our growth in operations has placed significant demands on our management,
engineering staff and facilities and could harm our ability to develop systems
on a timely basis. We may not be able to attract and retain the necessary
qualified personnel to accomplish our business objectives and we may experience
constraints that could harm our ability to satisfy customer demand in a timely
fashion or to support our customers and operations. Continued growth will
require us to hire more engineering, manufacturing, sales and administrative
personnel. We have at times experienced, and continue to experience, difficulty
in recruiting and retaining qualified personnel. Recruiting qualified personnel
is an intensely competitive and time-consuming process. We will need to train
new sales and marketing personnel before they achieve full productivity. In
addition, recently hired employees may not successfully integrate into our
management team. The inability to attract and retain qualified personnel or to
assimilate them into our business could significantly harm our business.
WE MAY BE HARMED BY DELAYED YEAR 2000 PROBLEMS.
Although the date is now past January 1, 2000, and we have not experienced
immediate harm from the transition to the year 2000, it is possible that we or
our suppliers and customers have been affected in a manner that is not yet
apparent. In addition, some computer programs that were date sensitive to the
year 2000 may not have been programmed to process the year 2000 as a leap year,
and any negative consequential effects remain unknown. In particular, we are
subject to:
o 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;
o business shutdowns or slowdowns as a result of a failure of the internal
management systems we use to run our business, which could disrupt our
business operations;
o interruption of system or component supplies, or a reduction in
product quality, as a result of the failure of systems used by our
suppliers; and
o reductions or deferrals in sales activities as a result of year 2000
compliance issues of our distributors and system integrators.
As a result, we will continue to monitor our year 2000 compliance and the year
2000 compliance of our suppliers and customers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
RISKS RELATING TO THIS OFFERING
MARKET VOLATILITY AMONG TECHNOLOGY STOCKS OR THE OCCURRENCE OF ANY OF THE RISKS
DISCUSSED IN THIS PROSPECTUS ARE LIKELY TO SUBJECT OUR STOCK TO SUBSTANTIAL
PRICE AND VOLUME FLUCTUATIONS.
Stock prices and trading volumes for many technology companies fluctuate
widely for a number of reasons, including some reasons which may be unrelated to
their businesses or results of operations. In addition, the Nasdaq stock market,
on which our common stock will be traded, has recently experienced extreme
volatility. This market volatility, could materially adversely affect the price
of our common stock without regard to our operating performance. For example,
the market prices of our publicly traded competitors have recently been affected
by earnings releases of other companies in our industry who are not their direct
competitors. Market volatility or the occurrence of other risks discussed in
this prospectus would likely cause the market price of our common stock to
significantly decrease.
18
<PAGE>
THE LIQUIDITY OF OUR COMMON STOCK IS UNCERTAIN SINCE IT HAS NOT BEEN PUBLICLY
TRADED AND MAY HAVE A LIMITED MARKET, AND THE INITIAL OFFERING PRICE NEGOTIATED
BY US AND THE UNDERWRITERS MAY NOT ACCURATELY REFLECT MARKET DEMAND.
Active trading markets generally result in lower price volatility and more
efficient execution of buy and sell orders for investors. There has not been a
public market for our common stock and we cannot predict the extent to which
investor interest in us will lead to the development of an active, liquid
trading market. In this offering, we intend to sell our common stock primarily
to a limited number of institutional investors, which could limit the
development of an active trading market. In addition, the initial public
offering price will be determined by negotiations between us and the
representatives of the underwriters and may bear no relationship to the price at
which our common stock will trade upon completion of this offering. You may not
be able to resell our common stock at or above the initial offering price.
Fluctuations or decreases in the market price may also harm our ability to raise
capital in the future. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.
SUBSTANTIAL NUMBERS OF SHARES OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR SALE
IN THE PUBLIC MARKET SIMULTANEOUSLY, WHICH COULD CAUSE THE MARKET PRICE OF OUR
STOCK TO DECLINE.
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available for
sale, could cause the market price of our common stock to decline. In addition
to the adverse effect a price decline could have on holders of common stock,
that decline would likely impede our ability to raise capital through the
issuance of additional shares of common stock or other equity securities. See
"Shares Available for Future Sale."
After this offering, if specific conditions are met, the holders of a
substantial number of shares of common stock and the holders of warrants to
purchase shares of common stock will be entitled to require us to register their
shares under the Securities Act. These shareholders and holders of additional
warrants also have the right to participate in any registration of our shares
which we undertake on our own. If these shareholders exercise their registration
rights, a large number of our shares may be registered and sold in the public
market. This could adversely affect the trading price for our shares. If we
attempted to raise money through a registration and sale of our stock and these
shareholders forced us to allow them to participate in the registration, our
ability to raise the amount of money we need to execute our business plan could
be adversely affected. See "Description of Capital Stock--Registration Rights."
YOU WILL NOT HAVE CONTROL OVER MANAGEMENT'S USE OF THE PROCEEDS FROM THIS
OFFERING AND THE PROCEEDS MAY NOT BE APPROPRIATELY USED.
$2.5 million of the proceeds will be paid to TRW in connection with the
license of the STARPORT technology. In addition, $8.5 million of the proceeds
will be paid to TRW in connection with accrued development costs through June
30, 2000 related to the STARPORT product and up to $15.0 million of the proceeds
will be paid to TRW in connection with future development costs related to
STARPORT. We expect to use the remaining proceeds from the offering to fund cash
flow deficits from anticipated increases in expenses and capital expenditures,
product development expenditures unrelated to STARPORT and other working capital
requirements. We may also use a portion of the remaining proceeds to invest in
complementary businesses or products or to obtain the right to use complementary
technologies. However, we will have broad discretion in how we use the proceeds
from the offering that will not be paid to TRW, and we may ultimately decide to
use these proceeds for purposes other than working capital, product development,
capital expenditures or investments and we may not use these proceeds for any of
these purposes. 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 of this offering or to approve these decisions. If our management uses
poor judgment in spending our proceeds or if the proceeds are not used
effectively, our business will be harmed.
19
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which involve risks
and uncertainties. These forward-looking statements are not historical facts but
rather are based on current expectations, estimates and projections about our
industry, our beliefs and assumptions. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and variations
of these words and similar expressions to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to
risks, uncertainties and other factors, some of which are beyond our control,
are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. These
risks and uncertainties include those described in "Risk Factors" and elsewhere
in this prospectus.
20
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale and issuance of the 8,500,000 shares of
common stock offered are estimated to be $68.6 million at an assumed initial
public offering price of $9.00 per share after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, our estimated net proceeds will be
$80.0 million. We are conducting this offering primarily to increase our equity
capital, to create a public market for our common stock and to facilitate our
future access to public equity markets. $2.5 million of the net proceeds will be
paid to TRW, Inc. upon completion of this offering in connection with our
license of the STARPORT technology. In addition, $8.5 million of the net
proceeds will be paid to TRW upon completion of this offering in connection with
accrued development costs incurred through June 30, 2000 associated with the
STARPORT product and up to an additional $15.0 million of the net proceeds will
be paid to TRW in connection with future development costs related to STARPORT.
We intend to use the remainder of the net proceeds for general corporate
purposes, including funding cash flow deficits from anticipated increases in
expenses and capital expenditures, product development expenditures unrelated to
STARPORT and other working capital requirements. We may also use a portion of
the remaining net proceeds to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. We currently
have no agreements or commitments with respect to any acquisition or investment.
Pending these uses, we will invest the net proceeds of the offering in
short-term, interest-bearing investment-grade securities. See "Risk Factors--You
will not have control over management's use of the proceeds from this offering
and the proceeds may not be appropriately used" and "Certain
Transactions--Strategic Relationship with TRW."
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock. We intend to
retain any future earnings to finance the operation and expansion of our
business and do not anticipate declaring or paying cash dividends in the
foreseeable future. Payments of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion. In addition, our loan agreement with Silicon
Valley Bank prohibits the payment or declaration of dividends without its prior
written consent. Consequently, stockholders will need to sell shares of common
stock in order to realize a return on their investment, if any.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 on
the following three bases:
o on an actual basis;
o on a pro forma basis to give effect to:
o the conversion of all outstanding shares of preferred stock
into common stock; and
o the exercise of outstanding warrants to purchase 150,000 shares
of common stock at a weighted-average exercise price of $3.00
per share, which by their terms expire or automatically convert
within 30 days of the completion of this offering.
o on a pro forma, as adjusted basis to give effect to the sale of
8,500,000 shares of common stock by us at an assumed initial public
offering price of $9.00 per share after deducting estimated
underwriting discounts and commissions and estimated offering
expenses.
You should read this table in conjunction with our financial statements and
the notes to our financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
Capital lease obligations, less current portion..................... $ 239 $ 239 $ 239
Stockholders' equity:
Convertible Preferred Stock, issuable in series, $0.001 par value
per share, 25,000,000 shares authorized actual and pro forma;
5,000,000 shares, $0.001 par value per share, authorized pro
forma, as adjusted; 20,277,898, no shares and no shares issued
and outstanding actual, pro forma and pro forma as adjusted,
respectively..................................................... 37,297 -- --
Common Stock, 50,000,000 shares, $0.001 par value per share,
authorized, actual; 100,000,000 shares, $0.001 par value per
share, authorized, pro forma and pro forma, as adjusted;
12,071,838 shares, issued and outstanding actual; 32,736,665
shares, issued and outstanding pro forma; 41,236,665 shares,
issued and outstanding pro forma, as adjusted.................. 12 33 41
Additional paid-in-capital.......................................... 36,547 74,273 142,860
Note receivable from stockholder.................................... (169) (169) (169)
Deferred stock-based compensation................................... (4,852) (4,852) (4,852)
Accumulated deficit................................................. (56,672) (56,672) (56,672)
------------ ------------- --------------
Total stockholders' equity..................................... 12,163 12,613 81,208
------------ ------------- --------------
Total capitalization........................................... $ 12,402 $ 12,852 $ 81,447
============ ============= ==============
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 2000, and excludes:
o 2,241,878 shares of common stock issuable upon exercise of stock
options outstanding as of June 30, 2000 at a weighted average exercise
price of $3.33 per share;
o 452,622 shares of common stock issuable upon the exercise of
outstanding warrants as of June 30, 2000 at a weighted average
exercise price of $1.18 per share;
o 330,576 shares of common stock issuable upon conversion of an
outstanding $1 million convertible promissory note, as of June 30,
2000;
o 8,750,000 shares of common stock reserved for issuance under our 2000
stock incentive plan that incorporates our 1997 stock option plan; and
o 250,000 shares of common stock reserved for issuance under our 2000
employee stock purchase plan.
For additional information regarding these shares, see "Executive Compensation
and Other Information--Employee Benefit Plans," "Description of Capital Stock"
and Note 6 of Notes to Financial Statements.
22
<PAGE>
DILUTION
Dilution is the amount by which the initial public offering price paid by
the purchasers of shares of common stock in the offering exceeds the net
tangible book value per share of common stock after the offering. The pro forma
net tangible book value per share of common stock is determined by subtracting
our total liabilities from the total book value of our tangible assets and
dividing the difference by the number of shares of common stock deemed to be
outstanding on the date of which such book value is determined.
Our pro forma net tangible book value at June 30, 2000, was approximately
$(1.6) million, or $(0.05) per share. After giving effect to the conversion of
all outstanding shares of preferred stock into common stock and the sale of the
shares of common stock offered by us at the assumed initial public offering
price of $9.00 per share, and after deducting underwriting discounts and
estimated offering expense, our pro forma net tangible book value at June 30,
2000, would have been $67.0 million, or $1.63 per share. This represents an
immediate increase in net tangible book value of $1.68 per share to existing
stockholders and an immediate dilution of $7.37 per share to new investors
purchasing shares of our common stock in this offering. The following table
illustrates this dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share............................................ $9.00
Pro forma net tangible book value per share at June 30, 2000............................ $(0.05)
Pro forma increase per share attributable to new investors.............................. 1.68
---------
Pro forma net tangible book value per share after the offering............................. 1.63
--------
Pro forma dilution per share to new investors.............................................. $7.37
========
</TABLE>
The following table summarizes, at June 30, 2000, on a pro forma basis,
the total number of shares and consideration paid to us and the average price
per share paid by existing stockholders and by new investors purchasing shares
of common stock in this offering at an assumed initial public offering price of
$9.00 per share before deducting the estimated underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- --------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 32,736,665 79.39% $ 60,477,991 44.15% $ 1.85
New investors............................... 8,500,000 20.61 76,500,000 55.85 9.00
------------- --------- --------------- --------- -------------
Total.................................... 41,236,665 100.0% $ 136,977,991 100.0%
============= ========= =============== =========
</TABLE>
The above computations are based on the number of shares of common stock
outstanding as of June 30, 2000 and exclude:
o 2,241,878 shares of common stock issuable upon exercise of stock
options outstanding as of June 30, 2000 at a weighted average exercise
price of $3.33 per share;
o 452,622 shares of common stock issuable upon the exercise of
outstanding warrants as of June 30, 2000 at a weighted average
exercise price of $1.18 per share;
o 330,576 shares of common stock issuable upon conversion of an
outstanding $1 million convertible promissory note, as of June 30,
2000;
o 8,750,000 shares of common stock reserved for issuance under our 2000
stock incentive plan that incorporates our 1997 stock option plan; and
o 250,000 shares of common stock reserved for issuance under our 2000
employee stock purchase plan.
To the extent that any of these options or warrants are exercised, there
could be further dilution to new investors. For additional information regarding
these shares, see "Capitalization," "Executive Compensation and Other
Information--Employee Benefit Plans," "Description of Capital Stock" and Note 6
of Notes to Financial Statements.
23
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
You should read the following selected financial data in conjunction with
our financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for the period from May 7,
1997 (inception) to December 31, 1997 and the years ended December 31, 1998 and
1999, and the balance sheet data as of December 31, 1998 and 1999, are derived
from the audited financial statements of Wireless, Inc. included elsewhere in
this prospectus. The statement of operations data for the six months ended June
30, 1999 and 2000 and the balance sheet data as of June 30, 2000 are unaudited.
See Note 1 of Notes to Financial Statements for a detailed explanation of the
determination of the shares used to compute actual and pro forma basic and
diluted net loss per share. The historical results are not necessarily
indicative of results to be expected for future periods.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1997
(INCEPTION),
TO YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------- -----------------------------
1997 1998 1999 1999 2000
-------------- ----------- ------------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................. $ 201 $ 11,172 $ 20,329 $ 9,505 $ 11,851
Cost of revenue......................... 421 9,091 15,357 6,454 9,613
-------------- ----------- ------------- ------------ ---------------
Gross profit (loss).............. (220) 2,081 4,972 3,052 2,238
-------------- ----------- ------------- ------------ ---------------
Operating expenses
Research and development............. 708 2,324 3,221 1,492 15,864
Sales and marketing.................. 902 3,811 7,443 3,080 4,326
General and administrative........... 258 1,316 2,689 514 2,014
In-process research and development
costs acquired..................... -- 817 -- -- 7,600
Amortization of intangibles.......... -- 359 1,102 497 1,655
Impairment of an intangible asset.... 1,500 -- -- -- --
Amortization of deferred stock
compensation*...................... 69 640 3,956 743 2,477
-------------- ----------- ------------- ------------ ---------------
Total operating expenses......... 3,438 9,267 18,411 6,326 33,937
-------------- ----------- ------------- ------------ ---------------
Operating loss.......................... (3,658) (7,186) (13,439) (3,275) (31,699)
Interest expense (income), net.......... (14) 290 427 222 (13)
-------------- ----------- ------------- ------------ ---------------
Net loss......................... $ (3,644) $ (7,476) $ (13,866) $ (3,497) $ (31,686)
============== =========== ============= ============ ===============
Net loss per share:
Basic and diluted.................... (**) $ (6.02) $ (4.18) $ (1.07) $ (3.33)
=========== ============= ============ ===============
Weighted average number of shares
used in computation................ 1,242,617 3,316,344 3,269,763 9,513,156
Pro forma net loss per share (unaudited):
Pro forma basic and diluted loss..... $ (0.85) $ (1.06)
============= ===============
Weighted average number of shares
used in computation................ 16,334,797 29,996,681
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, JUNE 30,
------------------------ -----------
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................................ $ 358 $ 1,140 $ 4,289
Working capital.......................................................... (4,174) 4,566 (3,931)
Total assets............................................................. 13,215 16,685 31,976
Capital lease obligations, less current portion.......................... 84 239 239
Total stockholders' equity............................................... 662 8,882 12,163
--------------
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------- ------------------------
1997 1998 1999 1999 2000
-------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(*) Amortization of deferred compensation:
Cost of revenue................................. $ 13 $ 48 $ 253 $ 100 $ 188
Research and development........................ 14 120 1,517 197 941
Sales and marketing............................. 19 81 513 150 384
General and administrative...................... 23 391 1,673 296 964
-------- --------- -------- ----------- -----------
Total $ 69 $ 640 $3,956 $ 743 $ 2,477
======== ========= ======== =========== ===========
</TABLE>
--------------
(**) net loss per share is not presented in the period from May 7, 1997
(inception) to December 31, 1997 as all common shares as of December 31,
1997 were unvested and subject to repurchase and, accordingly, are not
considered outstanding for the computations of net loss per share.
The pro forma financial data presented above reflects:
o the conversion of all outstanding shares of preferred stock into
common stock; and
o the exercise of outstanding warrants to purchase 150,000 shares of
common stock at a weighted-average exercise price of $3.00 per share,
which by their terms expire or automatically convert upon the
completion of this offering.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE
RELATED NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a provider of high-speed, or broadband, wireless access systems that
enable international and domestic Internet and communications service providers,
telephone operating companies and private network operators to deliver voice and
high-speed data services to their customers. Our systems are designed as an
alternative to fiber optic, copper-based or cable-based communication
transmission methods and allow a service provider to rapidly deliver high-speed
Internet access in a service area. In addition, our wireless systems transport
voice and high-speed data traffic within a service provider's network.
We offer two categories of wireless systems, point-to-point and
point-to-multipoint. A point-to-point wireless system connects two locations,
using two identical pieces of equipment. Each piece of equipment is first
connected to an end-user's or service provider's network by a cable and a
connector and then connected by an antenna cable to an antenna that is usually
mounted on a rooftop or tower. The two antennas are then aimed at one another to
create a wireless connection. A point-to-multipoint wireless system connects
multiple facilities within a geographic location to a central hub. Our systems
are available in a broad range of frequency assignments, enabling us to address
the different regulatory requirements of multiple geographic markets.
Each of our systems allows end-users to transmit voice and data
simultaneously via Internet protocol, or IP, or asynchronous transfer mode, or
ATM, architectures, two leading industry standards for communication
transport. Our broadband wireless access solutions address a wide range of
customer requirements in different markets, including:
o enabling Internet service providers to offer direct Internet access;
o rapidly installing new networks for communication service providers;
o supplementing telephone operating companies' existing wired networks;
o establishing communication networks in regions without existing
infrastructures; and
o establishing private corporate networks.
We were incorporated in California on May 7, 1997 to develop advanced
wireless access communications systems for networking and telephony
interconnection solutions. In 1997, under a master distributor agreement with
Innova Corporation, later acquired by Digital Microwave Corporation, we
introduced the ADR series, a family of high capacity digital radios. All of our
1997 revenues and approximately 54% of our 1998 revenues and 26% of our 1999
revenues were derived from this distributor agreement. We subsequently renamed
the ADR series as the WAVENET TRANSPORT DX.
In 1998, we released our ACCESS series of point-to-point digital radios
under a license and technology transfer and manufacturing agreement with Wi-LAN,
Inc. We also introduced the N2-ACCESS series, a point-to-point digital radio to
offer a smaller, cost-competitive package for cellular and personal
communication services, or PCS, networks. We subsequently renamed the N2-ACCESS
series as the WAVENET LINK series.
On August 26, 1998 we acquired Multipoint Networks, Inc., a California
corporation. The acquisition was accounted for by the purchase method and is
included in our operating results from the date of acquisition forward.
Multipoint developed, manufactured and marketed point-to-point and
point-to-multipoint digital wireless radios for customers connecting lottery
terminals, bank automated teller machines, and point-of-service networks. Just
prior to the acquisition, Multipoint designed the WAVENET IP 2400. Initial
shipments of the WAVENET IP 2400 were made in early 1998. In May 1999, we
introduced the WAVENET IP 2458. We subsequently renamed the WAVENET IP series as
the WAVENET ACCESS series.
We market our products through our direct sales force, complemented by
indirect sales channels consisting of agents, distributors, resellers, system
integrators and value-added resellers. Sales to markets outside the United
26
<PAGE>
States were $9.8 million, or 83% of total sales for the first half of 2000,
$17.7 million, or 87% of total sales for 1999, and $10.2 million, or 91% of
total sales for 1998. All of our international sales are denominated in U.S.
dollars. We expect our sales to international customers to grow in absolute
dollars, however, we expect the percentage of international revenue to total
revenue to decline gradually over the foreseeable future as product sales in the
United States increase. We expect that international revenues, however, will
likely continue to make up the majority of our revenues.
REVENUE. Revenue consists of product and service revenue. Product revenue
is recognized when all of the following occur:
o the product has been shipped;
o title and risk of loss have passed to the customer;
o we have the right to invoice the customer and collection of the
receivable is probable; and
o all pre-sales obligations have been fulfilled.
We classify our product revenue into four categories: WAVENET ACCESS,
WAVENET LINK, WAVENET TRANSPORT and legacy products. WAVENET ACCESS consists of
WAVENET ACCESS 3500, 2458 AND 2400 products. WAVENET LINK consist of WAVENET
LINK EX and 4X products. WAVENET TRANSPORT consist of WAVENET TRANSPORT DX and
MX products. Our legacy products in all periods presented consist of low data
rate capacity network products called the RAN series which were developed by
Multipoint or sold to us by third party developers for resale to our customers.
Service revenue is comprised principally of installation and system design
services and have not been material to date. Trial sales, reflecting sales of
demonstration equipment to customers, are made directly to the end users and are
not recognized as revenue until the trial has been completed and the product has
been accepted by the customer. Our product sales and services to date have
generally not been recurring, however, once a service provider purchases our
products we believe they are likely to buy additional products from us as they
expand their networks.
COST OF REVENUE. Cost of revenue consists of materials, manufacturing labor
and overhead, outsourced contract manufacturing costs and cost of acquiring
finished products from original equipment manufacturers.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and related personnel expenses, contract engineering
services, consulting fees, software development tools, and prototype expenses
related to the design, development, testing and enhancement of our products. All
research and development costs are expensed as incurred until technological
feasibility of the product is established. After technological feasibility is
established, material development costs are capitalized. To date, the period
between technological feasibility and general release of the product has been
short and development costs have been insignificant. Accordingly, we have
expensed all development costs. We expect these expenses to continue in the
future as we seek to develop new products and enhance existing products. A
significant portion of the increase in research and development expenses is
expected to result from the contracting of independent third party research and
development vendors in connection with the development of our STARPORT system.
See "Certain Transactions--Strategic Relationship with TRW."
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and related personnel expenses of our sales agents and
direct sales force. In addition, sales and marketing expenses consist of travel,
trade show, advertising, promotional and public relations expenses. Also
included are costs related to testing and certifying our products to meet
regulatory requirements in various foreign countries. We intend to pursue sales
and marketing campaigns aggressively and therefore expect these expenses to
increase in the future.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related personnel expenses for executive, accounting
and administrative personnel, as well as accounting and legal fees and other
general corporate expenses. As we add personnel and incur additional costs
related to the growth of our business and operating as a public company, we
expect that general and administrative expenses will also increase. We allocate
the total costs for information services and facilities to each functional area
that uses the information services and facilities based on our relative
headcount. These allocated costs include medical insurance premiums,
communication charges and rent and other facility-related costs.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. In connection with granting
stock options to our employees, directors and consultants, we recorded deferred
stock-based compensation totaling approximately $12.0 million
27
<PAGE>
through June 30, 2000. This amount represents the total difference between the
exercise prices of stock options and the deemed fair market value of the common
stock for accounting purposes on the date these stock options were granted or
other measurement dates. We revalue non-employee options on a quarterly basis
and record the resulting compensation expense on an accelerated basis. We have
recorded stock-based compensation expense of $0.6 million during the year ended
December 31, 1998, and approximately $4.0 million in 1999, and $2.5 million
during the first half of 2000, leaving $4.9 million to be amortized in future
periods.
INTEREST EXPENSE (INCOME), NET. Interest expense consists primarily of
interest expense paid on bank borrowings, short-term promissory notes from
investors and a $1.0 million convertible promissory note due on September 1,
2004 that bears interest at a fixed rate of 10% per annum. See "--Liquidity and
Capital Resources." Interest income consists of interest earned on excess cash.
Interest income represents interest earned on our invested cash equivalents.
INCOME TAXES. We have incurred net losses in each quarter since our
inception. As of June 30, 2000, we had an accumulated deficit of $56.7 million.
Our net losses resulted from significantly higher manufacturing, marketing,
selling, service and research and development expenditures relative to our sales
levels. We expect to continue experiencing increases in operating expenses,
particularly in research and development and sales and marketing. As a result,
we expect to incur additional losses and continued negative cash flow from
operations for the foreseeable future.
We have not made a provision for federal or California state income taxes
for any period because we have incurred operating losses since inception. As of
June 30, 2000, we had approximately $30 million of net loss carryforwards for
federal income tax purposes and approximately $17 million of net loss
carryforwards for California state income tax purposes. Utilization of the net
operating loss carryforwards is subject to our ability to generate future
profits and, in addition, may be subject to annual limitations due to an
ownership change as defined in Section 382 of the Internal Revenue Code.
RESULTS OF OPERATIONS
The following table presents selected financial data for the periods
indicated as a percentage of total revenue.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1997
(INCEPTION), YEARS ENDED SIX MONTHS ENDED
TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------- ------------------
1997 1998 1999 1999 2000
-------------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue................................................ 100% 100% 100% 100% 100%
Cost of revenue........................................ 209.7 81.4 75.5 67.9 81.1
Gross profit (loss)................................. (109.7) 18.6 24.5 32.1 18.9
Operating expenses:
Research and development............................ 352.8 20.8 15.8 15.7 133.9
Sales and marketing................................. 449.3 34.1 36.6 32.4 36.5
General and administrative.......................... 128.7 11.8 13.2 5.4 17.0
In-process research and development costs acquired.. -- 7.3 -- -- 64.1
Amortization of intangibles......................... -- 3.2 5.4 5.3 14.0
Impairment of an intangible asset................... 747.3 -- -- -- --
Amortization of deferred stock compensation......... 34.4 5.7 19.5 7.8 20.9
Total operating expenses.......................... 1,712.5 82.9 90.6 66.6 286.4
Operating loss......................................... (1,822.2) (64.3) (66.1) (34.5) (267.5)
Interest expense (income), net......................... (6.9) 2.6 2.1 2.3 (0.1)
Net loss............................................ (1,815.3)% (66.9)% (68.2)% (36.8)% (266.5)%
</TABLE>
28
<PAGE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUE. Total revenue increased from $9.5 million for the first half of
1999 to $11.9 million for the first half of 2000. The increase was as a result
of increases in sales of approximately $0.8 million of WAVENET ACCESS products,
$2.5 million of WAVENET LINK products, and $1.4 million of WAVENET TRANSPORT
products offset by reductions of approximately $2.4 million in sales of legacy
products. Sales for the first half of 1999 included a non-recurring sale of
legacy equipment to a single customer for which we were a reseller accounting
for approximately $1.5 million, or 16%, of our total revenue for the first half
of 1999. Sales for the first half of 2000 increased over the first half of 1999
as a result of a 15% increase in unit sales and a 9% increase in average selling
prices of our products. We anticipate sales of our WAVENET ACCESS, WAVENET LINK
and WAVENET TRANSPORT products to increase and sales of our legacy products to
remain the same or decline in the foreseeable future. In the first half of 2000,
three customers, Telefonia Celular del Norte, Wireless Inc. de Mexico, and
Celular de Telefonia each accounted for over 10% of our revenues and together
accounted for approximately 36.8% of our revenues. No other customer accounted
for more than 10% of our revenues during the first half of 2000. We expect that
for the foreseeable future the majority of our sales will be to fewer than 20
customers.
COST OF REVENUE AND GROSS PROFIT. Cost of revenue increased from $6.5
million for the first half of 1999 to $9.6 million in the first half of 2000.
Gross profit as a percentage of revenue was 32.1% for the first half of 1999
compared to 18.9% for first half of 2000. The product mix in any quarter will
vary depending on the products and average selling price, and therefore, our
cost of revenues will fluctuate on a quarterly basis. Our gross profit in the
first half of 2000 was negatively impacted by incremental inventory and warranty
reserves of $0.7 million, a decline in the average selling prices of our legacy
products of $0.2 million offset by improved average selling prices of our
WAVENET TRANSPORT products of $0.4 million. We expect that cost of revenue as a
percentage of revenue will decline in future quarters and as a result our gross
profit margin will increase.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$1.5 million for the first half of 1999 to $15.9 million for the first half of
2000. The increase of $14.4 million, or 962.9%, was primarily due to $12.9
million in contract research and development expense related to the development
of StarPort. The remaining increase of $1.5 million was related to increases in
engineering staff and consulting expenses related to other products under
development. As a percentage of revenue, research and development expenses were
15.7% for the first half of 1999 compared to 133.9% for the first half of 2000.
Research and development expenses are expected to remain at the same level or
decline in absolute dollars during the second half of 2000 in conjunction with
ongoing development of STARPORT and with the expansion of our engineering staff
to support the increasing number of research and development projects. We expect
research and development as a percentage of revenue to decline during the
balance of 2000.
SALES AND MARKETING. Sales and marketing expenses increased from $3.1
million for the first half of 1999 to $4.3 million for first half of 2000. The
increase of $1.2 million or 40.5%, was attributable primarily to the addition of
sales and marketing staff and related supporting expenses. As a percentage of
revenue, sales and marketing expenses were 32.4% for the first half of 1999
compared to 36.5% for the first half of 2000. We expect sales and marketing
expenses to remain the same or decline as a percentage of revenue during the
balance of 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $0.5 million for the first half of 1999 to $2.0 million for the first half
of 2000. The increase of $1.5 million, or 291.6%, was due primarily to increases
in salaries related to additional staff and legal, accounting and consulting
expenses related to our transition to a publicly traded company. As a percentage
of revenue, general and administrative expense increased from 5.4% for the first
half of 1999 to 17.0% for the first half of 2000. Also included in general and
administrative expenses was a provision of $0.2 million for potential bad debts
and $0.3 million associated with stock options issued to non-employees for
services rendered in the first half of 2000. We expect general and
administrative expenses to increase in absolute dollars and remain the same or
decline as a percentage of revenue during the balance of 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT COSTS ACQUIRED. In-process research and
development expense increased from zero in the first half of 1999 to $7.6
million for the first half of 2000. In January 2000, we entered into a
technology purchase and license agreement with TRW, Inc. to acquire the rights
to the technology underlying our STARPORT product. STARPORT is currently in
field testing and is expected to provide broadband wireless Internet access to
residential, small office and home office customers.
We issued to TRW 3,429,352 shares of common stock valued at $5 per share
and made a commitment to pay TRW $2.5 million in cash to acquire the STARPORT
technology license upon completion of this offering. The amount
29
<PAGE>
allocated to intangible assets was $19.6 million based on the fair market value
of our common stock and the $2.5 million commitment. We conducted an independent
valuation of the acquired technology which resulted in a $7.6 million allocation
to in-process technology that was immediately expensed. At the time of the
agreement, the STARPORT technology was an in-process technology under
development for a number of years at TRW which had not yet achieved
technological feasibility, had no alternative future use and was not expected to
generate any significant sales for one to three years.
The value of the purchased in-process technology was determined by
estimating the cost to develop the purchased in-process technology into a
commercially viable product. We estimated the resulting net cash flows from
STARPORT assuming an expected economic product life of 5 years, the revenue
generated in each future period and the corresponding operating expenses. These
cash flows were adjusted for taxes and charges related to fixed assets and
working capital. These cash flows were then discounted to their present value to
estimate the fair market value of the acquired in-process technology. The
technology was approximately 45% complete as of the acquisition date based on
the ratio of costs incurred to total development. A discount rate of 25% was
used for the in-process technology, reflecting a weighted average cost of
capital of 17% for industry-comparable companies and an 8% premium for
technological and market risk associated with commercializing the acquired
technology.
The estimated costs to be incurred to develop the purchased in-process
technology into commercially viable products were approximately $25-30 million
in the aggregate through 2001. We expected to begin realizing the benefit of the
purchased in-process technology during 2001 with estimated total revenues from
the purchased in-process technology expected to peak in its as-developed state
during 2004. The estimated selling, general and administrative costs were
expected to more closely approximate our future cost structure. These revenue
growth and ultimate earnings projections are only achievable based on the
assumption that we can commercialize and mass produce the purchased in-process
technology. In the event that we are unable to fully develop the technology into
a commercially viable product, our future financial performance and growth will
be harmed.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased from
$0.5 million for the first half of 1999 to $1.7 million for the first half of
2000. Amortization expense during the first half of 1999 relates specifically to
intangible assets resulting from the acquisition of Multipoint while for the
first half of 2000, amortization of intangibles also includes amortization of
capitalized license and technology related to the TRW purchase and license
agreement as well as other acquired technology.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation increased from $0.7 million during the first half of 1999 to $2.5
million during the first half of 2000. The increase of $1.7 million, or 233.5%,
is due to amortization associated with new options granted during 1999 and
additional options granted during the first half of 2000 which were subsequently
determined to have been granted at below their deemed fair value.
INTEREST EXPENSE (INCOME), NET. Interest expense (income), net changed
slightly from a $0.2 million expense during the first half of 1999 to income of
$13,000 during the first half of 2000.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUE. Total revenue increased from $11.2 million in 1998 to $20.3
million in 1999. The increase in revenue in 1999 was attributable to higher
sales resulting from the introduction of the WAVENET ACCESS 2458 and a full year
of sales of our WAVENET LINK series which contributed approximately $3.4 million
and $2.5 million in sales, respectively, in 1999. In addition, sales of our
WAVENET ACCESS 2400 contributed an incremental $1.5 million in revenue in 1999.
Sales of our legacy products contributed an incremental $2.8 million in revenue
in 1999, the majority of which related to a non-recurring sale of equipment to a
single customer of product for which we were a reseller. The increase in sales
in 1999 as compared to 1998 was due to a 150% increase in unit sales offset by a
27% decrease in average selling prices principally due to a change in product
mix. In 1999, one customer, Celular de Telefonia, accounted for approximately
14.5% of our revenues. No other customer represented over 10% of our revenues in
1999. Approximately 57.4% of our revenues were derived from ten customers in
1999.
COST OF REVENUE AND GROSS PROFIT. Cost of revenue increased from $9.1
million in 1998 to $15.4 million in 1999, primarily due to the related increase
in revenue. As a percentage of revenue, cost of revenue decreased from 81.4% to
75.5% during the same period, primarily due to a change in the mix of products
sold, the introduction of our WAVENET ACCESS 2458 and WAVENET LINK families of
systems and the distribution of manufacturing costs over a greater number of
units sold. Cost of revenue in 1999 included a provision of approximately $1.5
million for
30
<PAGE>
inventory obsolescence related to the earlier legacy products acquired from
Multipoint. Gross profit increased from 18.6% in 1998 to 24.5% in 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$2.3 million in 1998 to $3.2 million in 1999. The increases in research and
development expenses were primarily attributable to the addition of engineering
personnel and associated support required to expand and enhance our product
lines. Research and development as a percentage of total revenues decreased from
20.8% in 1998 to 15.8% in 1999.
SALES AND MARKETING. Sales and marketing expenses increased from $3.8
million in 1998 to $7.4 million in 1999. The increase in sales and marketing was
related to the expansion of our sales and marketing organization of $2.4
million, trade show expenses of $0.3 million and the increase in commission
expenses of $0.9 million resulting from higher revenue. Sales and marketing
expense as a percentage of total revenue increased from 34.1% in 1998 to 36.6%
in 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.3 million in 1998 to $2.7 million in 1999 due primarily to increases in
salaries and legal, accounting and consulting expenses. Also included in general
and administrative expenses for 1999 was a one-time building lease termination
charge of $0.2 million. We also made a provision for approximately $1.0 million
for potential bad debts in 1999. General and administrative expenses as a
percentage of total revenue increased from 11.8% in 1998 to 13.2% in 1999.
IN-PROCESS RESEARCH AND DEVELOPMENT COSTS ACQUIRED. In-process research and
development of $0.8 million was fully expensed in 1998 upon our acquisition of
Multipoint as a result of our determination that the acquired technology had not
yet achieved technological feasibility and that the technology did not have an
alternative future use.
On August 26, 1998, we acquired Multipoint. Multipoint was incorporated in
California in 1987. It was expected that Multipoint's wireless data
communication products could be used for point-to-point or point-to-multipoint
networks with major applications in the rapidly growing Internet market. The
acquisition provided us with an opportunity to gain access to additional
technology and diversify our product line by adding wireless data transmission
capability to our telephony-based product offerings. WAVENET ACCESS 2400,
jointly developed with WaveAccess, Inc., an Israeli company, was Multipoint's
first wireless point-to-multipoint router. At the time of acquisition, a new
product, WAVENET ACCESS 2458, was under development. WAVENET ACCESS 2458 was
designed to be the next generation, high-capacity point-to-multipoint router
with greater bandwidth than the existing WAVENET ACCESS 2400.
The acquisition was accounted for using the purchase method of accounting.
The allocation of purchase price to in-process technology was determined based
upon a valuation conducted through an independent third-party appraisal. At the
time of the acquisition, WAVENET ACCESS 2458 had not yet achieved technology
feasibility and was not expected to generate any significant sales for one to
two years.
The value of the purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into a
commercially viable product, estimating the resulting net cash flows from
WAVENET ACCESS 2458 and related products and discounting the net cash flows back
to their present value. The technology was approximately 85% complete as of the
acquisition date. A discount rate of 25% was used for the developed technology
and 30% for the in-process technology. These rates of return reflected
Multipoint's historical results as of the acquisition date and the risks
associated with revenue growth and profitability. These rates of return were
also consistent with our overall weighted average cost of capital due to the
revenues attributable to future, as yet unidentified, products.
The estimated costs to be incurred to develop the purchased in-process
technology into commercially viable products were approximately $1.0 million in
the aggregate through 1999. We completed the development of WAVENET ACCESS 2458
in March 1999 with actual costs incurred since the acquisition of approximately
$0.8 million. We expected to begin realizing the benefit of the purchased
in-process research and development during 1999, with estimated total revenues
from the purchased in-process technology expected to peak in 2001 and decline
rapidly in 2002. Cost of sales as a percentage of revenues was expected to be in
the range of 40% to 45%. The estimated selling, general and administrative costs
were expected to more closely approximate our cost structure. These revenue
growth and ultimate earnings projections were only achievable based on the
assumptions that the purchased in-process technology could be further developed
by us and that Multipoint could benefit from our experience in the
31
<PAGE>
wireless communications industry. In the event that we are unable to fully
develop the technology into a commercially viable product, our future financial
performance and growth will be harmed.
AMORTIZATION OF INTANGIBLES. All recorded intangible assets through 1999
relate to the acquisition of Multipoint. Amortization expense associated with
intangible assets was $0.4 million in 1998 and $1.1 million in 1999 due to
amortization associated with new options granted during 1999 which were
subsequently determined to have been granted below their deemed fair value. As
of December 31, 1999, the remaining balance to be amortized by the end of 2003
was $3.1 million.
IMPAIRMENT OF AN INTANGIBLE ASSET. In 1997, we entered into a license and
technology transfer and manufacturing agreement with Wi-LAN, Inc. Under this
license agreement, Wi-LAN agreed to license and transfer technology to us in
exchange for 3,000,000 shares of our Series A preferred stock, valued at $0.50
per share. An asset worth $1.5 million was recorded for the licensed and
transferred technology. In 1997 we determined that the licensed and transferred
technology was not applicable to our needs. As such, we recorded an impairment
charge of $1.5 million related to this acquired technology. On June 3, 1998 the
license agreement was replaced by a new license agreement and a manufacturing
agreement. In February 2000, we terminated the manufacturing agreement due to a
discontinuance of the product line and the license agreement terminated by its
own terms.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation increased from $0.6 million in 1998 to $4.0 million in 1999. As of
December 31, 1999, the remaining balance to be amortized by the end of 2003 was
$5.3 million.
INTEREST EXPENSE (INCOME), NET. Interest expense, net changed from $0.3
million in 1998 to $0.4 million in 1999 reflecting increases in various bridge
financings from investors as well as utilization of bank credit facilities.
COMPARISON OF PERIOD FROM INCEPTION TO DECEMBER 31, 1997 AND YEAR ENDED DECEMBER
31, 1998
REVENUE. Total revenue increased from $0.2 million from inception through
December 31, 1997 to $11.2 million in 1998. The increase in revenue in 1998
reflected the sale of our WAVENET TRANSPORT system to a single large customer,
the introduction of our WAVENET LINK series point-to-point radios in September
1998 and the inclusion of revenue of Multipoint from the date of acquisition on
August 26, 1998. The increase in sales in 1998 as compared to 1997 was due
primarily to an increase in unit sales.
COST OF REVENUE AND GROSS PROFIT (LOSS). Cost of revenues from inception
through December 31, 1997 represented mainly manufacturing overhead and the cost
of equipment that we resold. Cost of revenue increased from $0.4 million in 1997
to $9.1 million in 1998 primarily due to the related increase in revenue. As a
percentage of revenue, cost of revenue decreased from 209.7% to 81.4% during the
same period, primarily due to a change in the mix of products sold, the
introduction of our WAVENET ACCESS 2400 and WAVENET LINK families of systems and
the distribution of manufacturing costs over a greater number of units sold.
Gross loss in the period from inception through December 31, 1997 was a negative
109.7% compared to gross profit of 18.6% in 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$0.7 million from inception through December 31, 1997 to $2.3 million in 1998.
The increase in research and development expenses were primarily attributable to
the addition of engineering personnel and associated support required to expand
and enhance our product lines. Research and development as a percentage of total
revenues decreased from 352.8% in 1997 to 20.8% in 1998.
SALES AND MARKETING. Sales and marketing expenses increased from $0.9
million from inception through December 31, 1997 to $3.8 million in 1998. The
increase in sales and marketing was related to the expansion of our sales and
marketing organization, trade show expenses and the increase in commission
expenses resulting from higher revenue. Sales and marketing expense as a
percentage of total revenue decreased from 449.3% in 1997 to 34.1% in 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $0.3 million from inception through December 31, 1997 to $1.3 million in
1998 due primarily to increases in salaries and legal, accounting and consulting
expenses. General and administrative expenses as a percentage of total revenue
decreased from 128.7% in 1997 to 11.8% in 1998.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation increased from $0.1 million from inception through December 31,
1997 to $0.6 million in 1998 due to amortization associated with
32
<PAGE>
new options granted during 1998 which were subsequently determined to have been
granted below their deemed fair value.
INTEREST EXPENSE (INCOME), NET. Interest expense (income), net changed from
interest income of $14,000 from inception through December 31, 1997 to interest
expense of $0.3 million in 1998 reflecting increases in various bridge
financings from investors as well as utilization of bank credit facilities.
QUARTERLY RESULTS OF OPERATIONS
Set forth below is our revenue for the eight quarters ended June 30, 2000.
This information should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this prospectus. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- ---------- ---------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........ $ 4,411 $ 4,059 $ 6,276 $ 3,230 $ 5,000 $ 5,823 $ 5,535 $ 6,317
</TABLE>
Revenue for the first quarter of 1999 was $6.3 million, significantly
higher than 1998 fourth quarter revenue of $4.1 million primarily due to the
non-recurring resale of legacy products to a single customer. Revenue for the
second quarter of 1999 was $3.2 million. The decrease from the first quarter of
1999 relates to decreases in sales of our WAVENET TRANSPORT and other legacy
products of $1.1 million and $2.8 million, respectively, due to a temporary
decline in demand partially offset by an increase in sales of WAVENET ACCESS
products of $0.9 million. The increase in revenue for the third quarter of 1999
compared to the second quarter of 1999 relates to increases in sales related to
our WAVENET LINK and WAVENET TRANSPORT products. Our sales of WAVENET LINK
increased during this quarter principally due to the introduction of this
product to customers in Central America. The increase in revenue for the second
quarter of 2000 compared to the first quarter of 2000 relates to increases in
sales of our WAVENET TRANSPORT and WAVENET LINK products of $0.6 million and
$0.4 million respectively, offset by decreases in sales of our WAVENET ACCESS
and legacy products of $0.1 million and $0.1 million respectively. The increase
in sales of our WAVENET TRANSPORT products was due to increased demand from
customers in Mexico. The increase in sales of our WAVENET LINK products was due
to the introduction of our WAVENET LINK 4X during the quarter and a full quarter
of sales of $0.9 million of our WAVENET LINK EX introduced during the first
quarter of 2000. The decline in sales of our WAVENET ACCESS products was due to
delays in the expansion of a system in China utilizing our WAVENET ACCESS 2458
product and certain component shortages from several suppliers partially offset
by the introduction of our WAVENET ACCESS 3500 product in the later part of the
second quarter of 2000.
Our operating results have in the past, and may in the future, fluctuate on
a quarterly and annual basis as a result of various factors. These factors
include, among others:
o the size, timing and terms of customer orders;
o a decrease in the average selling prices of our systems due to
competition;
o the relatively long sales and development cycles for our systems;
o our ability to develop and market new systems;
o the ability to obtain regulatory approval of system installation in
foreign countries;
o the ability to reach and maintain required production volumes and
quality levels for our systems;
o general domestic and international economic conditions;
o market acceptance of our systems and our customers' services;
o introduction of products and systems by our competitors;
o our ability to respond to fluctuations in customer order levels;
o the timing and provision of returns from our distributors; and
o whether our customers buy from a distributor, an original equipment
manufacturer or directly from us.
33
<PAGE>
Therefore, we believe that period-to-period comparisons of our quarterly
operating results are not necessarily meaningful. You should not rely on them to
predict future performance.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily from sales of
our preferred stock totaling $37.3 million and other financing activities,
including a bank credit facility, convertible notes for working capital and
capital leases for the purchase of equipment.
Cash used by operating activities was $9.7 million during the first half of
2000 compared to $3.2 million during the first half of 1999. The increase in
cash used by operating activities from the first half of 1999 to the first half
of 2000 resulted principally from an increase in net loss of $28.2 million, as
adjusted for increases in non-cash items including amortization of deferred
stock-based compensation, in-process research and development and amortization
of intangibles of $1.7 million, $7.6 million and $1.2 million, respectively
offset by increases in accruals related to work performed by TRW of $8.5 million
as well as the $2.5 million liability to TRW payable upon completion of our
initial public offering. Cash used in operating activities was also due to
increases in prepaid and other current assets of $1.0 million associated with
deferred costs of this offering. Cash used by operating activities was $2.8
million during 1998 compared to $11.5 million during 1999. The increase in cash
used by operating activities from 1998 to 1999 resulted principally from
additional net losses incurred, an increase in accounts receivable from $3.7
million to $4.8 million, a decrease in accounts payable from $5.1 million to
$3.4 million and an increase in inventory from $3.8 million to $5.0 million. The
increase in accounts receivable reflects an increase in sales. The decrease in
accounts payable reflects an increase in cash payments to suppliers as a result
of bringing current our accounts payable. The increase in inventory levels
reflects anticipated higher sales levels. These increases in cash used by
operating activities are partially offset by non-cash charges such as
amortization of deferred stock compensation, amortization of intangibles and
depreciation and amortization of fixed assets.
Cash used by investing activities for the first half of 2000 was $1.9
million compared to cash used in investing activities of $0.3 million in the
first half of 1999. The increase in cash used by investing activities was due to
an increase in purchases of equipment principally related to the expansion of
our engineering facilities and the purchase of licensed technology. Cash used by
investing activities during 1999 was $0.5 million compared with cash provided by
investing activities of $0.1 million in 1998. The decrease in cash flow from
investing activities from 1998 to 1999 was primarily due to purchases of
property and equipment, including computer equipment, furniture, manufacturing
fixtures, testing equipment and leasehold improvements relating to our new
facility in Santa Clara, California.
Cash provided by financing activities for the first half of 2000 was $14.8
million compared to $3.4 million for the first half of 1999. The increase was
due principally to the sale of Series F preferred stock to TRW. Cash provided by
financing activities was $2.8 million in 1998 and $12.8 million in 1999. The
increase in cash flow provided by financing activities from 1998 to 1999 was
primarily the result of $12.7 million in proceeds from the issuance of common
and preferred stock.
As of June 30, 2000 our liabilities included current liabilities of $19.6
million and non-current liabilities of $0.2 million. Our current liabilities
consisted principally of accounts payable and accrued expenses totaling $7.0
million. The accounts payable relate to liabilities associated with inventory
purchases and vendor services, including those associated with this offering.
The accrued liabilities include warranty, reserves, payroll related liabilities,
customer advances and liabilities related to purchased license technology. The
accrued liabilities also include a liability to TRW for development services
rendered through June 30, 2000 of approximately $8.5 million and a liability to
reimburse TRW for $2.5 million upon the completion of our initial public
offering. We currently operate under a letter agreement with TRW which provides
contract research and development services to us on a time and materials basis.
We expect our expenses associated with TRW's efforts to remain the same or
decline during the balance of this year. See "Risk Factors--If we are unable to
successfully complete development and commercialization of STARPORT in a timely
and cost-effective manner, or if the system fails to perform to customer
expectations, our business will be substantially harmed," "If we are unable to
sucessfully retain, allocate and motivate our STARPORT engineering team, our
business and growth opportunities will be substantially harmed" and "If the
development of our STARPORT system is materially delayed, we may lose our
exclusive license with TRW to the STARPORT technology and our business and
growth opportunities will be substantially harmed." Our ability to continue to
utilize TRW for such services is dependent upon our ability to raise sufficient
financing either in this
34
<PAGE>
offering or through alternative means. In the event that we fail to raise such
financing we might be required to significantly curtail TRW's development
efforts which in turn would potentially delay the completion and introduction of
STARPORT. See "--Results of Operations, "Business--Strategic Relationship with
TRW, and Certain Transactions -- Strategic Relationships with TRW."
We generally commit to purchase products based on customer forecasts to be
delivered within the next 120 days. As of June 30, 2000, we have committed to
make purchases totaling $6.5 million from these manufacturers. In some
instances, we issue blanket purchase orders for specific quantities and delivery
schedules over 12 to 18 months to obtain price discounts. If we cancel the
purchase order before its term ends, we would be obligated for the difference
between the regular price and the discounted price plus the cost of components
bought by the manufacturer specifically for our products. Based on current sales
projections, we do not believe that we will incur any material obligations under
these purchase orders.
As of June 30, 2000, cash and cash equivalents were $4.3 million. We have a
$2.0 million bank credit facility with Silicon Valley Bank secured by
substantially all of our assets which is subject to certain restrictions
relating to eligible accounts receivable and liquidity. Borrowings under this
facility accrue interest at the prime rate plus 2.5%. As of June 30, 2000, we
had not drawn against this facility and there is no outstanding balance due.
This facility expires on February 23, 2001. In connection with an amendment of
this facility, we agreed to issue a warrant to Silicon Valley Bank for the
purchase of 37,500 shares of our common stock at an exercise price of $4.00 per
share if we did not complete an initial public offering before May 31, 2000. On
June 1, 2000, this warrant was issued. We have issued a convertible promissory
note to AMT Capital, Ltd. for $1.0 million which matures on September 1, 2004
and bears interest at a fixed rate of 10% per annum. The note is convertible at
the option of AMT Capital Ltd. into Series E preferred stock at $3.125 per share
at any time at or prior to maturity. If the note is converted, the holder will
receive a warrant to purchase 32,000 shares of common stock at $0.75 per share.
We have experienced a substantial increase in our expenditures since our
inception consistent with growth in our operations and personnel. We expect to
devote substantial additional resources to our research and development efforts,
our sales, support, and marketing organizations, establishing additional
facilities worldwide and building the infrastructure necessary to support our
current and future products, including our STARPORT system. We believe that the
net proceeds of this offering, together with cash and cash equivalents and funds
available under existing credit facilities will be sufficient to meet our
working capital requirements for at least the next 12 months. We may require
additional funds to support our working capital requirements or for other
purposes and may seek to raise additional funds through public or private equity
financings or from other sources. We have received capital commitments of $2.5
million each from Dynamics Technology, Inc., Gemini Investors LLC, Stratford
Equity Partners, L.P., Crossroads Venture Capital, LLC and TRW, Inc. Except for
Stratford Equity Partners, each of these entities is a 5% or greater stockholder
and is affiliated with a member of our board of directors. To date we have not
called upon these capital commitments. The $12.5 million in commitments, if
required, will be documented in the form of convertible promissory notes bearing
interest at a fixed rate of 10% per annum. If not prepaid, the notes will
convert into shares issued in our next round of equity financing of at least
$15.0 million. In connection with obtaining these commitments, we issued
warrants to purchase 10,000 shares of our common stock to each of these five
investors at a price of $4.00 per share and agreed to issue additional warrants
for up to 30,000 shares of our common stock to each of these five investors at
the then fair market value per share if the loan commitments are exercised.
These warrants expire upon the earlier of 5 years or 30 days after the
consummation of an initial public offering. We do not know whether additional
financing will be available on acceptable terms, if at all. In addition,
although there are no present understandings, commitments or agreements with
respect to acquisitions of other businesses, products or technologies, we may,
from time to time evaluate these acquisitions. In order to consummate potential
acquisitions, we may issue additional securities or need additional equity or
debt financing and any financing we undertake may be dilutive to existing
investors.
YEAR 2000 COMPLIANCE
In August 1998, we initiated a year 2000 compliance program. The program
was directed by our Director of Management Information Systems and included an
intra-company task force with members from each of our principal departments,
including accounting, engineering, manufacturing, sales and marketing. The task
force was charged with identifying areas of potential risk within each
department and making evaluations, modifications, upgrades or replacements, as
appropriate.
35
<PAGE>
With the change of the new year, we experienced no major problems
associated with year 2000. The year 2000 task force continued to monitor the
hardware and software systems used until February 2000. After February, the task
force no longer proactively monitored systems and concluded that we met all year
2000 compliance standards. As an ongoing effort, we will continue to upgrade
hardware and software systems to cut costs and improve performance.
Despite our efforts and our experience with year 2000 so far, we may
discover year 2000 compliance problems in our systems that will require
substantial revision. In addition, third-party software, hardware and services
incorporated into our information systems may need to be revised or replaced,
all of which could be time-consuming and expensive and result in the following,
any of which could adversely affect our business, financial condition and
results of operations:
o delay or loss of revenue;
o cancellation of customer contracts;
o diversion of development resources;
o damage to our reputation;
o increased service and warranty costs; and
o litigation costs.
Our failure to fix or replace third-party software, hardware or services on
a timely basis could result in lost revenues, increased operating costs, the
loss of customers and other business interruptions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. For
a derivative not designated as a hedging instrument, changes in the fair value
of the derivative are recognized in earnings in the period of change. This
statement will be effective for all annual and interim periods beginning after
January 1, 2001. We do not believe the adoption of SFAS No. 133 will have a
material effect on our financial position or results of operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell such products in North,
Central and South America, Africa, Asia and Europe. As a result, our financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. As all sales are
currently made in U.S. dollars, a strengthening of the dollar could make our
products less competitive in foreign markets. We do not use derivative
instruments to hedge our foreign exchange risk. Our interest income is sensitive
to changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Due to the nature of
our short-term investments, we have concluded that there is no material market
risk exposure. Therefore, no quantitative tabular disclosures are required.
36
<PAGE>
BUSINESS
OVERVIEW
We are a provider of high-speed, or broadband, wireless access systems that
enable international and domestic Internet and communications service providers,
telephone operating companies and private network operators to deliver voice and
high-speed data services to their customers. Our systems are designed as an
alternative to fiber optic, copper-based or cable-based communication
transmission methods and allow a service provider to rapidly deliver high-speed
Internet access in a service area. In addition, our wireless systems transport
voice and high-speed data traffic within a service provider's network.
Our line of systems allows end-users to transmit voice and data
simultaneously via Internet protocol, or IP, or asynchronous transfer mode, or
ATM, architectures, two leading industry standards for telecommunication
transport. Our broadband wireless access solutions address a wide range of
applications in different markets, including:
o enabling Internet service providers to offer direct Internet access;
o rapidly installing new networks for communication service providers;
o supplementing telephone operating companies' existing wired networks;
o establishing communication networks in regions without existing
infrastructures; and
o establishing private corporate networks.
Our systems are available in a broad range of frequency assignments,
enabling us to address the different regulatory requirements of multiple
geographic markets. Our systems operate in both licensed and license-exempt
frequency assignments. A licensed frequency assignment requires that prior to
installing our systems the operator obtain a conditional license from the
appropriate regulatory body for a specific frequency allocation.
We have systems installed and operating in Argentina, Brazil, Chile, China,
Mexico, Panama, the Philippines, Poland and the United States. In 1999 and the
first half of 2000, 87% and 83% of our revenues, respectively, were derived from
outside the United States. Our international service organization provides
customer support 24 hours per day, 7 days a week and offers network design and
installation services as part of our wireless solution.
INDUSTRY BACKGROUND
THE DEMAND FOR HIGH-SPEED NETWORK ACCESS
As the Internet and public and private communication networks have become
essential for communication, electronic commerce and information exchange, the
volume of voice and high-speed data traffic worldwide has increased
dramatically. In addition, user applications, such as electronic mail,
telecommuting and business-to-business exchanges have further increased the
amount of network traffic. This increase in network traffic has resulted in a
demand for greater transmission capacity, or bandwidth, and broadband services
to support it.
Bandwidth limitations between service providers' central offices and
end-users, often referred to as the last mile bottleneck, have constrained
service providers from delivering broadband services to the end-user. We believe
that traditional dial-up modem technology is insufficient to support the growth
in network traffic and demand for high-speed data transmission. Although wired
access network infrastructures using cable, digital subscriber line, or DSL, and
fiber optic systems can deliver greater bandwidth than that provided by dial-up
modem technology, these systems are not universally available to end-users. This
last mile bottleneck is frustrating a broad base of business, residential and
small office/home office users, many of whom require high-speed access to data.
WIRED SOLUTIONS
The demand for broadband access continues to accelerate, pressuring service
providers to improve and expand existing wired infrastructures. Wired broadband
access solutions that are intended to address this demand
37
<PAGE>
include cable modem service, DSL and fiber optic technology. Often, these
technologies require a trained installation technician and involve a lengthy
implementation process.
COAXIAL CABLE MODEM. Coaxial cable modem technology is currently the most
common wired solution for broadband network access. The cable solution is
limited in its effectiveness, however, because:
o performance deteriorates as more subscribers are added because the
users share a common transmission medium;
o performance difficulties worsen as users transmit more data because
transmission capacity has been allocated primarily to receiving data,
or downstream transmission, and cannot be easily reallocated to
transmitting data, or upstream transmission;
o there are inherent privacy limitations because all users share a
common link rather than using an individual link; and
o the current infrastructure is primarily geared towards residential
service, and is unavailable to most business customers.
DSL. DSL service is delivered over existing copper-based wired
infrastructure and is gaining wide acceptance by both residential and business
markets for high-speed Internet access. However, DSL service is limited in its
effectiveness because:
o the length and quality of available copper wires limit transmission
rates;
o the condition of many of the copper lines between the subscriber and
central office prohibits the use of DSL technology; and
o federally mandated regulations require incumbent local telephone
companies, such as the regional Bell operating companies, to offer
competing service providers access to their copper wire. As a result,
service providers are reluctant to upgrade their infrastructures, and
copper wire infrastructures are not keeping pace with the increase in
demand for high-speed Internet access.
FIBER OPTIC. Fiber optic transmission systems offer far greater
transmission rates than either cable modem or DSL service offerings. Although
many wide-area networks have been upgraded to fiber optic cable, fiber optic
technology is not a cost effective solution to the last mile bottleneck due to
its high installation cost. Similarly, dedicated leased lines providing high
speed Internet access, such as T-1 lines, also have high monthly and
installation costs that deter most business customers from pursuing them.
WIRELESS SOLUTIONS
Non-movable, or fixed, broadband wireless access technology can solve
many of the problems imposed by wired networks. Broadband wireless technology
enables rapid implementation of high-speed network access in a cost-effective
manner relative to wired networks. We believe that wireless network providers
will be able to gain a greater share of the network access market because,
unlike incumbent local telephone companies, they are not required by federal law
to share their wireless networks with competing service providers. Moreover, a
broadband wireless network is often the best option for high-speed communication
in remote areas and in many developing countries due to the lack of an existing
wired infrastructure. In these regions, wireless technologies provide clear
advantages over wired networks, including lower cost, faster installation,
greater flexibility and increased reliability.
Broadband wireless technologies are classified as either point-to-point or
point-to-multipoint:
POINT-TO-POINT. A point-to-point wireless system connects two
locations, using two identical pieces of equipment. Each piece of equipment
is first connected to an end-user's or service provider's network by a
cable and a connector and then connected by an antenna cable to an antenna
that is usually mounted on a rooftop or tower. The two antennas are then
aimed at one another to create a wireless connection. Point-to-point
wireless technology is used to transport data traffic from one location to
a second location, typically in local distribution applications.
Point-to-point wireless systems can interconnect high-speed data networks
between buildings or facilities within the same metropolitan area.
Point-to-point wireless systems can also be used to transport high density
network traffic. However, implementing a large wireless network
38
<PAGE>
based on point-to-point technology becomes costly and cumbersome as the
number of locations increases. As a result, this technology is not
practical for interconnecting a large number of buildings or facilities.
POINT-TO-MULTIPOINT. A point-to-multipoint wireless system connects
multiple facilities within a relatively small geographic location to a
central hub. Point-to-multipoint wireless technology is used to transport
data traffic from one location to many locations, typically to interconnect
a large number of facilities in a relatively small geographic area.
Point-to-multipoint wireless technology overcomes the limitations of
point-to-point technology by designating a single radio transceiver as the
central base station. The base station uses a radio protocol to control and
manage end-user devices so that data is transmitted and received among
multiple locations with minimal interference. An area served by a single
base station is often referred to as a cell. In order to serve a larger
geographic region and a larger number of facilities, multiple cells are
interconnected using point-to-point technology. As a result,
point-to-multipoint systems are combined with point-to-point technology to
deliver broadband wireless access service to a large geographic area.
Broadband wireless access technology has disadvantages and limitations. In
contrast to mobile wireless access solutions, the systems we currently offer
require line-of-site installation, which often requires the end-user to obtain
roof rights from third parties. Wireless systems may also experience problems
due to radio signal interference, which may occur if multiple wireless systems
are operating on the same radio frequencies and in the same geographic areas.
Historically, most broadband wireless manufacturers focused on delivering
either point-to-multipoint or point-to-point systems. Few companies have merged
both technologies to deliver a single broadband wireless access solution for
large geographic areas that meets the needs of business and residential
end-users over the last mile. The absence of a single broadband wireless
solution is magnified internationally, where the lack of wire-based
infrastructure and the prohibitive costs associated with building new wired
infrastructure render wireless broadband technology the economically feasible
alternative for high-speed network access. We believe that in order to serve the
international broadband wireless access market, a network solution must
integrate point-to-multipoint and point-to-point technologies on a
cost-effective basis. In addition, a solution must be certified by the
applicable regulatory agencies for installation domestically and
internationally.
OUR SOLUTION
Our line of broadband wireless access systems includes point-to-multipoint
and point-to-point wireless products that connect end-users to the Internet and
public and private communication networks. Our systems allow a service provider
to offer high-speed network access to the end-user as a cost-effective
alternative to wired services. These systems assure service providers a quick
time-to-market by permitting rapid installation of complete high-speed
communication networks. In addition, we design our systems to be compliant with
domestic and international standards. We incorporate a worldwide service
organization that provides customer support 24 hours a day, 7 days a week and
offers network design and installation services.
The following describes the key benefits of our broadband wireless access
solution:
COST-EFFECTIVE DESIGN AND IMPLEMENTATION. Our systems provide a
cost-effective combination of point-to-multipoint broadband wireless access
and high-speed point-to-point voice and data transmission.
RAPID INSTALLATION. Our systems are shipped off-the-shelf and are easy
to install. We believe that our systems are reliable. Our license-exempt
products do not require frequency coordination or licensing, eliminating
many of the time-consuming processes required in planning, coordinating and
installing traditional radio technology. License-exempt operation permits
rapid installation to meet customer demand for broadband wireless access.
SCALABILITY. Our systems are scalable. As more users are added to a
network, a central base station that may have initially been equipped with
a single transmitter can be easily upgraded to accommodate up to ten
transmitters.
REMOTE MANAGEMENT. Our standard network management applications
include a simple network management protocol and a secure Web-based browser
interface. These interfaces allow the system to be managed and administered
remotely through the Internet.
39
<PAGE>
NETWORK COMPATIBILITY. Our wireless systems provide built-in routing
and support industry standard protocols that allow data to be transported
at carrier-quality standards.
Our systems address a broad range of applications in different markets.
Examples of these applications include:
o ENABLING INTERNET SERVICE PROVIDERS TO OFFER DIRECT INTERNET ACCESS.
Digital Wireless Communications, a wireless Internet service provider
based in Savannah, Georgia, focuses on delivering high-speed Internet
service to the small office/home office marketplace. Our WAVENET LINK
product permits Digital Wireless Communications to establish direct
Internet access for its customers. This eliminates the need to
coordinate line access with the incumbent communication service
provider and enables faster availability of services to its customers.
o RAPIDLY INSTALLING NEW NETWORKS FOR COMMUNICATION SERVICE PROVIDERS.
Central City Online, also known as EZNET Total Access, an Internet
service provider based in Huntington, West Virginia, uses our WAVENET
wireless systems to provide high-speed Internet access in direct
competition with the local telephone company. EZNET used our WAVE NET
systems to offer high-speed wireless Internet services, and as a
result did not need to lease copper wire facilities from the local
telephone company, which can be a time consuming process.
o SUPPLEMENTING TELEPHONE OPERATING COMPANIES' EXISTING WIRED NETWORKS.
Northern Indiana Telephone Company, or NetNITCO, was unable to meet
customer demand for high-speed Internet access due to limitations in
copper-based DSL. Our WAVENET ACCESS system enabled NetNITCO to
provide high-speed data services to its entire service area.
o ESTABLISHING COMMUNICATION NETWORKS IN REGIONS WITHOUT EXISTING
INFRASTRUCTURES. In many parts of the world, communication networks
are incapable of supporting the increasing amount of high-speed data
traffic due to inadequate or poorly maintained equipment. Netcom,
S.A., a communication service provider based in Haiti, determined that
reliable dial-up service was not available in Haiti. By installing our
WAVENET broadband wireless system, Netcom is now able to supply its
Haitian customers with more reliable high-speed data services.
STRATEGY
Our goal is to be the broadband wireless access solution of choice, both
domestically and internationally, for Internet and communication service
providers, telephone operating companies and private network operators. Our
strategy for achieving this goal includes the following core elements:
INTRODUCING NEW BROADBAND WIRELESS ACCESS TECHNOLOGIES. We are
devoting substantial resources to the development of new
point-to-multipoint broadband wireless access technologies. For example,
this year we expect to introduce for order STARPORT, a broadband access
system designed for the residential and small office/home office markets,
which we expect to be available for commerical delivery in Spring 2001.
This year, we also expect to begin shipping the WAVENET ACCESS 3500, a
point-to-multipoint system designed exclusively for use in the licensed
spectrum in the international market.
LEVERAGING OUR STRATEGIC RELATIONSHIPS. We have entered into a
strategic relationship with TRW which provides us with technology that we
use in our STARPORT system. We anticipate forming strategic relationships
with additional partners to market and sell STARPORT into the residential
and small office/home office markets. These partners may include Internet
and communication service providers and telephone operating companies. We
intend to leverage these relationships in order to develop an international
market for STARPORT once the system is completed. In the future we may
enter into additional strategic relationships to enhance existing or
develop new market opportunities.
EXPANDING OUR INTERNATIONAL MARKET PRESENCE. We intend to add
additional direct sales and sales support resources within the United
States and to increase our direct sales presence in Europe, Asia and Latin
America. In addition to expanding our field sales and systems engineering
forces, we intend to continue to build additional sales channels, both in
the United States and international markets, to expand the distribution of
our products. We expect to continue to establish distribution relationships
with service providers, distributors and value-added resellers to further
penetrate our target markets.
40
<PAGE>
EMPHASIZING RESEARCH AND DEVELOPMENT. We have invested significant
resources in research and development, particularly in the areas of radio
frequency engineering, software and network protocol development. We intend
to increase our investment in research and development substantially in
order to maintain and enhance our technological position. By building on
our expertise in developing broadband wireless access technology, we intend
to develop high-performance product lines that will address the needs of
international wireless broadband markets.
CONTINUING TO DELIVER HIGH-QUALITY CUSTOMER SERVICE AND SUPPORT. We
provide pre- and post-installation support, with 24 hours per day, 7 days a
week coverage on an international basis. We are committed to providing
exceptional service, and we intend to continually enhance our customer
service and support capabilities in order to address the needs of existing
and new markets.
TECHNOLOGY
We believe that we have industry-leading multidisciplinary expertise in the
development of broadband wireless access solutions and that our products
incorporate several technologies that provide us with advantages relative to our
competitors.
POINT-TO-MULTIPOINT PROTOCOLS. We have applied our software design
expertise to develop robust point-to-multipoint networking protocols that
allow multiple users to have access in a radio environment without
interfering with each other. We have implemented a sophisticated set of
software resources, including digital signal processing, network routing
and network management, to address many of the unique challenges of
wireless environments. Some of these challenges include interference,
signal fading, path obstructions, signal absorption, security, capacity
requirements and shared operations with other radio systems.
SPREAD SPECTRUM TECHNOLOGY. Spread spectrum transmission is a method
whereby the original signal is spread over a wide range of frequencies so
that the original signal is difficult to detect and is very resistant to
interference from other signals. Some of our WAVENET ACCESS systems use a
form of radio transmission technology known as frequency hopping spread
spectrum. In frequency hopping, the transmitter sends at one frequency for
a period of time and then hops to another frequency and sends again with
the original signal being decoded at the receiving end. Our STARPORT system
uses a form of radio transmission technology known as direct sequence
spread spectrum, a technique that combines an information signal with a
pseudo-random signal to produce a final signal significantly greater in
bandwidth than the original information signal, with improved interference
resistance. We believe that our STARPORT system will deliver extremely
reliable operation in situations where other wireless-based technologies
might suffer from degraded performance.
IP-OVER-ATM. Our STARPORT system transmits data via Internet protocol,
or IP, and voice using asynchronous transfer mode, or ATM, transmission. IP
is a method for transporting data by splitting the data into small sets of
data, called packets, and transmitting the data packets to a destination
where they are recombined into their original form. Asynchronous transfer
mode is a method for grouping voice and data information into discrete
units called cells, and transmitting the cells to a destination where the
information is reassembled into its original form. The principal difference
between IP and asynchronous transfer mode is that IP transports data
packets that may be of indeterminate size whereas asynchronous transfer
mode transports fixed cells that always contain an identical amount of
information. IP is the leading industry standard for data transmission
within the information technology sector and is typically used by Internet
access providers to transmit data over the Internet. Asynchronous transfer
mode is the preferred telecommunications industry standard for switching
and transmission of voice and data, and is typically used by telephone
operating companies in their networks. IP using asynchronous transfer mode,
or IP-over-ATM, transmission is a method for carrying IP traffic over
asynchronous transfer mode-based networks. We offer solutions based on IP,
asynchronous transfer mode and IP using asynchronous transfer mode
transmission, allowing us to market our products to both Internet service
providers and telephone operating companies with minimum disruption to
their network architectures.
ROUTER-BASED WIRELESS NETWORKS. We use a router-based architecture for
our WAVENET ACCESS wireless systems, versus many of our competitors who use
bridge-based architectures. The advantages of routing systems include
scalability, control and security. Unlike bridge-based systems where IP
traffic is bridged to all network nodes, in a router-based system, IP
traffic is routed to desired locations eliminating excess
41
<PAGE>
broadcast traffic. By reducing the excess broadcast traffic, our
router-based systems greatly improve the bandwidth efficiency of our
networks in comparison to systems that do not have internal router
capability.
DIGITAL COMMUNICATION TECHNOLOGY. Our strategic relationship with TRW
provides us with access to advanced digital communication technology,
including innovative protocols, algorithms and digital signal processing.
Scientific technology licensed to us by TRW as part of the STARPORT
initiative includes direct sequence spread spectrum waveforms, multiple
access control schemes, quality of service mechanisms and element
management interfaces.
WEB-BASED NETWORK MANAGEMENT. Our products come with WIRELESS
NETMANAGER, a secure Web-based network management system that gives our
clients the ability to easily manage their networks, download software
upgrades, and change or configure software parameters. Additionally,
WIRELESS NETMANAGER allows us to access and analyze our customers' systems
from any location through the Internet, giving us the ability to provide
remote customer support to clients, 24 hours per day, 7 days a week.
PRODUCTS
We manufacture a complete suite of broadband wireless access systems that
provide point-to-multipoint, point-to-point and high-capacity transport. Our
systems provide IP and asynchronous transfer mode transport via wireless
broadband service for high-speed network access. These systems are designed as
an alternative to copper-based DSL or cable-based broadband technologies and
allow a service provider to rapidly install high-speed access throughout a
service area. Our technology enables service providers to respond quickly to
meet the demand for high-speed network access, and allows businesses to build
high-performance wireless networks to supplement wired offerings from service
providers. We also offer high-capacity products to transport traffic from a
central base station to a service provider's network. In addition, we
manufacture peripheral products that complete our total network solution.
WAVENET
Our WAVENET broadband wireless access series is a family of systems
providing broadband wireless access using point-to-multipoint, point-to-point
and high-capacity transport technology that can transmit data over distances of
up to 20 miles. These systems allow a service provider to offer broadband
wireless access as an economic alternative to cable, DSL and fiber optic
technologies. This series includes the following products:
WAVENET ACCESS. Our WAVENET ACCESS point-to-multipoint system
interconnects a large number of facilities in a relatively small area. In
order to serve a larger geographic region and a larger number of
facilities, multiple WAVENET ACCESS systems are interconnected using
point-to-point technology. Connection into the end user's local area
network from the remote WAVENET ACCESS terminal is accomplished through an
industry standard Ethernet cable. WAVENET ACCESS systems are typically used
to facilitate high-speed Internet access for small and medium sized
businesses.
o WAVENET ACCESS 3500. The WAVENET ACCESS 3500, which is currently under
development, will operate in the international 3.5 gigahertz, or GHz,
band currently accepted as the preferred frequency assignment for
fixed broadband radio access. Once completed, up to 3.25 Mbps of
throughput will be available to the user. Central base stations will
be able to be scaled to support transmission rates from 2 Mbps to 26
Mbps. This system is being specifically designed for
point-to-multipoint applications in markets outside the United States.
o WAVENET ACCESS 2458. The WAVENET ACCESS 2458 operates as a full duplex
radio by using both the 2.4 GHz and 5.8 GHz license-exempt bands.
Using the 2.4 GHz band for downstream transmission and the 5.8 GHz
band for upstream transmission provides a unique solution in high
interference environments. Up to 1.2 Mbps throughput is available to
each user. Central base stations can be scaled to support transmission
rates from 1 to 7 Mbps. This system is designed for
point-to-multipoint applications in the United States and selected
international markets.
o WAVENET ACCESS 2400. The WAVENET ACCESS 2400 operates in the 2.4 GHz
license-exempt band and is European Telecommunications Standards
Institute, or ETSI-approved. With user throughput of up to 1 Mbps and
central base stations which are scaled to support transmission rates
of up to 10 Mbps, it allows an economical alternative to T-1 and other
dedicated leased lines.
42
<PAGE>
WAVENET LINK. The WAVENET LINK series is a family of point-to-point
products using the license-exempt 5 GHz band, available in the United
States and in an increasing number of other countries. Our WAVENET LINK
system transports data traffic from one location to another, typically in
local distribution applications. Our WAVENET LINK systems can interconnect
high-speed data networks between buildings or facilities within the same
metropolitan area and are characterized by low end-to-end signal delay,
ease of installation and simplicity in use. WAVENET LINK systems are
typically used by Internet service providers to deliver high-speed Internet
access to businesses and high-density residential buildings.
o WAVENET LINK EX. The WAVENET LINK EX is a cost-effective product
capable of transporting up to 16 Mbps over a distance of up to 10
miles. The radio is mounted outdoors, close to the antenna, to
minimize transmission losses, and is connected to the user's local
access network or in-building distribution system with an industry
standard Ethernet cable. Although primarily used in point-to-point
applications, the product can be used to implement a
point-to-multipoint system with a 100 Mbps effective central base
station capacity and a 16 Mbps user throughput.
o WAVENET LINK 4X. The WAVENET LINK 4X provides a cost-effective
solution for access requirements as well as cellular base station
connectivity with capacities of up to 4 x 2.048 Mbps. This system
features an embedded simple network management protocol. The indoor
unit, or IDU, provides all user interfaces including 2.048 Mbps ports,
simple network management protocol access and external alarm input.
WAVENET TRANSPORT. Our WAVENET TRANSPORT high-capacity wireless
systems are similar to our point-to-point systems but provide considerably
higher data transport rates. WAVENET TRANSPORT systems are typically used
by communications service providers, cellular network providers and
telephone operating companies to transport high-density network traffic
between base stations and backbone systems. Like our point-to-point
systems, our WAVENET TRANSPORT systems are characterized by low end-to-end
signal delay and simple installation.
o WAVENET TRANSPORT DX. The WAVENET TRANSPORT DX series is a family
of licensed digital microwave radios operating from 13 to 38 GHz, with
digital capacities of up to 34 Mbps. This system is targeted toward
high-speed data transport in selected international markets.
o WAVENET TRANSPORT MX. The WAVENET TRANSPORT MX is a line-of-sight
digital radio transmission solution operating in millimeter wave
frequency bands for voice, high-speed data, Internet and video
traffic. The WAVENET TRANSPORT MX supports extensive scalable data
rates up to 100 Mbps.
STARPORT
We believe there will be a significant increase in demand for broadband
services in the residential and small office/home office markets. We believe
that communication companies will adopt wireless solutions as a more
cost-effective method than wired solutions to meet this demand since it allows
them to deploy broadband Internet access services more rapidly than would be
possible if they had to lease copper wire from the local telephone company. We
are currently testing in the field a new system called STARPORT, which, once the
system is completed, we intend to introduce for order in Fall 2000 and for
commerical delivery in Spring 2001. STARPORT is a point-to-multipoint broadband
wireless access system that does not require a line-of-sight between
transmission and reception points and provides high-speed Internet access using
asynchronous transfer mode transmission. The current architecture supports
operation in the 5.8 GHz license-exempt frequency band and we expect future
development to support operation in additional frequency bands. STARPORT is
designed as a cost-effective alternative to wire-based cable, DSL or fiber-optic
technologies and is intended to allow a service provider to rapidly supply
services, such as high-speed Internet access, throughout a service area.
STARPORT is designed to be installed by the consumer without the need for the
communication service provider to supply a professional technician. STARPORT
consists of base station units and customer premises units. STARPORT is
specifically designed for the residential, small office/home office markets. We
expect that the consumer will be able to connect an interface cable from
STARPORT to a personal computer and then automatically receive broadband service
at data rates comparable to typical DSL service. The base station units can
support data rates of up to 4.3 Mbps per end-user. STARPORT uses an asynchronous
transfer mode-based network architecture allowing communication service
providers to deliver bandwidth on demand to their end-users. The technology used
in this system is licensed from TRW, Inc. and is subject to certain
restrictions. See "--Strategic Relationship with TRW" and "Certain
Transactions--Strategic Relationship with TRW."
43
<PAGE>
LEGACY PRODUCTS
Multipoint developed, manufactured and marketed point-to-point and point-to
multipoint network products, called the RAN series, prior to its acquisition by
us. The RAN 64/25 and 128/50 are licensed wireless systems for low
data rate connectivity. The RAN 64/25 and 128/50 support a 64 kilobit per
second, or kbps, data circuit in a 25 kilohertz, or kHz, radio channel or a 128
kbps data circuit in a 50 kHz radio channel, respectively. These systems are
typically used to support low-speed traditional data networks, such as automated
teller machine networks.
CUSTOMERS
We have a globally diversified customer base consisting of Internet and
communication service providers, telephone operating companies and private
network operators. In the first half of 2000, three customers, Telefonia Celular
del Norte, Wireless Inc. de Mexico and Celular de Telefonia each accounted for
over 10% of our revenues and together accounted for approximately 36.8% of our
revenues. No other customer accounted for more than 10% of our revenues during
the first half of 2000. In addition, in the first half of 2000, 21 customers
each purchased more than $100,000 of our products and 6 customers each purchased
more than $500,000 of our products. In 1999, one customer, Celular de Telefonia,
accounted for approximately 14.5% of our revenues. No other customer accounted
for more than 10% of our revenues in 1999. In addition, in 1999, 39 customers
each purchased more than $100,000 of our products and 9 customers each purchased
more than $500,000 of our products.
SALES AND MARKETING
We market our systems and services globally through our direct sales force
and through a distribution network. We have sales and service offices located in
the United States, Europe, Latin America and Asia. Our distribution network
includes the following channels: systems integrators and distributors, value
added resellers, telephone operating companies and Internet and communication
service providers.
Our direct sales managers provide support to all of the distribution
channels in their geographic territories. They work closely with our channel
partners, participating in end-user briefings, proposals, product training
sessions, end-user seminars, trade shows and other demand-generating activities.
In addition, in partnership with our indirect channels, our direct sales
managers are involved in generating and qualifying end-user leads that result in
sales.
Our distributors are responsible for identifying potential business
customers, selling our systems as part of complete solutions and installing and
supporting the equipment at end-user sites. We generally establish relationships
with distributors through written agreements that provide pricing, terms and
conditions under which they may purchase our systems for resale. These
agreements are generally non-exclusive, may be terminated at will and do not
prevent these distributors from carrying competing lines or require them to
attain specific sales levels. We provide significant sales, marketing, training
and technical support to our distributors.
CUSTOMER SUPPORT
We complement our products with a worldwide service organization that
provides product support, network and radio system design, turnkey installation,
maintenance and field engineering. Our distributors are typically responsible
for installation, maintenance and support services to their customers, and we
offer our distributors assistance in providing customer service and support 24
hours per day, 7 days a week.
We offer a 12-month warranty on our systems and provide both in-warranty
and out-of-warranty repair and return services. Tracking of field returns is
handled by our on-line return material authorization system. Our manufacturing
department uses an on-line material control system allowing us to track product
and customer trends and history.
Our customer service department also issues technical support notes,
customer service bulletins, and field support notes to keep our customers and
distributors apprised of any changes, issues or concerns regarding product
performance or need for upgrades.
44
<PAGE>
RESEARCH AND DEVELOPMENT
We have assembled a team of engineers with significant communications and
networking industry experience. Our engineers have expertise in radio design,
wireless networking protocols, data networking, hardware and software.
Our current product development plans focus on the commercialization of our
STARPORT point-to-multipoint system and other next generation systems. We use
digital signal processors and other digital components to reduce the cost of our
systems. STARPORT is being developed under an agreement with TRW that requires
TRW to provide most of the engineering personnel necessary for its completion.
Although we manage the engineers provided by TRW for the development of
STARPORT, we do not have direct control over such engineers deployment. Our
engineers may not have sufficient knowledge of the STARPORT technology to
effectively replace any TRW engineers if such engineers are lost or not
deployed. See "Risk Factors--if we are unable to successfully retain, allocate
and motivate our STARPORT engineering team, our business and growth
opportunities will be substantially harmed."
We have made, and will continue to make, a substantial investment in
research and development. We believe that our research and development efforts
are key to our ability to maintain technical competitiveness and to deliver
innovative products that address the needs of the market. However, our product
development efforts may not result in commercially successful products and may
be rendered obsolete by changing technology or new product announcements by
other companies.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We rely upon a combination of patents, trademarks, trade secrets,
copyrights and a variety of other measures to protect our intellectual property.
We currently hold two U.S. patents and have two patent applications pending
before the U.S. Patent and Trademark Office relating to our point-to-point
wireless networking technology. We also share ownership of two patent
applications pending before the U.S. Patent and Trademark Office, obtained under
a purchase and license agreement with TRW, relating to our STARPORT
point-to-multipoint wireless networking technology. In addition, under the
purchase and license agreement with TRW, we obtained rights in technology in the
field of wireless communications systems that may lead to additional patent
applications. We currently also have registered trademarks for the marks
"WAVENET," and "RAN" and applications pending before the U.S. Patent and
Trademark Office for additional marks including "BROADBAND WITHOUT BOUNDARIES"
and the Wireless logo. We have also filed two applications for the mark
"STARPORT," one covering services and one covering goods we intend to offer
under that mark. Our application covering goods we intend to offer using the
name "STARPORT" was deemed abandoned by the U.S. Patent and Trademark Office in
February 2000. We filed a petition to revive this application in May 2000 and
are awaiting approval from the U.S. Patent and Trademark Office, which we expect
will be granted. Although we rely on patent, copyright, trade secret and
trademark laws to protect our technology, we believe that factors such as the
technological and creative skill of our personnel, new product developments,
frequent product enhancements and reliable product maintenance are more
essential to establishing and maintaining technology leadership position.
We generally enter into confidentiality or license agreements with our
employees, consultants, service providers, customers and corporations with whom
we have strategic relationships, and generally control access to and
distribution of our software, documentation and other proprietary information.
In addition, we often incorporate the network designs of our customers into our
solutions and have obligations with respect to the use and disclosure of this
information.
We rely on licensed technology for use in our broadband wireless access
systems. We may not be able to maintain these licensing arrangements, or we may
be unable to maintain them on affordable terms. If these license agreements were
not renewed, our business would be severely harmed, and we would not be able to
ship product for the broadband wireless access market. See "Risk Factors--If the
development of our STARPORT System is materially delayed, we may lose our
exclusive license with TRW to the technology and our business and growth
opportunities will be substantially harmed."
The market for broadband wireless access products and systems is
characterized by vigorous protection and pursuit of intellectual property
rights. From time to time, we may receive notice of claims of infringement of
other parties' proprietary rights. Any claims of infringement, whether or not
they have merit, could result in litigation which could severely harm our
business. See "Risk Factors--Our business model depends upon obtaining and
protecting our intellectual property, and if we fail to protect our proprietary
rights, our business could be harmed"
45
<PAGE>
and "--We may become involved in costly and time consuming litigation over
proprietary rights which could delay or prevent sales of our current and future
products."
GOVERNMENT REGULATION
Our systems intentionally radiate radio frequency energy, and therefore
must comply with regulations in the countries where we sell and install our
systems. The process of verifying compliance with radio and network regulations
is known as system certification, and this must be granted before a system is
offered commercially for sale. The Federal Communications Commission, or FCC,
certifies systems we sell and install in the United States. Some regions of the
world, such as Latin America and the Philippines, accept FCC certification as
sufficient approval for operation within these regions. The European
Telecommunications Standards Institute, or ETSI, certifies systems we sell and
install in Europe. Many countries also require additional testing to certify
compliance to local standards and requirements, in addition to FCC or European
Telecommunications Standards Institute rules.
Our systems operate in both licensed and license-exempt frequency
assignments. A licensed frequency assignment requires that, prior to installing
our systems, the operator obtain a license from the appropriate regulatory body
for a specific frequency allocation. A license-exempt frequency assignment
allows an operator to install and activate our systems without notifying any
authority once we have received certification for the systems. In the United
States, operation of unlicensed radio communications equipment is subject to the
conditions that no harmful interference is caused to authorized users of the
band, and that interference, including interference that may cause undesired
operation, must be accepted from all other users of the band. This includes
other unlicensed operators, authorized operators such as amateur licensees,
industrial, scientific and medical equipment, and U.S. Government operations.
Unlicensed operators that cause harmful interference to authorized users, or
that exceed permitted radio frequency emission levels, may be required to cease
operations until the condition causing the harmful interference or excessive
emissions has been corrected.
The delays inherent in this regulatory approval process may cause the
rescheduling, postponement or cancellation of the installation of
communications systems by our customers which, in turn, may significantly
reduce sales of systems to these customers. The failure to comply with current
or future regulations or changes in the interpretation of existing regulations
in a particular country could result in the suspension or cessation of sales in
that country, restrictions on our development efforts and those of our
customers, render current systems obsolete, expose us to fines, or increase the
opportunity for additional competition. These regulations or changes in
interpretation of these regulations could require us to modify our products and
incur substantial compliance costs. See "Risk Factors -- Government agencies
retain broad authority to designate the permissible uses for various radio
Frequency allocations and if the radio Frequency allocation in which our WAVENET
ACCESS 3500 system is designed to operate is reassigned, our business will be
substantially harmed", "SYSTEMS WE DESIGN FOR SALE IN THE UNITED STATES MUST
COMPLY WITH THE REGULATORY REQUIREMENTS OF THE FEDERAL COMMUNICATIONS COMMISSION
AND ANY FAILURE TO COMPLY WITH SUCH REGULATIONS COULD PREVENT SALES IN THE
UNITED STATES AND HARM OUR BUSINESS" and "Systems we design for sale outside the
united states must comply with the regulatory requirements of the host country
and any failure to comply with such regulations could prevent sales in such
country and harm our business."
MANUFACTURING
Our manufacturing operations occupy 38,000 square feet of our facility in
Santa Clara, California and consist of planning, procurement, final assembly,
testing, quality control, shipping, receiving and stock management.
We design and develop a number of the key components of our products,
including printed circuit boards, mechanical enclosures and software. We
outsource the majority of our sub-assembly operations, and we utilize strategic
ISO 9000 certified local and offshore manufacturing partners to provide
sub-assembly of the printed circuit boards and key components. We also outsource
the sub-assembly of the printed circuit boards for some of OUR WAVENET ACCESS
and WAVENET LINK systems. We provide exact specifications to our manufacturing
partners that provide the sub-assemblies and components for each product. We
then conduct final assembly, burn-in, test and shipment of our products from our
headquarters in Santa Clara, California.
Our manufacturing team works closely with our engineers to manage the
supply chain. We determine the components that are incorporated in our products
and select the appropriate suppliers of these components. All materials used in
our products are processed through a full qualification cycle and are controlled
by an approved vendor list.
46
<PAGE>
Our approach to manufacturing provides the flexibility of outsourcing while
maintaining quality control of delivered products to customers. We believe that
this approach allows us to respond to rapid growth and sudden market shifts. Key
factors that influence our manufacturing operations are cost reduction, quality,
time-to-market and supply of materials. Any interruption in the operations of
our manufacturing partners or material suppliers would harm our ability to meet
scheduled product deliveries to our customers.
We use a rolling four-month forecast based upon anticipated product orders
to determine our material requirements. Lead times for the materials and
components that we order vary significantly and depend on factors such as
specific supplier, contract terms and demand for a component at a given time.
We, along with our contract manufacturers, may terminate our contracts without
cause at any time. At that time, the terminating party must honor all open
purchases. We obtain parts and components through purchase orders and have no
long-term commitments regarding supply or price from these suppliers. We have
established second source manufacturing and material suppliers to provide parts
and components within weeks of losing these suppliers. However, the loss of any
of our suppliers could prevent us from meeting our scheduled product deliveries
to our customers and could materially harm our business, results of operations
and financial condition. See "Risk Factors -- We depend on a limited number of
contract manufacturers and sole-source suppliers. If these manufacturers or
suppliers are unable to fill our orders on a timely basis, we may be unable to
deliver products to meet customer orders."
STRATEGIC RELATIONSHIP WITH TRW
We entered into a purchase and license agreement with TRW on January 14,
2000. Under the agreement, we purchased and obtained exclusive license rights in
point-to-multipoint wireless networking technology, generally referred to as the
STARPORT technology. Any products we develop based on such technology may only
be sold by us with base stations configured for outdoor use. Sales of products
containing the STARPORT technology with base stations configured for indoor use
or to the U.S. Government--including organizations in which the U.S. is a
member, such as NATO--must be made through TRW or its licensees. TRW also has a
license in any improvements made by us upon the STARPORT technology. If we do
not offer a commercial version of a product containing the STARPORT technology
for sale by July 14, 2001, unless the delay is the fault of TRW or attributable
to specified reasons, we will lose our exclusive license with TRW. The STARPORT
technology was originally developed by TRW Systems and Information Technology
Group for military communications. TRW is an international company that provides
advanced technology products and services. The principal businesses of TRW and
its subsidiaries are the design, manufacture and sale of products and the
performance of systems engineering, research and technical services for industry
and the U.S. Government in the automotive, aerospace and information systems
markets. In connection with this agreement, TRW acquired approximately 18% of
our capital stock outstanding prior to this offering. See "Risk Factors--If we
are unable to successfully complete development and commercialization of
STARPORT in a timely and cost-effective manner, or if the system fails to
perform to customer expectations, our business will be substantially harmed,"
"If we are unable to successfully retain, allocate and motivate our STARPORT
engineering team, our business growth opportunities will be substantially
harmed," "If the development of our STARPORT system is materially delayed, we
may lose our exclusive license with TRW to the STARPORT technology and our
business and growth opportunities will be substantially harmed," and "Certain
Transactions--Strategic Relationship with TRW."
COMPETITION
The broadband wireless access market is rapidly evolving and highly
competitive. We believe that our business is affected by the following
competitive factors:
o cost;
o ease of installation;
o technical support and service;
o sales and distribution capability;
o breadth of product line;
o conformity to industry standards; and
o implementation of additional product features and enhancements.
47
<PAGE>
Our competition is dependent on the product line under consideration. The
primary sources of competition to WAVENET TRANSPORT are from DMC Stratex
Networks, Inc. and P-Com, Inc. We have not yet established WAVENET TRANSPORT as
a major competitor to comparable offerings from either of these companies. The
primary sources of competition to WAVENET LINK are from BreezeCOM, Ltd., Proxim,
Inc. and SPEEDCOM Wireless International Corporation. We believe that WAVENET
LINK is competitive with comparable offerings from each of these companies. The
primary sources of competition to WAVENET ACCESS are from Adaptive Broadband
Corporation, BreezeCOM, Ltd., Floware Wireless Systems Ltd. and Lucent
Technologies, Inc. We believe that WAVENET ACCESS is competitive with comparable
offerings from each of these companies as well. In addition, well-capitalized
wireless equipment manufacturers including Cisco Systems, Inc., Ericsson, Inc.,
Motorola, Inc., Nokia Corporation, QUALCOMM Incorporated and Siemens AG are
potential entrants into any of these markets. Our WAVENET products also compete
with wired solutions such as cable, DSL, fiber optic systems and high-speed
lines leased from communication service providers, such as T-1 lines.
STARPORT faces significant competition and challenges from both wire-based
and wireless access technologies. The primary sources of competition to STARPORT
from wired technologies include cable modem service and DSL service, currently
the dominant forms of broadband services in the residential and small
office/home office markets. Adaptive Broadband Corporation and NextNet Wireless,
Inc. are the predominant providers of systems competitive with STARPORT. Other
manufacturers including DMC Stratex Networks, Inc., Ensemble Communications,
Inc., Netro Corporation, P-Com, Inc. and Triton Networks Systems, Inc. have
introduced point-to-multipoint technologies, that while not offering equivalent
operation to STARPORT, can competitively provide high-speed Internet access. In
addition, Cisco Systems, Inc. and Nortel Networks Corporation have indicated
that they intend to provide broadband wireless access products in the near
future. We believe that STARPORT, once introduced, will be competitive with each
of these products.
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. Many of our
competitors have longer operating histories, larger installed customer bases,
substantially greater name recognition, and greater financial, sales and
marketing, technical, manufacturing, and distribution resources than us. We may
not be able to compete successfully against current or future competitors and
the competitive pressures we face may seriously harm our business and results of
operations.
FACILITIES
Our principal operations are located in Santa Clara, California. We lease
approximately 55,000 square feet for our corporate headquarters that includes
manufacturing, sales and marketing, research and development, customer service
and support, and finance and administration. This lease expires on July 31,
2006. In addition, we have short-term leases for our various sales offices. We
believe our current facilities will be adequate to meet production needs for the
foreseeable future.
EMPLOYEES
As of June 30, 2000 we had a total of 135 employees, of which 36 were in
operations and manufacturing, 35 were in sales and marketing, 39 were in
research and development, 8 were in customer service and support, and 17 were in
finance and administration. None of our employees is represented by a labor
union. We have not experienced any work stoppages and consider relations with
our employees to be good.
TRADEMARKS
Our trademarks and service marks include WIRELESS, WAVENET, WAVENET ACCESS,
WAVENET LINK, WAVENET TRANSPORT, STARPORT, RAN and BROADBAND WITHOUT BOUNDARIES
with the accompanying design and the Wireless logo. Each trademark, trade name
or service mark of any other company appearing in this prospectus belongs to its
holder.
LEGAL PROCEEDINGS
We are not currently a party to any material litigation.
48
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of June 30, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William E. Gibson.......... 60 Chairman of the Board of Directors
William J. Palumbo......... 57 President, Chief Executive Officer and Director
Mark A. Byington........... 48 Executive Vice President
Antonio Canova............. 38 Executive Vice President, Chief Financial Officer
and Secretary
William E. Kunz............ 42 Senior Vice President, Engineering and Chief
Technology Officer
Charles C. Pai............. 58 Senior Vice President, Finance
Donald H. MacLeod.......... 50 Senior Vice President, International
James D. Bletas............ 55 Vice President, Sales--Americas
Ralph M. Gushiken.......... 56 Vice President, Manufacturing
Thomas L.F. Ohlsson........ 44 Vice President, Marketing
Andrew I. Fillat........... 52 Director
Denny R.S. Ko.............. 60 Director
David F. Millet............ 55 Director
Patrick A. Rivelli......... 63 Director
Mark S. Silverman.......... 41 Director
</TABLE>
WILLIAM E. GIBSON, one of our co-founders, has served as Chairman of our
board of directors since our inception. Prior to October 1999, Mr. Gibson also
served as our President and Chief Executive Officer. Mr. Gibson is the founder
and has served as Managing Member of Crossroads Venture Capital LLC, a private
equity fund, since its inception in October 1996 and serves as Managing Partner
of several private equity funds of which Crossroads Venture Capital LLC is the
General Partner. Since June 1995, Mr. Gibson has served as President and Chief
Executive Officer of Pu'u'ala Corporation, a certified organic farm and ranch
located in Hawaii. Mr. Gibson was a founder of Digital Microwave Corporation, a
manufacturer of high-frequency digital microwave radios, and served as its
President and Chief Executive Officer from 1984 through 1991 and as President of
DMC Telecom International from August 1991 until June 1995. Previously, Mr.
Gibson held various management positions at the Farinon division of Harris
Corporation, a manufacturer of digital microwave radios, including Vice
President and General Manager. He also serves on the boards of directors of
Mobicom Corporation, a designer of GSM cellular telephone handsets, Momentum
Laser, Inc., a manufacturer of laser-based construction tools and Oncologic,
Inc., a biotechnology company focusing on the development of a cancer detection
and therapy process. Mr. Gibson holds a M.B.A. and a B.S. in Engineering from
the College of Notre Dame.
WILLIAM J. PALUMBO has served as our President, Chief Executive Officer and
as a member of our board of directors since October 1999. Mr. Palumbo served as
President and CEO of 2 Dot3.com, a research company focusing on the operation of
broadband services, from April 1998 to October 1999. Mr. Palumbo served as Vice
President of Sales and Marketing of SpectraLink Corp., a manufacturer of indoor
wireless products, from July 1990 to March 1998. From 1987 to 1990, Mr. Palumbo
was the Vice President, Sales and Marketing at Digital Microwave Corporation. He
founded Communication Office Machines, Inc., a virtual network equipment
manufacturer, and served as its President and Chief Executive Officer from 1983
to 1987. Previously, from 1976 to 1983, Mr. Palumbo held the position of Vice
President of Sales for Honeywell Action Communication. Mr. Palumbo holds a B.S.
in Marketing from Southern Illinois University.
MARK A. BYINGTON has served as our Executive Vice President since December
1999. From May 1997 to December 1999, Mr. Byington held various positions
including Vice President, Engineering, Senior Vice President, Engineering and
Chief Technology Officer of Wavespan Corporation, a wireless networking
equipment manufacturer. From March 1996 to May 1997, he was the Vice President,
Marketing, Wireless Products of Netro Corporation, a wireless equipment
manufacturer. Previously, from February 1984 to March 1996, he held various
managerial and technical positions at Digital Microwave Corporation including
Vice President, Engineering. From March 1976 to February 1984, Mr. Byington held
the positions of Development Engineer and Senior Development Engineer for the
Farinon division of Harris Corporation. From June 1974 to November 1975, Mr.
Byington worked
49
<PAGE>
for Computer Curriculum Corporation as a Development Engineer. Mr. Byington
holds a B.S. in Electrical Engineering from Stanford University.
ANTONIO CANOVA has served as our Executive Vice President, Chief Financial
Officer and Secretary since April 2000. From July 1995 to April 2000, Mr. Canova
was an audit partner in the Information, Communication and Entertainment
practice group of KPMG LLP where he focused principally on
telecommunications-related companies. Previously, from July 1990 to July 1995,
Mr. Canova was a Senior Manager with KPMG specializing in technology companies.
Mr. Canova is a certified public accountant and holds a B.S. in Business from
Santa Clara University.
WILLIAM E. KUNZ has served as our Senior Vice President, Engineering and
Chief Technology Officer since January 1999. From May 1998 to January 1999, Mr.
Kunz served as our Vice President, Engineering. From July 1979 to May 1998, Mr.
Kunz held various management and technical positions at Hewlett Packard, Inc.,
including LMDS Base Station Program Manager of Video Division-Wireless Systems,
Engineer Scientist at HP Laboratories and Development Engineer in the Network
Measurements Division. Mr. Kunz holds a B.S.E.E. from the University of
California, Davis and a M.S.E.E. from the University of California, Berkeley.
CHARLES C. PAI, one of our co-founders, has served as our Senior Vice
President, Finance since our inception. Prior to April 2000, Mr. Pai also served
as our Chief Financial Officer and Secretary. From May 1996 to June 1997, Mr.
Pai was the Vice President, Finance of SSE Telecom Products, a manufacturer of
satellite transceivers and data modems. He was a co-founder of Spatial Systems,
a software mapping company, and served as its Chief Executive Officer from
September 1993 to May 1996. He served as the Vice President, Finance of Digital
Microwave Corporation from January 1985 to September 1993. Previously, from 1972
to 1984, Mr. Pai held various financial management positions at Plantronics,
Inc., a telephone headset manufacturer, Fairchild Camera and Instrument, a
semiconductor technology developer and fabricator and Xerox Corporation. Mr. Pai
serves as a director of Mobicom Corporation. Mr. Pai holds a M.B.A. from
Columbia University and a B.S. in Electrical Engineering from Cornell
University.
DONALD H. MACLEOD, one of our co-founders, has served as our Senior Vice
President, International since December 1999. Mr. MacLeod also served as our
Senior Vice President, Sales and Marketing from July 1998 to December 1999 and
as our Vice President, Asia from September 1997 to July 1998. From September
1996 to September 1997, Mr. MacLeod was employed as General Manager, Asia by MAS
Technology, Ltd., a manufacturer of digital microwave products. From 1993 to
September 1996, he was employed by Digital Microwave Corporation as Vice
President, Asia. Mr. MacLeod holds an M.B.A. from Concordia University of Canada
and a B. Eng from McMaster University of Canada.
JAMES D. BLETAS has served as our Vice President, Sales--Americas since
June 1999. From September 1998 to May 1999, Mr. Bletas was a consultant to
Comtier Corporation, a satellite network communication system company. From
March 1997 to August 1998, he served as Executive Vice President, Sales and
Marketing, Systems and Customer Services at SSE Telecom Products. From June 1996
to February 1997, Mr. Bletas was the Executive Vice President, Sales, Marketing
and Systems for First Pacific Networks, a service provider in the broadband
cable modem market. From May 1993 to June 1996, Mr. Bletas served as President
of the Telecommunication Transmission System division of California Microwave.
From October 1975 to March 1993, he served in various positions with the Farinon
division of Harris Corporation, including Vice President, International. Mr.
Bletas holds B.A. in Electrical Engineering from Concordia University of Canada.
RALPH M. GUSHIKEN has served as our Vice President, Manufacturing since
August 1997. From February 1989 to August 1997, Mr. Gushiken held various
manufacturing positions at Digital Microwave Corporation including Director of
Manufacturing, Spectrum Division, Director of Technology Transfer and Director
of Production. Previously, from January 1971 to February 1989, Mr. Gushiken
served in various manufacturing positions at the Farinon division of Harris
Corporation. Mr. Gushiken holds a B.S. in Industrial Technology from California
State University, San Jose.
THOMAS L.F. OHLSSON has served as our Vice President, Marketing since
November 1999. From March 1991 to November 1999, he served in various roles with
SpectraLink Corporation, including Director of Marketing. From November 1990 to
March 1991, Mr. Ohlsson served as Senior Product Marketing Manager with Cylink
Corp., a manufacturer of data communication products which is now part of P-Com,
Inc. From November 1987 to November 1990, Mr. Ohlsson served in various roles
with Digital Microwave Corporation, including Director of Product Marketing.
Previously, from 1978 to 1987, Mr. Ohlsson held various product management and
engineering
50
<PAGE>
positions at the Lenkurt division of GTE Corporation, DSC Communication and
DCA/Cohesive Networks, all manufacturers of telecommunications products. Mr.
Ohlsson holds a M.B.A. and a B.S. in Electrical Engineering from Santa Clara
University.
ANDREW I. FILLAT has served as a member of our board of directors since
August 1998 and served as a member of Multipoint's board of directors from
September 1994 until the acquisition of Multipoint in August 1998. Since 1989,
he has been a Managing Director of Advent International Corporation, a private
equity fund focusing on high growth sectors, including cable media, information
technology, specialty chemicals, health care, consumer products and retailing.
He also serves on the board of Advanced Radio Telecom, a public company that
provides broadband Internet protocol service, as well as on the boards of
several private companies. Mr. Fillat holds a M.B.A. from Harvard University, a
M.S. in Computer Science from the Massachusetts Institute of Technology and a
B.S. in Computer Science from the Massachusetts Institute of Technology.
DENNY R. S. KO has served as a member of our board of directors since
August 1998. Since August 1997, Dr. Ko has been the Managing General Partner of
DynaFund Ventures, a private equity fund that focuses on internet, software,
communications, electronics, photonics and related fields. Since October 1976 he
has served as the Chairman and Chief Executive Officer of Dynamics Technology.
He serves on the boards of several technology companies, including Gadzoox
Networks, Inc., a developer of hardware and software equipment in the SAN
(storage area network) market. Dr. Ko holds a Ph.D. in Aeronautics & Applied
Math from the California Institute of Technology, a M.S. in Aeronautical
Sciences from the University of California, Berkeley and a B.S. in Mechanical
Engineering from National Taiwan University.
DAVID F. MILLET has served as a member of our board of directors since
September 1999. Since June 1997, he has been a Managing Director of Gemini
Investors, a private equity fund that focuses on middle market companies in
technology and business services. Since August 1993, he has served as the
President of Thomas Emery & Sons. Since 1998, he has also served as President of
Chatham Venture Corporation. Mr. Millet serves on the boards of View Tech, Inc.,
National Telemanagement Corporation, Eloquent, Inc. and Holographix, Inc. Mr.
Millet holds a B.A. in Physical Sciences from Harvard College.
PATRICK A. RIVELLI has served as a member of our board of directors since
September 1999. Since 1987, Mr. Rivelli has been a general partner of Sunwestern
Investment Group, a private equity fund that focuses on data,
telecommunications, and computer related ventures. Mr. Rivelli serves on the
boards of Vista Information Solutions, an Internet-based provider of real estate
information, and several privately-held companies. He holds a M.S. in Electrical
Engineering from the University of Pennsylvania and a B.S. in Electrical
Engineering from Northeastern University.
MARK S. SILVERMAN has served as a member of our board of directors since
January 2000. Since October 1999, Mr. Silverman has served as Vice President,
Strategic Development for the Aerospace and Information Systems Sector of TRW,
Inc. From 1995 to October 1999, Mr. Silverman served as Vice President, Planning
and Development for the Systems and Information Technology Group of TRW, Inc.
From 1993 to 1995, Mr. Silverman became director of planning and business
development for the TRW Engine Components Group, becoming Vice President in
1994. Previously, from 1983 to 1993, Mr. Silverman held various management and
technical positions with TRW. Mr. Silverman holds a M.B.A. from Case Western
Reserve University's Weatherhead School of Management and a B.S. in Management
Information Systems from Case Western Reserve University.
COMPOSITION OF THE BOARD
Immediately prior to the completion of this offering, we will amend and
restate our certificate of incorporation. Under our amended and restated
certificate of incorporation, our board of directors will be divided into three
classes, with each class serving for a term of three years. At each annual
meeting of stockholders, directors will be elected by the holders of common
stock to succeed the directors whose terms are expiring. Our Board has resolved
that Messrs. Millet and Fillat will be Class I directors whose term will expire
in 2001, Mr. Rivelli and Dr. Ko will be Class II directors whose terms will
expire in 2002 and Messrs. Gibson, Palumbo and Silverman will be Class III
directors whose terms will expire in 2003. With respect to each class, a
director's term will be subject to the election and qualification of their
successor, or their earlier death, resignation or removal. In addition, under
our amended and restated certificate of incorporation, cumulative voting for
directors will be eliminated.
51
<PAGE>
BOARD COMMITTEES
We have established an audit committee composed of independent directors,
which reviews and supervises our financial controls, including the selection of
our auditors, reviews our books and accounts, meets with our officers regarding
our financial controls, acts upon recommendations of our auditors and takes
further actions as the audit committee deems necessary to complete an audit of
our books and accounts, as well as other matters which may come before it or as
directed by the board. The audit committee currently consists of three
directors, Messrs. Millet and Fillat and Dr. Ko.
We have established a compensation committee, which reviews and approves
the compensation and benefits for our executive officers, administers our stock
plans and performs other duties as may from time to time be determined by the
board. The compensation committee currently consists of two directors, Messrs.
Fillat and Rivelli. None of our compensation committee members is, or ever was,
an employee of ours. None of our executive officers serve on the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of our board or compensation committee.
DIRECTOR COMPENSATION
Directors who are also employees do not receive additional compensation for
serving as directors. Non-employee directors receive $10,000 for each year of
board service following each annual meeting. Non-employee directors also receive
$1,000 for attending each regular and special meeting of the full Board of
Directors and $500 for attending each regular or special meeting of a board
committee, plus, in each case, reimbursement for reasonable expenses.
Non-employee directors are also eligible to receive discretionary option grants
and stock issuances under our 2000 stock incentive plan. In addition, under the
2000 stock incentive plan, non-employee directors receive automatic option
grants to purchase 30,000 shares of common stock upon becoming directors and
automatic option grants to purchase 5,000 shares of common stock on the date of
each annual meeting of stockholders. The 2000 stock incentive plan also contains
a director fee option grant program. Should this program be activated in the
future, each non-employee board member will have the opportunity to apply all or
a portion of any annual retainer fee otherwise payable in cash to the
acquisition of an option with an exercise price below the then fair market
value. See "Executive Compensation and Other Information--Employee Benefit
Plans."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
o any breach of their duty of loyalty to the corporation or its
stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
o any transaction from which the director derived an improper personal
benefit.
Such limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission. Our certificate of
incorporation and bylaws provide that we shall indemnify our directors and
executive officers and may indemnify our other officers and employees and other
agents to the fullest extent permitted by law. Our bylaws 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 the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding arising out of such person's services as a
director or executive officer of Wireless, any subsidiary of Wireless or any
other entity to which the person provides services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
52
<PAGE>
EMPLOYMENT, SEVERANCE AND OTHER ARRANGEMENTS
We have entered into an employment agreement with Antonio Canova, dated
March 30, 2000, which provides for Mr. Canova's employment as Executive Vice
President and Chief Financial Officer on an at-will basis. The agreement became
effective on April 10, 2000. The agreement provides for Mr. Canova to receive a
base salary of $180,000 plus a bonus of $50,000 upon completion of audited
financial statements for 2000. Mr. Canova was also granted options to purchase
350,000 shares of our common stock at $5.00 per share. The agreement provides
that, in the event that there is a change of control of Wireless and all of the
shares granted to Mr. Canova have not vested, 50% of his unvested shares will
vest immediately and the remaining unvested shares will vest if he is
constructively terminated within one year of the change of control. Constructive
termination is defined as a relocation of Mr. Canova's principal place of
business by more than 40 miles or a reduction in his duties, authority,
responsibility, title, salary or bonus in effect immediately before the change
of control. Further, the agreement provides that in the event that Mr. Canova's
employment is terminated without cause, even if no change of control has
occurred, we will pay his base salary for a period of six months if he was
employed by us less than two years at the time of his termination, or twelve
months if he was employed by us more than two years at the time of his
termination, and that he and his dependents will be eligible to participate in
our health benefit plans for six or twelve months, respectively.
We do not have employment arrangements with any of our other employees
which obligate us to make severance payments, accelerate the vesting or
exercisability of unvested shares or convertible securities or take any other
action upon the occurrence of certain events or the termination of employment.
All of our employees are employed on an at-will basis.
EXECUTIVE OFFICERS
Our executive officers are appointed by and serve at the discretion of our
board of directors. There are no family relationships among any of our
directors, officers or key employees.
53
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth the compensation paid or awarded by us in
1999 to our Chief Executive Officer, our former Chief Executive Officer and each
of our four other most highly compensated executive officers for the year ended
December 31, 1999. These individuals are referred to in this prospectus as the
named executive officers. The compensation table below excludes other
compensation in the form of perquisites and other personal benefits that
constitutes the lesser of $50,000 or ten percent of the total annual salary and
bonus of each of the named executive officers in 1999.
No individual who would otherwise have been includable in the compensation
table on the basis of salary and bonus earned during 1999 has resigned or
otherwise terminated his or her employment during 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------------- -----------------
SECURITIES
UNDERLYING ALL OTHER
YEAR OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ENDED SALARY($) BONUS($) (#) ($)
------------------------------- ------ --------- -------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
William J. Palumbo (1)........ 1999 $ 34,597 $25,000 1,250,000(2) --
President and Chief
Executive Officer
William E. Gibson (3)......... 1999 180,000 -- 850,961(4) --
Chairman of the Board of
Directors and former
Chief Executive Officer
William E. Kunz............... 1999 143,058 -- 93,055 --
Senior Vice President,
Engineering and Chief
Technology Officer
Charles C. Pai................ 1999 125,112 -- 63,697(5) --
Senior Vice President,
Finance
Donald H. MacLeod............. 1999 108,750 -- 59,380 $ 38,621(6)
Senior Vice President,
International
--------------
</TABLE>
(1) Mr. Palumbo has served as our President and Chief Executive Officer since
October 1999 and, therefore, these amounts are for less than a full year.
(2) 250,000 of these option shares become immediately vested upon the
successful consummation of our initial public offering prior to December
31, 2000 or meeting certain revenue and profit targets in 2000.
(3) Mr. Gibson served as our President and Chief Executive Officer from May
1997 until October 1999.
(4) 800,000 of these option shares became fully vested on the grant date and
48,961 of these option shares became fully vested 11 days after the grant
date.
(5) In January 2000 our board of directors resolved to accelerate all of Mr.
Pai's unvested option shares such that 100% of his option shares become
fully vested as of September 30, 2000.
(6) Consists of rent payments for corporate housing of $30,380 and lease
payments for a company car of $8,241.
54
<PAGE>
STOCK OPTION GRANTS AND STOCK APPRECIATION RIGHTS
The following table sets forth summary information with respect to stock
options granted to each of our named executive officers in 1999, including the
potential realizable value over the term of the options, based on assumed rates
of stock appreciation of 5% and 10%, compounded annually. Each option represents
the right to purchase one share of our common stock. No stock appreciation
rights were granted during 1999.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
TOTAL RATES OF STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR OPTION
SECURITIES GRANTED TO EXERCISE TERM AT INITIAL PUBLIC
UNDERLYING EMPLOYEES PRICE OFFERING PRICE ($)
OPTIONS IN PER EXPIRATION ------------------------
NAME GRANTED 1999 SHARE DATE 5% 10%
-------------------- ---------- ------------ --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
William J. Palumbo.. 1,250,000(1) 30.1% $0.27 9/15/09 7,075,065 17,929,603
William E. Gibson... 48,961(2) 1.2% 0.297 3/13/04 121,743 269,021
2,000 0.05% 0.297 9/15/04 4,973 10,989
800,000(3) 19.4% 0.297 9/15/09 4,528,041 11,474,946
William E. Kunz..... 43,055 1.0% 0.27 3/19/09 243,691 617,567
50,000 1.2% 0.27 9/15/09 283,000 717,184
Charles C. Pai...... 13,697(4) 0.3% 0.27 3/19/09 77,525 196,465
50,000(4) 1.2% 0.27 9/15/09 283,000 717,184
Donald H. MacLeod... 9,380 0.2% 0.27 3/19/09 53,091 134,544
50,000 1.2% 0.27 9/15/09 283,000 717,184
</TABLE>
--------------
(1) 250,000 of such option shares become immediately vested upon the successful
consummation of our initial public offering prior to December 31, 2000 or
meeting certain revenue and profit targets in 2000.
(2) These option shares became fully vested on April 30, 1999.
(3) These option shares became fully vested on the grant date.
(4) In January 2000 our board of directors resolved to accelerate all of Mr.
Pai's unvested option shares such that 100% of his option shares become
fully vested as of September 30, 2000.
In 1999, we granted options to purchase up to an aggregate of 4,149,209
shares of our common stock to employees, officers, directors and consultants
under our 1997 stock plan. Only employees, including officers and employee
members of our board of directors, were eligible to receive incentive stock
options, which qualify for favorable income tax treatment under the federal tax
laws. As a result of this treatment, no income is recognized for regular tax
purposes upon the exercise of the option and a long-term capital gain is
realized upon the sale of the shares purchased under the option if those shares
are held for the required period following exercise. Non-employee members of our
board of directors and consultants were eligible to receive non-statutory stock
options, which do not qualify for such treatment. The exercise price of
incentive stock options under the 1997 stock plan must be at least equal to the
fair market value of our common stock on the date of grant, as determined in
good faith by our board of directors, while the exercise price of nonstatutory
options must be at least equal to 85% of the fair market value. Holders of more
than 10% of the outstanding voting shares were only granted options with an
exercise price of at least 110% of the fair market value of the underlying stock
on the date of grant, and if such holder has incentive stock options, the term
of the options must not exceed five years. Options granted under the 1997 stock
plan generally vest over a four-year period and must be exercised within ten
years.
The potential realizable value is calculated assuming the aggregate
exercise price on the date of grant appreciates at the indicated rate for the
entire term of the option and that the option is exercised and sold on the last
day of its term at the appreciated price. Stock price appreciation of 5% and 10%
is assumed under the rules of the Securities and Exchange Commission. We can
give no assurance that the actual stock price will appreciate over the term of
the options at the assumed 5% and 10% levels or at any other defined level.
Actual gains, if any, on stock option exercises will be dependent on the future
performance of our common stock. Unless the market price of the common stock
appreciates over the option term, no value will be realized from the option
grants made to the named executive officers.
55
<PAGE>
The following table sets forth summary information with respect to stock
options granted from January 1, 2000 through June 30, 2000 to each of our named
executive officers, directors and all other executive officers as a group in
2000. Each option represents the right to purchase one share of our common
stock. No stock appreciation rights were granted during this period. Except as
otherwise noted, all options vest over a four-year period and must be exercised
within ten years.
OPTION GRANTS IN 2000
(1/1/00 - 6/30/00)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------
NAME PERCENT OF
NUMBER TOTAL
OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES PRICE
OPTIONS IN PER EXPIRATION
GRANTED 2000 SHARE DATE
---------------------------------------------------- --------- ------------ ------- ----------
<S> <C> <C> <C> <C>
William J. Palumbo................................. -- -- -- --
William E. Gibson.................................. -- -- -- --
William E. Kunz.................................... -- -- -- --
Charles C. Pai..................................... -- -- -- --
Donald MacLeod..................................... -- -- -- --
Andrew I. Fillat................................... -- -- -- --
Denny R. S. Ko..................................... -- -- -- --
David F. Millet.................................... -- -- -- --
Patrick A. Rivelli................................. -- -- -- --
Mark S. Silverman.................................. 70,000 4.9% $ 4.00 1/17/10
All Other Executive Officers as a Group (5 persons) 425,000 29.7% $ 5.04(1) (2)
</TABLE>
--------------
(1) The exercise price represents the weighted average exercise price of the
outstanding options.
(2) All options expire ten years from the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth information with respect to the named
executive officers concerning their exercise of stock options during the year
ended December 31, 1999 and the number and value of shares of common stock
underlying the unexercised options held by them at the close of such year. No
stock appreciation rights were exercised during 1999 and no stock appreciation
rights were outstanding as of December 31, 1999. The value realized is
calculated as the difference between the fair value of the shares at the time of
exercise less the exercise price paid for the shares. The value of unexercised
in-the-money options at December 31, 1999 is calculated on the basis of the
assumed initial public offering price of $9.00, less the aggregate exercise
price of the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
SHARES AT DECEMBER 31, 1999 IN-THE-MONEY OPTIONS
ACQUIRED VALUE (#) AT DECEMBER 31, 1999 ($)
EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------- ---------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Palumbo...... 1,250,000(1) $ -- -- -- -- --
William E. Gibson....... 1,400,961(2) -- -- -- -- --
William E. Kunz......... 173,055 3,500 -- -- -- --
Charles C. Pai.......... 135,447(3) 5,303 -- -- -- --
Donald H. MacLeod....... -- -- 162,430 -- 1,418,014 --
</TABLE>
--------------
(1) 250,000 of these option shares become immediately vested upon the
successful consummation of our initial public offering prior to December
31, 2000 or meeting certain revenue and profit targets in 2000.
(2) 800,000 of these option shares became fully vested on the grant date and
48,961 of these option shares became fully vested on April 30, 1999.
(3) In January 2000 our board of directors resolved to accelerate all of Mr.
Pai's unvested option shares such that 100% of his options shares become
fully vested as of September 30, 2000.
56
<PAGE>
EMPLOYEE BENEFIT PLANS
2000 STOCK INCENTIVE PLAN.
INTRODUCTION. The 2000 stock incentive plan is intended to serve as the
successor program to our 1997 stock option/stock issuance plan. The 2000 plan
was adopted by the board on January 18, 2000 and was approved by our
stockholders in May 2000. The 2000 plan will become effective when the
underwriting agreement for this offering is signed. At that time, all
outstanding options under our existing 1997 plan will be transferred to the 2000
plan, and no further option grants will be made under the 1997 plan. The
transferred options will continue to be governed by their existing terms, unless
our compensation committee decides to extend one or more features of the 2000
plan to those options. Except as otherwise noted below, the transferred options
have substantially the same terms as will be in effect for grants made under the
discretionary option grant program of our 2000 plan.
SHARE RESERVE. 8,750,000 shares of our common stock have been authorized
for issuance under the 2000 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1997 plan plus an additional
increase of approximately 1,300,000 shares. The share reserve under our 2000
plan will automatically increase on the first trading day in January each
calendar year, beginning with calendar year 2001, by an amount equal to three
percent of the total number of shares of our common stock outstanding on the
last trading day of December in the prior calendar year, but in no event will
this annual increase exceed 2,000,000 shares. In addition, no participant in the
2000 plan may be granted stock options or direct stock issuances for more than
875,000 shares of common stock in total in any calendar year.
PROGRAMS. Our 2000 plan has five separate programs:
o the discretionary option grant program, under which eligible
individuals in our employ may be granted options to purchase shares of
our common stock at an exercise price not less than the fair market
value of those shares on the grant date;
o the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or the completion of a specified period of
service or as a bonus for past services;
o the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below market stock option grants;
o the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
o the director fee option grant program, under which our non-employee
board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants.
ELIGIBILITY. The individuals eligible to participate in our 2000 plan
include our officers and other employees, our board members and any consultants
we hire.
ADMINISTRATION. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for which
any granted option is to remain outstanding. The compensation committee will
also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.
57
<PAGE>
PLAN FEATURES. Our 2000 plan will include the following features:
o the exercise price for any options granted under the 2000 plan may be
paid in cash or in shares of our common stock valued at fair market
value on the exercise date. The option may also be exercised through a
same-day sale program without any cash outlay by the optionee;
o the compensation committee will have the authority to cancel
outstanding options under the discretionary option grant program,
including any transferred options from our 1997 plan, in return for
the grant of new options for the same or different number of option
shares with an exercise price per share based upon the fair market
value of our common stock on the new grant date; and
o stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock. None of the options
under our 1997 plan have any stock appreciation rights.
CHANGE IN CONTROL. The 2000 plan will include the following change in
control provisions which may result in the accelerated vesting of outstanding
option grants and stock issuances:
o in the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which
is not to be assumed by the successor corporation will immediately
become exercisable for all the option shares, and all outstanding
unvested shares will immediately vest, except to the extent our
repurchase rights with respect to those shares are to be assigned to
the successor corporation;
o the compensation committee will have complete discretion to grant one
or more options which will become exercisable for all the option
shares in the event those options are assumed in the acquisition but
the optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under our 2000 plan
may be accelerated upon similar terms and conditions; and
o the compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a successful tender
offer for more than fifty percent of our outstanding voting stock or a
change in the majority of our board through one or more contested
elections. Such accelerated vesting may occur either at the time of
such transaction or upon the subsequent termination of the
individual's service.
SALARY INVESTMENT OPTION GRANT PROGRAM. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees may
elect to reduce his or her base salary for the calendar year by an amount not
less than $10,000 nor more than $50,000. Each selected individual who makes such
an election will automatically be granted, on the first trading day in January
of the calendar year for which his or her salary reduction is to be in effect,
an option to purchase that number of shares of common stock determined by
dividing the salary reduction amount by two-thirds of the fair market value per
share of our common stock on the grant date. The option will have exercise price
per share equal to one-third of the fair market value of the option shares on
the grant date. As a result, the option will be structured so that the fair
market value of the option shares on the grant date less the exercise price
payable for those shares will be equal to the amount of the salary reduction.
The option will become exercisable in a series of twelve equal monthly
installments over the calendar year for which the salary reduction is to be in
effect.
AUTOMATIC OPTION GRANT PROGRAM. Each individual who first becomes a
non-employee board member at any time after the effective date of this offering
will receive an option grant to purchase 30,000 shares of common stock on the
date such individual joins the board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each
non-employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase 5,000 shares of common stock,
provided such individual has served on the board for at least six months.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option which are not vested at the time of
the optionee's cessation of board service. One-third of the shares subject to
the initial
58
<PAGE>
30,000 share grant will be fully vested at the time of the grant. The remaining
two-thirds of such shares will vest in a series of two successive annual
installments upon the optionee's completion of each year of board service over
the two-year period measured from the grant date. However, the shares will
immediately vest in full upon certain changes in control or ownership or upon
the optionee's death or disability while a board member. The shares subject to
each annual 5,000-share automatic grant will vest upon the optionee's completion
of the one year period measured from the grant date.
DIRECTOR FEE OPTION GRANT PROGRAM. If this program is put into effect in
the future, then each non-employee board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January in the year for which the non-employee board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third of
the fair market value of the option shares on the grant date, and the number of
shares subject to the option will be determined by dividing the amount of the
retainer fee applied to the program by two-thirds of the fair market value per
share of our common stock on the grant date. As a result, the option will be
structured so that the fair market value of the option shares on the grant date
less the exercise price payable for those shares will be equal to the portion of
the retainer fee applied to that option. The option will become exercisable in a
series of twelve equal monthly installments over the calendar year for which the
election is in effect. However, the option will become immediately exercisable
for all the option shares upon the death or disability of the optionee while
serving as a board member.
ADDITIONAL PROGRAM FEATURES. Our 2000 plan will also have the following
features:
o outstanding options under the salary investment and director fee
option grant programs will immediately vest if we are acquired by a
merger or asset sale or if there is a successful tender offer for more
than 50% of our outstanding voting stock or a change in the majority
of our board through one or more contested elections;
o limited stock appreciation rights will automatically be included as
part of each grant made under the salary investment option grant
program and the automatic and director fee option grant programs, and
these rights may also be granted to one or more officers as part of
their option grants under the discretionary option grant program.
Options with this feature may be surrendered to us upon the successful
completion of a hostile tender offer for more than 50% of our
outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount
per surrendered option share based upon the highest price per share of
our common stock paid in that tender offer;
o the board may amend or modify the 2000 plan at any time, subject to
any required stockholder approval; and
o the 2000 plan will terminate no later than January 18, 2010.
2000 EMPLOYEE STOCK PURCHASE PLAN.
INTRODUCTION. Our 2000 employee stock purchase plan was adopted by our
board of directors on January 18, 2000 and was approved by our stockholders in
May 2000. The plan will become effective when the underwriting agreement for
this offering is signed. The plan is designed to allow our eligible employees
and the eligible employees our participating subsidiaries to purchase shares of
common stock, at semi-annual intervals, with their accumulated payroll
deductions.
SHARE RESERVE. 250,000 shares of our common stock will initially be
reserved for issuance. The reserve will automatically increase on the first
trading day in January each calendar year, beginning in calendar year 2001, by
an amount equal to two percent of the total number of outstanding shares of our
common stock on the last trading day in December in the prior calendar year. In
no event will any such annual increase exceed 1,300,000 shares.
OFFERING PERIODS. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for the offering covered is
signed and will end on the last business day in July 2002. The next offering
period will start on the first business day in August 2002, and subsequent
offering periods will set by our compensation committee.
ELIGIBLE EMPLOYEES. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period.
59
<PAGE>
Semi-annual entry dates will occur on the first business day of February and
August each year. Individuals who become eligible employees after the start date
of an offering period may join the plan on any subsequent semi-annual entry date
within that offering period.
PAYROLL DEDUCTIONS. A participant may contribute up to 10% of his or her
cash earnings through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of January and July each
year. However, a participant may not purchase more than 800 shares on any
purchase date, and not more than 150,000 shares may be purchased in total by all
participants on any purchase date. Our compensation committee will have the
authority to change these limitations for any subsequent offering period.
RESET FEATURE. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start date
of the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
CHANGE IN CONTROL. Should we be acquired by merger or sale of all or
substantially all of our assets or more than fifty percent of our voting
securities, then all outstanding purchase rights will automatically be exercised
immediately prior to the effective date of the acquisition. The purchase price
will be equal to 85% of the market value per share on the participant's entry
date into the offering period in which an acquisition occurs or, if lower, 85%
of the fair market value per share immediately prior to the acquisition.
PLAN PROVISIONS. The following provisions will also be in effect under the
plan:
o the plan will terminate no later than the last business day of July
2010; and
o the board may at any time amend, suspend or discontinue the plan,
subject to any required stockholder approval.
MULTIPOINT 1996 STOCK OPTION PLAN.
The Multipoint 1996 stock option plan was assumed in connection with our
acquisition of Multipoint. The 1996 stock option plan was terminated following
the acquisition and no further option grants will be made under the plan,
however, as of June 30, 2000, 25,040 options were outstanding under the plan
which continue to be governed by their existing terms. The outstanding options
are either incentive stock options or non-statutory stock options which were
granted at an exercise price of not less than 100% of the fair market value of
the Multipoint common stock on the grant date. In accordance with the terms of
the individual stock option agreements, in the event that we are acquired by
merger or asset sale, the options under the 1996 stock option plan will become
fully vested and exercisable unless they are either:
o assumed or continued by the successor corporation;
o replaced with a comparable option to purchase capital stock of the
successor corporation;
o replaced with a cash incentive program which preserves the spread
existing on the option shares at the time of the acquisition and
provides for subsequent payout in accordance with the same vesting
schedule applicable to such option; or
o the acceleration of such options was subject to additional limitations
imposed by the Multipoint board of directors at the time of the option
grant.
All repurchase rights shall lapse except to the extent assigned to the
successor corporation in such acquisition.
60
<PAGE>
CERTAIN TRANSACTIONS
SALES OF SECURITIES
The following table and text describes the equity issuances that have
funded our operations from inception through June 30, 2000. All of the equity
issuances described were sold or exchanged at their fair market value.
<TABLE>
<CAPTION>
PREFERRED COMMON
VALUE OF STOCK STOCK WARRANT
CONSIDERATIO FORM OF WARRANT WARRANTS EXERCISE
DATE CLOSED SERIES RECEIVED CONSIDERATION PRICE/SHARE SHARES/ISSUED ISSUED ISSUED PRICE/SHARE
----------------- --------- ------------- ------------- ----------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
May, 1997....... A $ 3,000,000 Cash/License $ 0.50 6,000,000 -- -- --
October, 1997... B $ 1,500,000 Cash $ 2.00 750,000 -- -- --
August, 1998.... C $ 2,855,334 Stock $ 1.33 2,146,868 -- -- --
August, 1998.... Common $ 741,542 Stock $ 0.27 2,746,452 -- -- --
March, 1999..... D $ 8,176,266 Cash $ 1.25 6,541,013 48,000 $ 1.25
September, 1999. E $ 9,003,620 Cash $ 2.50 3,600,000 20,000 362,000 $ 0.75
January, 2000... F $ 15,000,000 Cash $ 5.00 3,000,000 -- -- --
January, 2000... Common $ 17,146,760 License $ 5.00 3,429,352 -- -- --
</TABLE>
SERIES A PREFERRED STOCK. In May 1997, we issued 6,000,000 shares of our
Series A preferred stock, of which 3,000,000 shares were issued to Crossroads
Venture Investors II, L.P. at a price of $0.50 per share, resulting in aggregate
proceeds of $1,500,000 and 3,000,000 shares valued at $0.50 per share were
issued to Wi-LAN, Inc. under the terms of a technology license and manufacturing
agreement. As a result of a subsequent restructuring of this license agreement,
1,700,000 of the shares held by Wi-LAN were returned to us, of which 1,400,000
shares were related to the technology license and manufacturing agreement and
300,000 shares were related to the cancellation of a note payable from Wi-LAN to
us. The license agreement with Wi-LAN was terminated in February 2000.
SERIES B PREFERRED STOCK. In October 1997, we issued 750,000 shares of
our Series B preferred stock at a price of $2.00 per share to Crossroads Venture
Investors III, L.P., resulting in aggregate proceeds of $1.5 million.
SERIES C PREFERRED STOCK. In August 1998, in connection with the
acquisition of Multipoint Networks, Inc., or Multipoint, all outstanding shares
of the former Series 1 preferred stock of Multipoint were exchanged for an
aggregate of 2,146,868 shares of our Series C preferred stock. In November 1999,
we repurchased 59,983 shares of our Series C preferred stock from one investor
for a price of $1.33 per share.
SERIES D PREFERRED STOCK. In March 1999, we issued 6,541,013 shares of
our Series D preferred stock at a price of $1.25 per share, resulting in
aggregate proceeds of $8.2 million. Major investors included Crossroads Venture
Investors VI, L.P., DynaFund International, L.P., and Dynamics Technology, Inc.
In connection with a loan agreement we also issued warrants to purchase an
additional 48,000 shares of our Series D preferred stock to Silicon Valley Bank
at an exercise price of $1.25 per share.
SERIES E PREFERRED STOCK. In September 1999, we issued 3,600,000 shares
of our Series E preferred stock at a price of $2.50 per share, resulting in
aggregate proceeds of $9.0 million and issued warrants at a price of $0.01 per
warrant to purchase an additional 360,000 shares of common stock at an exercise
price of $0.75 per share. GMN Investors II, L.P. was among the major investors.
The conversion price of our Series E preferred stock was subsequently reduced to
$2.42 per share by a resolution of the board of directors adopted on December
21, 1999 following the realization that shares of common stock issuable upon the
exercise of options granted to certain officers should have been considered
outstanding when determining our capitalization for purposes of establishing the
purchase price of the Series E preferred stock. In connection with a loan
agreement we also issued warrants to purchase an additional 20,000 shares of our
Series E preferred stock to Silicon Valley Bank at an exercise price of $2.50
per share.
SERIES F PREFERRED STOCK. In January 2000, we issued 3,000,000 shares of
our Series F preferred stock at a price of $5.00 per share, resulting in
aggregate proceeds of $15.0 million. TRW and CECAP Wireless Group, LLC were the
only investors.
The securities described above were sold under the terms of preferred
stock purchase agreements and an investors' rights agreement on substantially
similar terms, except for terms relating to date and price, under which we made
standard representations, warranties, and covenants, and in which we provided
the purchasers thereunder
61
<PAGE>
with registration rights, information rights, and rights of first refusal, among
other provisions standard in venture capital financings. Each share of our
Series A, Series D and Series F preferred stock will automatically convert into
one share of our common stock upon the completion of the offering. Each share of
our Series B preferred stock will automatically convert into 1.1145 shares of
our common stock and each share of our Series C preferred stock will
automatically convert into 1.0153 shares of our common stock, in each case after
giving effect to an anti-dilution adjustment resulting from the sales of the
Series C and Series D preferred stock, respectively. Each share of our Series E
preferred stock will automatically convert into 1.0331 shares of our common
stock after giving effect to a price adjustment approved by our board of
directors in December 1999, as discussed above.
COMMON STOCK. In addition to the foregoing, we have issued 12,071,838
shares of our common stock to various investors at prices ranging from $0.27 per
share to $5.74 per share in connection with the exercise of warrants and options
we granted. In August 1998, in connection with the acquisition of Multipoint,
all outstanding shares of Multipoint common stock were exchanged for 2,746,452
shares of our common stock. In January 2000, in connection with a purchase and
license agreement with TRW, we issued 3,429,352 shares of our common stock to
TRW for a price of $5.00 per share. The shares of common stock issued or
issuable upon the exercise of common stock purchase warrants enjoy certain
registration rights different from those enjoyed by holders of our preferred
stock. See "Description of Capital Stock--Registration Rights."
The purchasers of the securities described above included, among others,
the following beneficial holders of 5% or more of our capital stock, named
executive officers, directors, and entities associated with them as of June 30,
2000:
<TABLE>
<CAPTION>
TOTAL SHARES
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F COMMON ON AN
COMMON PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK AS-CONVERTED
INVESTOR STOCK STOCK STOCK STOCK STOCK STOCK STOCK WARRANTS BASIS
-------------------- --------- --------- --------- --------- --------- --------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advent Entities (1).... 830,035 -- -- 349,344 259,310 61,984 -- 6,000 1,506,673
Crossroads
Entities (2)........ 46,000 3,000,00 835,875 -- 1,534,767 475,226 -- 10,000 5,901,868
DynaFund
Entities (3)........ 50,000 -- -- -- 1,671,562 -- -- 10,000 1,731,562
GMN Investors II,
L.P (4)............. -- -- -- -- -- 1,652,960 -- 170,000 1,822,960
William E.
Gibson (5).......... 985,961 -- -- 92,113 244,537 -- -- -- 1,322,611
William J.
Palumbo (6)......... 1,220,000 -- -- -- -- -- -- -- 1,250,000
William E. Kunz (7).... 173,055 -- -- -- -- -- -- -- 173,055
Charles C. Pai (8)..... 210,447 -- -- 7,612 -- -- -- -- 218,059
Donald H.
MacLeod (9)......... 162,430 -- -- 19,031 -- -- -- -- 181,461
TRW (10)............... 3,429,352 -- -- -- -- -- 2,300,000 10,000 5,739,352
Patrick Rivelli........ 315,000 -- -- -- -- -- -- -- --
Denny R. S. Ko (11).... 70,000 -- -- -- -- -- -- -- --
David F. Millet (12)... 70,000 -- -- -- -- -- -- -- --
Andrew I. Fillat (13).. 70,000 -- -- -- -- -- -- -- --
</TABLE>
--------------
(1) Consists of 141,530 shares held by Adtel, L.P., 191,527 shares held by
Advent Crown Fund, C.V., 9,173 shares held by Advent Crown Fund II, C.V.,
99 shares held by Advent International Investors II, L.P., 1,001,741
shares held by Global Private Equity II, L.P., 156,603 shares held by
Golden Gate Development and Investment, L.P., a warrant exercisable for
4,488 shares of common stock held by Global Private Equity II, L.P., a
warrant exercisable for 624 shares held by Adtel, L.P. and a warrant
exercisable for 888 shares held by Advent Crown Fund II, C.V. Andrew J.
Fillat, a member of our board of directors, is a Managing Director of
Advent International Corporation, the general partner of the Advent
Entities.
(2) Consists of 334,767 shares held by Crossroads Venture Capital LLC,
3,000,000 shares held by Crossroads Venture Investors II, L.P., 835,875
shares held by Crossroads Venture Investors III, L.P., 1,200,000 shares
held by Crossroads Venture Investors VI, L.P., 521,226 shares held by
Crossroads Venture Investors VII, L.P. and a warrant exercisable for
10,000 shares of common stock held by Crossroads Venture Capital, LLC.
62
<PAGE>
William E. Gibson, one of our co-founders and the Chairman of our board of
directors, is the Managing Member of Crossroads Venture Capital, LLC and
Managing Partner of the other Crossroads Entities.
(3) Consists of 435,986 shares held by DynaFund International, L.P., 370,918
shares held by DynaFund, L.P., 914,658 shares held by Dynamics Technology,
Inc. and a warrant exercisable for 10,000 shares of common stock held by
DynaTech Capital, LLC. Denny R. S. Ko, a member of our board of directors,
is a General Partner of DynaFund International, L.P. and DynaFund, L.P.
and is a member of the board of directors of Dynamics Technology, Inc.
(4) David F. Millet, a member of our board of directors, is General Partner of
GMN Investors II, L.P.
(5) Consists of 1,405,498 shares held by Mr. Gibson, 92,113 shares held
jointly by Mr. Gibson and his wife, Kahala-Ann Trask Gibson and 240,000
shares held by the William E. and Kahala-Ann Trask Gibson Charitable
Remainder Trust. Excludes 334,767 shares held by Crossroads Venture
Capital LLC, 3,000,000 shares held by Crossroads Venture Investors II,
L.P., 835,875 shares held by Crossroads Venture Investors III, L.P.,
1,200,000 shares held by Crossroads Venture Investors VI, L.P., 521,226
shares held by Crossroads Venture Investors VII, L.P. and a warrant
exercisable for 10,000 shares of common stock held by Crossroads Venture
Capital LLC. Mr. Gibson, Managing Partner of each of the Crossroads
Entities, disclaims beneficial ownership of the shares held by the
Crossroads Entities except to the extent of his pecuniary interest
therein.
(6) Mr. Palumbo is our President and Chief Executive Officer.
(7) Mr. Kunz is our Senior Vice President, Engineering and Chief Technology
Officer.
(8) Mr. Pai is one of our co-founders and our Senior Vice President, Finance
and was our Chief Financial Officer and Secretary until April, 2000.
(9) Mr. MacLeod is one of our founders and our Senior Vice President,
International.
(10) TRW holds more than 5% of our capital stock and is entitled to designate
one member of our board of directors. TRW has designated Mark Silverman as
its designee to our board.
(11) Excludes 435,986 shares held by DynaFund International, L.P., 370,918
shares held by DynaFund, L.P., 914,658 shares held by Dynamics Technology,
Inc. and a warrant exercisable for 10,000 shares of common stock held by
DynaTech Capital, LLC. Dr. Ko, Chairman of the board of directors of
Dynamics Technology, Inc. and a General Partner of DynaFund International
and DynaFund, L.P., disclaims beneficial ownership of the shares held by
the DynaFund Entities except to the extent of his pecuniary interest
therein.
(12) Excludes 1,652,960 shares held by GMN Investors II, L.P. and warrants
exercisable for 170,000 shares held by GMN Investors II, L.P. Mr. Millet,
General Partner of GMN Investors II, L.P., disclaims beneficial ownership
of the shares held by GMN Investors II, L.P. except to the extent of his
pecuniary interest therein.
(13) Excludes 141,530 shares held by Adtel, L.P., 191,527 shares held by Advent
Crown Fund, C.V., 9,173 shares held by Advent Crown Fund II, C.V., 99
shares held by Advent International Investors II, L.P., 1,001,741 shares
held by Global Private Equity II, L.P., 156,603 shares held by Golden Gate
Development and Investment, L.P., a warrant exercisable for 4,488 shares
of common stock held by Global Private Equity II, L.P., a warrant
exercisable for 624 shares held by Adtel, L.P. and a warrant exercisable
for 888 shares held by Advent Crown Fund II, C.V. Mr. Fillat, a member of
our board of directors, is a Managing Director of Advent International
Corporation, the general partner of the Advent Entities.
OPTIONS GRANTED TO FOUNDERS
The following individuals were co-founders of Wireless, Inc. and have
been granted the options set forth below since we were founded in 1997:
NAME OPTIONS EXERCISE PRICE
----- ------------ --------------------
William E. Gibson.................... 1,250,961 $ 0.297 per share
150,000 $ 0.20 per share
Charles C. Pai....................... 88,697 $ 0.27 per share
45,750 $ 0.16 per share
75,000 $ 0.05 per share
Donald H. MacLeod.................... 84,380 $ 0.27 per share
3,050 $ 0.16 per share
75,000 $ 0.05 per share
In addition we have granted the following directed stock issuances to our
founders:
NAME COMMON STOCK
---- --------------
Charles C. Pai..................................... 1,000 shares
63
<PAGE>
MULTIPOINT NETWORKS, INC. ACQUISITION
In August 1998, we acquired Multipoint. In connection with this
acquisition, the former common stockholders of Multipoint exchanged all
outstanding shares of common stock of Multipoint for an aggregate of 2,746,452
shares of our common stock. The former Multipoint Series 1 preferred
stockholders exchanged all outstanding shares of their Multipoint Series 1
preferred stock for an aggregate of 2,146,838 shares of our Series C preferred
stock. In November 1999, we repurchased 59,983 shares of Series C preferred
stock from one investor. Certain holders of 5% or more of our capital stock,
executive officers, directors and persons associated with them acquired our
Series C preferred stock as a result of the Multipoint acquisition. Among the
parties participating in this exchange, Mr. Gibson, the Chairman of our board of
directors, received 90,725 shares of our Series C preferred stock. Charles C.
Pai, our Senior Vice President, Finance, received 7,498 shares of our Series C
preferred stock. Donald MacLeod, our Senior Vice President, International,
received 18,745 shares of our Series C preferred stock. Adtel L.P. received
32,324 shares of our Series C preferred stock. Advent Crown Fund C.V. received
45,829 shares of our Series C preferred stock. Global Private Equity II, L.P.
received 228,484 shares of our Series C preferred stock and Golden Gate
Development and Investment, L.P. received 37,445 shares of our Series C
preferred stock. At the time of the acquisition, Mr. Gibson was our Chief
Executive Officer and was also serving as the Chief Executive Officer of
Multipoint, Mr. Pai was our Chief Financial Officer and was also serving as the
Chief Financial Officer of Multipoint and Mr. Gushiken was our Vice President,
Manufacturing and was also serving as the Vice President, Manufacturing of
Multipoint. See "--Sales of Securities."
STRATEGIC RELATIONSHIP WITH TRW
We entered into a purchase and license agreement with TRW on January 14,
2000. Under the agreement, we purchased and obtained an exclusive, including as
to TRW, royalty-free worldwide license in point-to-multipoint wireless
networking technology, generally referred to in this prospectus as the STARPORT
technology. Any products we develop based on such technology may only be sold
with base stations configured for outdoor use. Sales of products containing the
STARPORT technology with base stations configured for indoor use or to the U.S.
Government--including organizations in which the U.S. is a member, such as
NATO--must be made through TRW or its licensees. The agreement provides TRW with
a royalty-free worldwide non-exclusive license in any improvements made by us
upon the STARPORT technology for the manufacture and sale of products to the
U.S. Government. If we do not offer a commercial version of a product containing
the STARPORT technology for sale by July 14, 2001, unless the delay is the fault
of TRW or attributable to certain specified reasons, we will lose our exclusive
license with TRW.
The STARPORT technology was originally developed by TRW Systems and
Information Group for military communications. TRW is an international company
that provides advanced technology products and services. The principal
businesses of TRW and its subsidiaries are the design, manufacture and sale of
products and the performance of systems engineering, research and technical
services for industry and the United States Government in the automotive,
aerospace and information systems markets. In connection with this agreement,
TRW acquired approximately 18% of our capital stock outstanding prior to the
offering, including 2,300,000 shares of our Series F preferred stock and
3,429,352 shares of common stock.
Under the terms of the purchase and license agreement, TRW has agreed to
establish an office for the continued development of STARPORT products to be
staffed by employees of both us and TRW and managed by us. TRW has agreed to
provide substantially all of the supplies, infrastructure and services for this
office. TRW will charge us for services performed by its employees at negotiated
rates, including expenses for overhead, facilities, equipment and general and
administrative expenses. TRW will also provide, at no additional charge, 24
person-months of consultation advice and 12 person-months of assistance in
responding to actual and potential claims regarding infringements of third-party
intellectual property rights in connection with the STARPORT technology. TRW is
required to pay for certain field trials of the STARPORT technology and all
products purchased or manufactured for use in these trials.
The purchase and license agreement also provides that, until January 14,
2003, at our option, TRW will purchase from L3 Communications, Inc. products and
components needed for use in, as well as services to develop and manufacture,
our STARPORT system at a negotiated markup. TRW will also pass through to us any
rights of exclusivity granted to TRW by L3 and any representations and
warranties granted in favor of TRW by L3.
In consideration of the right and licenses provided under the purchase
and license agreement and the technical assistance to be provided by TRW, we
have agreed to pay TRW 10% of the net proceeds of this offering or any
64
<PAGE>
private placement of equity occurring on or before October 14, 2000, until we
have paid TRW an aggregate of $2.5 million. The balance of this amount is due on
January 1, 2001, if it has not been paid prior to that date.
The purchase and license agreement terminates upon the expiration of the
last patent licensed under the agreement unless terminated earlier by either
party 30 days following a default by the other party. Liability for breaches
under the agreement by either party to the other is limited to $17.0 million
with the exception of, in our case, additional money to be paid by us to TRW
under the agreement or a related time and materials agreement.
As contemplated by the purchase and license agreement, we also entered
into a time and materials agreement and a teaming agreement with TRW. The time
and materials agreement describes the rates and payment terms under which TRW
will perform certain research and development activities for us to commercialize
the STARPORT technology. The teaming agreement describes the roles and
responsibilities of TRW and us in delivering STARPORT to a potential customer
and the royalties payable to TRW in connection with such sales if they occur.
Either or both agreements may be cancelled by either TRW or us without canceling
the purchase and license agreement.
COMMITMENTS TO PROVIDE CAPITAL
In February 2000, we received capital commitments of $2.5 million each
from Dynamics Technology, Inc., Gemini Investors LLC, Stratford Equity Partners,
L.P., Crossroads Venture Capital, LLC and TRW in the event that we did not
complete an initial public offering with gross proceeds of $25 million by May
31, 2000. Except for Stratford Equity Partners, each of these entities holds
more than 5% of our capital stock and is affiliated with a member of our board
of directors. To date, we have not needed to call upon these capital
commitments. The $12.5 million in commitments, if required, will be documented
in the form of convertible promissory notes bearing interest at a fixed rate of
10% per annum. If not prepaid, the notes will convert into shares issued in our
next round of equity financing of at least $15.0 million. In connection with
obtaining these commitments, we issued warrants to purchase 10,000 shares of our
common stock to each of these five investors at a price of $4.00 per share and
agreed to issue additional warrants for 30,000 shares of our common stock to
each of these five investors at the then fair market value per share if the loan
commitments are exercised, for each $2,500,000 borrowed. These warrants expire
upon the earlier of 5 years or 30 days after the consummation of an initial
public offering.
AGREEMENTS WITH OFFICERS AND DIRECTORS
On December 10, 1999, Wireless made a full recourse loan to William J.
Palumbo in the amount of $168,750 to fund the exercise of his option to purchase
625,000 shares of common stock. The loan bears interest at the rate of 6.47% per
year compounded annually, and principal and interest due under the loan are
payable on the earlier to occur of December 10, 2009, default on the loan, sale
of any of the underlying securities or termination of Mr. Palumbo's employment
with us. The loan is secured by a lien on the option shares.
We have entered into a consulting agreement with William E. Gibson under
which Mr. Gibson is paid $15,000 per month for his services as Chairman of our
board of directors.
OTHER RELATED PARTY TRANSACTIONS
We have granted options and issued common stock to our executive officers
and directors. See "Management--Director Compensation" and "Principal
Stockholders."
Holders of shares of preferred stock and certain holders of warrants for
the issuance of common stock are entitled to registration rights in respect of
the common stock issued or issuable upon conversion or exercise thereof. See
"Description of Capital Stock--Registration Rights."
We have entered into an indemnification agreement with each of our
executive officers and directors containing provisions that may require us,
among other things, to indemnify our officers and directors against liabilities
that may arise by reason of their status or service as officers or directors
(other than liabilities arising from willful misconduct of a culpable nature)
and to advance expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Management--Limitation of Liability and
Indemnification."
We have entered into non-competition and confidentiality agreements with
some of our officers.
We believe that all of the transactions set forth above were made on
terms no less favorable to us than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between us and our officers, directors and principal stockholders and their
affiliates and any transactions between us and any entity with which our
officers, directors or five percent stockholders are affiliated will be approved
by a majority of the board of directors, including a majority of the independent
and disinterested outside directors of the board of directors and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
65
<PAGE>
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of our common stock as of June 30, 2000, by the following individuals or groups:
o each person or entity who is known by us to own beneficially more than
5% of our outstanding stock;
o each of the named executive officers;
o each of our directors; and
o all directors and executive officers as a group.
Each stockholder's percentage ownership prior to the offering in the
following table is based on 32,736,665 shares of common stock outstanding as of
June 30, 2000, and 41,236,665 shares of common stock outstanding after the
offering, assuming in each case the conversion of all outstanding shares of
preferred stock upon the closing of this offering, the exercise of all
outstanding warrants to purchase preferred stock and the exercise of all
outstanding warrants to purchase common stock which, by their terms, expire or
convert within 30 days of the completion of this offering, plus any outstanding
options and any other warrants to purchase common stock exercisable within 60
days of June 30, 2000 held by the particular stockholder that are included in
the first column. The numbers shown in the table below assume no exercise by the
underwriters of their over-allotment option.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o Wireless, Inc., 5452 Betsy Ross Drive, Santa Clara, CA
95054. Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock held by them.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES BENEFICIALLY
BENEFICIALLY --------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PRIOR TO OFFERING AFTER THE OFFERING
---------------------------------------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
Crossroads Entities (1)........................... 5,901,868 18.0% 14.3%
TRW (2)........................................... 5,739,352 17.5% 13.9%
DynaFund Entities (3)............................. 1,731,562 5.3% 4.2%
GMN Investors II, L.P. (4)........................ 1,822,960 5.5% 4.4%
William E. Gibson (5)............................. 7,224,479 22.1% 17.5%
William J. Palumbo(6)............................. 1,220,000 3.7% 3.0%
Charles C. Pai.................................... 218,059 * *
William E. Kunz................................... 173,055 * *
Donald H. MacLeod................................. 181,461 * *
Patrick A. Rivelli (7)............................ 315,000 * *
Denny R.S. Ko (8)................................. 1,801,562 5.5% 4.4%
David F. Millet (9)............................... 1,892,960 5.8% 4.6%
Andrew I. Fillat (10)............................. 1,576,673 4.8% 3.8%
Mark S. Silverman(11)............................. 70,000 * *
All directors and executive officers as a group
(14 persons) (12).............................. 15,540,176 47.0% 37.4%
</TABLE>
--------------
* Less than one percent.
(1) Consists of 334,767 shares held by Crossroads Venture Capital LLC,
3,000,000 shares held by Crossroads Venture Investors II, L.P., 835,875
shares held by Crossroads Venture Investors III, L.P., 1,200,000 shares
held by Crossroads Venture Investors VI, L.P., 521,226 shares held by
Crossroads Venture Investors VII, L.P. and a warrant exercisable for 10,000
shares of common stock held by Crossroads Venture Capital LLC
(collectively, the Crossroads Entities). The address for the Crossroads
Entities is 155 Montgomery Street, Suite 603, San Francisco, California
94104. Crossroads Venture Capital LLC is the general partner of each of the
other Crossroads Entities. William E. Gibson and his wife, Kahala-Ann Trask
Gibson, are the sole members of Crossroads Venture Capital LLC, of which
Mr. Gibson is the President and Managing Member. Mr. Gibson has sole voting
and dispositive power over shares of our stock held by the Crossroads
Entities.
(2) Includes a warrant exercisable for 10,000 shares of common stock. The
address for TRW is 12011 Sunset Hills Road, Reston, Virginia 20190.
Executive officers of TRW designated from time to time by the board of
66
<PAGE>
directors of TRW have the power and authority to vote and/or dispose of, on
behalf of TRW, shares of stock owned by TRW.
(3) Consists of 435,986 shares held by DynaFund International, L.P., 370,918
shares held by DynaFund, L.P. and 914,658 shares held by Dynamics
Technology, Inc. and a warrant exercisable for 10,000 shares of common
stock held by DynaTech Capital, LLC. (collectively, the DynaFund Entities).
The address for the DynaFund Entities is 21311 Hawthorne Blvd, Suite 300,
Torrance, California 90503. Denny R. S. Ko, James Liao and Richard Whiting
are the General Partners of DynaFund International L.P. and DynaFund, L.P.
who exercise control over shares held by those funds. Executive officers of
Dynamics Technology designated from time to time by the board of directors
of Dynamics Technology have the power and authority to vote and/or dispose
of, on behalf of Dynamics Technology, shares of our stock owned by Dynamics
Technology. Dr. Ko is Chairman of the board of directors of, Dynamics
Technology, Inc.
(4) Includes warrants exercisable for an aggregate of 170,000 shares of common
stock. The address for GMN Investors II, L.P. is 20 William Street,
Wellesley, Massachusetts 12481. David F. Millet, James Goodman and Jeffery
Newton are the Partners of GMN Investors II, L.P. who exercise control over
the shares held by the fund.
(5) Includes 1,082,611 shares held jointly by Mr. Gibson and his wife,
Kahala-Ann Trask Gibson, 240,000 shares held by the William E. and
Kahala-Ann Trask Gibson Charitable Remainder Trust, 334,767 shares held by
Crossroads Venture Capital LLC, 3,000,000 shares held by Crossroads Venture
Investors II, L.P., 835,875 shares held by Crossroads Venture Investors
III, L.P., 1,200,000 shares held by Crossroads Venture Investors VI, L.P.,
521,226 shares held by Crossroads Venture Investors VII, L.P. and a warrant
exercisable for 10,000 shares of common stock held by Crossroads Venture
Capital LLC. William E. and Kahala-Ann Trask Gibson are the sole members of
Crossroads Venture Capital LLC. Mr. Gibson, Managing Partner of each of the
Crossroads Entities, disclaims beneficial ownership of the shares held by
the Crossroads Entities except to the extent of his pecuniary interest
therein. Further, Mr. Gibson disclaims beneficial ownership of 96,900
shares held by Crossroads Venture Investors II in which he holds a
pecuniary interest, such shares being held in the Gibson Family Trust, an
educational trust for Ho'okele O Kamakani Trask Gibson Granroos, Kalae
Ola'a Ku'upoki'ialoha Kamaka'alohi o Pu'ulena Trask Sharpe, Mililani
Kaleionaona Trask-Batti, Kawehi Lakea Imaikalani Trask-Batti, Hulali Kakea
I Mahealani Trask, Kaiana Kaukaohu Trask, Mahi Lee William Cooper and
Kauakea Ian Bucken Cooper. See Footnote 1.
(6) Includes 250,000 shares subject to vesting restrictions which become
immediately vested upon the successful consummation of our initial public
offering prior to December 31, 2000 or upon meeting certain revenue and
profit targets in 2000.
(7) Consists of 315,000 shares held by the Patrick A. Rivelli Senior and Yvonne
D. Rivelli Trust. The address for Mr. Rivelli is 12221 Merit Drive, #935,
Dallas, Texas 75251.
(8) Includes 435,986 shares held by DynaFund International, L.P., 370,918
shares held by DynaFund, L.P., 914,658 shares held by Dynamics Technology,
Inc. and a warrant exercisable for 10,000 shares of common stock held by
DynaTech Capital, LLC. Dr. Ko, Chairman of the board of directors of
Dynamics Technology, Inc. and a General Partner of DynaFund International
and DynaFund, L.P., disclaims beneficial ownership of the shares held by
the DynaFund Entities except to the extent of his pecuniary interest
therein. See Footnote 3.
(9) Includes 1,652,960 shares held by GMN Investors II, L.P. and warrants
exercisable for 170,000 shares held by GMN Investors II, L.P. Mr. Millet,
General Partner of GMN Investors II, L.P., disclaims beneficial ownership
of the shares held by GMN Investors II, L.P. except to the extent of his
pecuniary interest therein. See Footnote 4.
(10) Includes 141,530 shares held by Adtel, L.P., 191,527 shares held by Advent
Crown Fund, C.V., 9,173 shares held by Advent Crown Fund II, C.V., 99
shares held by Advent International Investors II, L.P., 1,001,741 shares
held by Global Private Equity II, L.P., 156,603 shares held by Golden Gate
Development and Investment, L.P., a warrant exercisable for 4,488 shares of
common stock held by Global Private Equity II, L.P., a warrant exercisable
for 624 shares of common stock held by Adtel, L.P. and a warrant
exercisable for 888 shares of common stock held by Advent Crown Fund II,
C.V. (collectively, the Advent Entities). In its capacity as general
partner of the Advent Entities, Advent International Corporation exercises
sole voting and investment power with respect to all shares held by the
Advent Entities. Advent International Corporation exercises its voting and
investment power through a group of three persons: Douglas A. Brown,
President and Chief Executive Officer, Andrew J. Fillat, Managing Director
responsible for the investment in us and Janet L. Hennessy, Vice President
responsible for monitoring public securities, none of whom may act
independently and a majority of whom must act in concert to exercise voting
or investment power over the beneficial holdings of such entity. Therefore,
no individual in this group other than Advent International
67
<PAGE>
Corporation is deemed to have sole voting or investment power. Mr. Fillat
disclaims beneficial ownership of shares held by the Advent Entities except
to the extent of his pecuniary interest therein.
(11) Consists of options exercisable for 70,000 shares of common stock. Mr.
Silverman is an officer of TRW. See Footnote 2.
(12) Includes options exercisable for 458,332 shares of common stock within 60
days of June 30, 2000 under the 1997 stock option/stock issuance plan and
warrants exercisable for 196,000 shares of common stock within 60 days of
June 30, 2000. See Footnotes 5-11.
68
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
At the closing of this offering, we will be authorized to issue 100,000,000
shares of common stock, $0.001 par value per share, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value per share, after giving effect to
the amendment of our certificate of incorporation to delete references to the
existing preferred stock following conversion of that stock. The following
description of capital stock gives effect to the certificate of incorporation to
be filed upon closing of this offering. Immediately following the completion of
this offering, and assuming no exercise of the underwriters' over-allotment
option, an aggregate of shares of common stock will be issued and outstanding,
and no shares of preferred stock will be issued and outstanding.
The following provides a summary description of our capital stock and our
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and the provisions
of applicable Delaware law.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock that may come into existence, the
holders of common stock are entitled to receive ratably those dividends, if any,
as may be declared from time to time by the board of directors out of funds
legally available for dividends. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, the holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. Our common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock.
PREFERRED STOCK
Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of our
authorized but unissued shares of preferred stock with any dividend, redemption,
conversion and exchange provisions as may be provided in the particular series.
Any series of preferred stock may possess voting, dividend, liquidation and
redemption rights superior to those of the common stock. The rights of the
holders of our common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. Issuance of a new series of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of entrenching our board of directors and making
it more difficult for a third-party to acquire, or discourage a third-party from
acquiring, a majority of our outstanding voting stock. We have no present plans
to issue any shares of or designate any series of preferred stock.
WARRANTS
As of June 30, 2000, we had outstanding warrants to purchase an aggregate
of 602,622 shares of our common stock on an as-converted basis, including:
o Warrants to purchase 316,000 shares of common stock at $0.75 per share
which will expire on March 31, 2005;
o Warrants to purchase 30,460 shares of common stock at $1.22 per share
which will expire on May 5, 2002;
o Warrants to purchase 48,000 shares of common stock at $1.25 per share,
which will expire on October 16, 2003;
o Warrants to purchase 20,662 shares of common stock at $2.50 per share,
which will expire on September 13, 2004 and upon the closing of this
offering, respectively;
o Warrants to purchase 150,000 shares of common stock at $4.00 per
share, which will expire 30 days after the closing of this offering;
and
o Warrants to purchase 37,500 shares of common stock at $4.00 per share,
which will expire on June 1, 2005.
69
<PAGE>
CONVERTIBLE PROMISSORY NOTE
AMT Capital, Ltd. holds a promissory note, dated as of August 17, 1999 in
the principal amount of $1,000,000 which note is convertible into 320,000 shares
of Series E preferred stock and upon conversion the holder will receive a
warrant to purchase 32,000 shares of common stock at an exercise price of $0.75
per share. The note matures on September 1, 2004, bears interest at a fixed rate
of 10% per annum and may be converted at any time at or prior to maturity.
REGISTRATION RIGHTS
After this offering, under the terms of an investors' rights agreement,
holders of 20,514,827 shares of our common stock and 314,000 shares of our
common stock issuable upon the exercise of outstanding warrants will be entitled
to certain registration rights with respect to their capital stock of Wireless.
Under the investors' rights agreement, at any time after the earlier of January
31, 2001 or three months after our initial public offering, holders of more than
30% of these shares may require us to effect registration under the Securities
Act, subject to the board of directors' right if such registration would harm
us, to defer such registration for up to 60 days. In addition, if we propose to
issue equity securities under the Securities Act for our own account in an
underwritten public offering, then any of the investors has a right, subject to
quantity limitations determined by the underwriters, to request that we register
such investor's registrable securities. Once we qualify to register the sale of
securities on Form S-3, under the investors rights agreement, investors
proposing to sell an aggregate of at least $2,000,000 of registrable securities
may require us to effect one Form S-3 registration per year. All registration
expenses incurred in connection with any of the registrations described above
will be borne by us. The participating investors will pay for underwriting
discounts and commissions incurred in connection with any such registrations. We
have agreed to indemnify the investors against liabilities such as Securities
Act liabilities in connection with any registration effected by us in which
their shares are included under the investors' rights agreement. Registration of
any of the shares of common stock held by security holders with registration
rights would result in such shares becoming freely tradeable without restriction
under the Securities Act immediately upon effectiveness of such registration.
These registration rights terminate once all shares of our stock may be sold
under Rule 144 during any 90 day period. In addition, holders of 138,622 shares
of our common stock issuable upon the exercise of outstanding warrants will be
entitled to registration rights different from those described above. In
particular, these holders are entitled to include their shares in any
registration initiated by us or by other holders on Forms S-1 or S-3 (excluding
registrations relating to stock plans) but are not entitled to initiate these
registrations themselves. Holders of an additional 200,000 shares issuable upon
the exercise of outstanding options will be entitled to require us to register
their shares on a Form S-3 reoffer prospectus beginning one year after the date
of this prospectus.
COMPLIANCE WITH CALIFORNIA LAW
We are currently subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, certain provisions of California corporate law will apply to that
company if more than 50% of our outstanding voting securities are held of record
by persons having addresses in California and the majority of the company's
operations occur in California. For example, while we are subject to Section
2115, stockholders may cumulate votes in electing directors. This means that
each stockholder may vote the number of votes equal to the number of candidates
multiplied by the number of votes to which the stockholder's shares are normally
entitled in favor of one candidate. This potentially allows minority
stockholders to elect some members of the board of directors. When we are no
longer subject to Section 2115, unless our certificate of incorporation is
amended to provide for cumulative voting, cumulative voting will not be allowed
and a holder of 50% or more of our voting stock will be able to control the
election of all directors. In addition to this difference, Section 2115 has the
following additional effects:
o enables removal of directors with or without cause with majority
stockholder approval;
o places limitations on the distribution of dividends;
o extends additional rights to dissenting stockholders in any
reorganization, including a merger, sale of assets or exchange of
shares; and
o provides for information rights and required filings in the event we
effect a sale of assets or complete a merger.
70
<PAGE>
We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we may have at
least 800 stockholders by the record date for our 2000 annual meeting of
stockholders. If these two conditions occur, then we will no longer be subject
to Section 2115 as of the record date for our 2000 annual meeting of
stockholders.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Our certificate of incorporation authorizes our board to issue up to
5,000,000 shares of undesignated preferred stock after the offering. Further,
without any further vote or action on the part of our stockholders, our board of
directors will have the authority to determine the rights, preferences,
privileges and restrictions of the undesignated preferred stock. See
"--Preferred Stock." Our certificate of incorporation also provides that all
stockholder action must be effected at a duly called meeting of stockholders and
not by written consent. In addition, our certificate of incorporation and bylaws
do not permit our stockholders to call a special meeting of stockholders. Only
our Chief Executive Officer, President, Chairman of the Board or a majority of
the board of directors are permitted to call a special meeting of stockholders.
Our certificate of incorporation also provides that the board of directors is
divided into three classes, with each director assigned to a class with a term
of three years, and that the number of directors may only be determined by the
board of directors. Our bylaws require that stockholders give advance notice to
our secretary of any nominations for director or other business to be brought by
stockholders at any stockholders' meeting, and that the chairman of the board
has the authority to adjourn any meeting called by the stockholders. Our bylaws
also require a supermajority vote of members of the board of directors and/or
stockholders to amend certain bylaw provisions. These provisions of our restated
certificate of incorporation and our bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control of the
company. These provisions also may have the effect of preventing changes in our
management. See "Risk Factors--Our certificate of incorporation and bylaws may
discourage potential acquisitions of our business by third parties that
stockholders may consider favorable and this may reduce the price of our common
stock."
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
o prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder;
o upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned by:
o persons who are directors and also officers; and
o employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer; or
o on or subsequent to that date, the business combination is approved
by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines a business combination to include the following:
o any merger or consolidation involving the corporation and the
interested stockholder;
o any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
o subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
o any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder;
or
71
<PAGE>
o the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A.
72
<PAGE>
MATERIAL UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS
The following is a general discussion of the material U.S. federal income
and estate tax consequences of the ownership and disposition of the common stock
applicable to holders who are not U.S. persons within the meaning of the
Internal Revenue Code. A U.S. person is any person who is:
o a citizen or resident of the U.S.;
o a corporation, partnership, unless otherwise provided by Treasury
regulations, or other entity created or organized in the U.S. or under
the laws of the U.S. or any political subdivision thereof;
o an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source; or
o a trust whose administration is subject to the primary supervision of
a U.S. court and which has one or more U.S. persons who have the
authority to control all substantial decisions of the trust.
This discussion does not address all aspects of U.S. federal income and
estate taxation that may be relevant in light of a holder's particular facts and
circumstances, such as being a U.S. expatriate, and does not address any tax
consequences arising under the laws of any state, local or non-U.S. taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect. We have
not and will not seek a ruling from the Internal Revenue Service with respect to
the U.S. federal income and estate tax consequences described below, and as a
result, there can be no assurance that the Internal Revenue Service will not
disagree with or challenge any of the conclusions set forth in this discussion.
In addition, the Internal Revenue Service is not precluded from adopting a
contrary position.
DIVIDENDS
Any dividend paid to a holder of common stock who is not a U.S. person
generally will be subject to U.S. withholding tax either at a rate of 30% of the
gross amount of the dividend or such lower rate as may be specified by an
applicable tax treaty. Dividends received by a holder that are effectively
connected with a U.S. trade or business conducted by the holder are exempt from
such withholding tax. However, those effectively connected dividends, net of
certain deductions and credits, are taxed at the same graduated rates applicable
to U.S. persons.
In addition to the graduated rates described above, dividends received by a
corporate holder that are effectively connected with its U.S. trade or business
may also be subject to a branch profits tax at a rate of 30% or such lower rate
as may be specified by an applicable tax treaty.
A holder of common stock that is eligible for a reduced rate of withholding
tax under the terms of a tax treaty may obtain a refund of any excess amounts
currently withheld by filing an appropriate claim for refund with the Internal
Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A holder of common stock who is not a U.S. person generally will not be
subject to U.S. federal income tax on any gain realized upon the sale or other
disposition of his common stock unless:
o the gain is effectively connected with a U.S. trade or business of the
holder, which gain, in the case of a corporate holder, must also be
taken into account for branch profits tax purposes;
o the holder is an individual who holds his or her common stock as a
capital asset and who is present in the U.S. for a period or periods
aggregating 183 days or more during the calendar year in which the
sale or disposition occurs and certain other conditions are met; or
o we are or have been a United States real property holding corporation
within the meaning of the Internal Revenue Code at any time within the
shorter of the five-year period preceding the disposition or the
holder's holding period for its common stock. We have determined that
we are not and do not believe that we will become a United States real
property holding corporation.
73
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder of the common
stock. Under tax treaties or other agreements, the Internal Revenue Service may
make its reports available to tax authorities in the recipient's country of
residence.
Dividends paid to a holder who is not a U.S. person at an address within
the U.S. may be subject to backup withholding at a rate of 31% if the holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and other information to the payer. Backup
withholding will generally not apply to dividends paid to holders who are not
U.S. persons at an address outside the U.S. on or prior to December 31, 2000,
unless the payer has knowledge that the payee is a U.S. person. Final Treasury
Regulations regarding withholding and information reporting provide that
payments of dividends to a holder who is not a U.S. person at an address outside
the U.S. after December 31, 2000, may be subject to backup withholding at a rate
of 31% unless such holder satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is subject
to information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a holder of common stock who is not a U.S. person outside the
U.S. to or through a foreign office of a broker will not be subject to backup
withholding but will be subject to information reporting requirements if the
broker is a U.S. person, a controlled foreign corporation as defined in the
Internal Revenue Code, or a foreign person 50% or more of whose gross income for
certain periods is from the conduct of a U.S. trade of business, unless the
broker has documentary evidence in its files of the holders' non-U.S. status and
certain other conditions are met, or the holder otherwise establishes an
exemption. Neither backup withholding nor information reporting generally will
apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
In general, the final Treasury Regulations applicable to payments made
after December 31, 2000, described above, do not significantly alter the
substantive withholding and information reporting requirements but do alter the
procedures for claiming benefits of an income tax treaty and change the
certification procedures relating to the receipt by intermediaries of payments
on behalf of the beneficial owner of shares of common stock. Holders should
consult their tax advisors regarding the effect, if any, of those final Treasury
Regulations on an investment in the common stock.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment, a refund may be obtained,
provided that the required information is furnished to the Internal Revenue
Service.
ESTATE TAX
An individual holder who owns common stock at the time of his death or had
made one or more of certain lifetime transfers of an interest in common stock
will be required to include the value of that common stock in such holder's
gross estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
THE FOREGOING IS A DISCUSSION OF THE MATERIAL U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF COMMON
STOCK BY HOLDERS WHO ARE NOT U.S. PERSONS WITHIN THE MEANING OF THE INTERNAL
REVENUE CODE. ACCORDINGLY, INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF
COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
74
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and we do not know the effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock for sale will
have on the market price of common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock in the public
market could adversely affect the market price of our common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
Upon the completion of this offering we will have 41,236,665 shares of
common stock outstanding assuming no exercise of the underwriters over-allotment
option. The number of shares of common stock to be outstanding after this
offering is based on the number of shares outstanding as of June 30, 2000, and
excludes:
o 2,241,878 shares of common stock issuable upon the exercise of stock
options outstanding as of June 30, 2000 at a weighted average exercise
price of $3.33 per share;
o 452,622 shares of common stock issuable upon the exercise of
outstanding warrants as of June 30, 2000 at a weighted average
exercise price of $1.18 per share;
o 330,592 shares of common stock issuable upon conversion of an
outstanding convertible promissory note, as of June 30, 2000;
o 8,750,000 shares of common stock reserved for issuance under our 2000
stock incentive plan that incorporates our 1998 stock plan; and
o 250,000 shares of common stock reserved for issuance under our 2000
employee stock purchase plan.
Of the outstanding shares, all of the shares sold in this offering will be
freely tradable, except that any shares held by our affiliates, as that term is
defined in Rule 144 promulgated under the Securities Act, may only be sold in
compliance with the limitations described below. The remaining 32,736,665 shares
of common stock will be deemed restricted securities as defined under Rule 144.
Restricted shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. Subject
to the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows:
NUMBER OF
SHARES DATE
-------------- ---------------------------------------------------------------
1,300,000 After the date of this prospectus, shares saleable under Rule
144(k) that are not subject to the 180-day lock-up
3,412,629 After 90 days from the date of this prospectus, shares saleable
under Rule 701 that are not subject to the 180-day lock-up
2,620,982 After 180 days from the date of this prospectus, the 180-day
lock-up is released and these shares are saleable under Rule
701, subject to repurchase by us
27,874,036 After 180 days from the date of this prospectus, the 180-day
lock-up is released and these shares are saleable under Rule
144, subject, in some cases, to volume limitations, or Rule
144(k)
150,000 After 180 days from the date of this prospectus, restricted
securities that are held for less than one year and are not yet
saleable under Rule 144
RULE 144
In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, including any of our
affiliates, who has beneficially owned shares for at least one year, including
the holding period of any prior owner who is not an affiliate, is entitled to
sell within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of one percent
of the then-outstanding shares of our common stock, which will be approximately
413,000 shares immediately after this offering, or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to certain restrictions. In
addition, a person who is not deemed to have been an affiliate 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, including the holding period of any
prior owner who is
75
<PAGE>
not an affiliate, would be entitled to sell these shares under Rule 144(k)
without regard to the requirements described above, unless otherwise
contractually restricted. To the extent that shares were acquired from one of
our affiliates, a person's holding period for the purpose of effecting a sale
under Rule 144 would commence on the date of transfer from the affiliate.
STOCK OPTIONS
As of June 30, 2000, options to purchase a total of 2,241,878 shares of
common stock were outstanding, all of which were currently exercisable. Only a
portion of the shares issuable upon exercise of these options were vested. We
intend to file a Form S-8 registration statement under the Securities Act to
register all shares of common stock issuable under our 2000 stock incentive plan
and our 2000 employee stock purchase plan. Accordingly, shares of common stock
underlying these options will be eligible for sale in the public markets,
subject to vesting restrictions or the lock-up agreements described below. See
"Executive Compensation and Other Information--Employee Benefit Plans."
In general, under Rule 701 of the Securities Act of 1933 as currently in
effect, each of our employees, consultants or advisors who purchases shares from
us in connection with a compensatory stock plan or other written agreement is
eligible to resell such shares 90 days after the date of this prospectus in
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
LOCK-UP AGREEMENTS
We have agreed, and each of our officers and directors and substantially
all of our securityholders have agreed, subject to specified exceptions, not to,
without the prior written consent of Salomon Smith Barney Inc., sell, otherwise
dispose of any shares of our common stock or options to acquire shares of our
common stock or take any action to do any of the foregoing during the 180-day
period following the date of this prospectus. Salomon Smith Barney Inc. may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to lock-up agreements. See "Underwriting."
REGISTRATION RIGHTS
Following this offering, under specified circumstances and subject to
customary conditions, holders of approximately 20,514,827 shares of our
outstanding common stock and warrants to purchase up to 314,000 shares of our
common stock will have demand registration rights with respect to their shares
of common stock, subject to the 180-day lock-up arrangement described above, to
require us to register their shares of common stock under the Securities Act,
and rights to participate in any future registrations of our securities. Holders
of an additional 138,622 shares of our common stock issuable upon exercise of
outstanding warrants will be entitled to participate in any future registrations
of our securities, but are not entitled to initiate registrations themselves.
Holders of an additional 200,000 shares of our common stock issuable upon
exercise of outstanding options will be entitled to require us to register their
shares of common stock on a Form S-3 reoffer prospectus beginning one year after
the date of this prospectus. If the holders of these registrable securities
request that we register their shares, and if the registration is effected,
these shares will become freely tradable without restriction under the
Securities Act. Any sales of securities by these stockholders could have a
material adverse effect on the trading price of our common stock. See
"Description of Capital Stock--Registration Rights."
76
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement,
each underwriter named below has severally agreed to purchase, and we have
agreed to sell to such underwriter, the number of shares set forth opposite the
name of such underwriter.
NAME NUMBER OF SHARES
------ ------------------
Salomon Smith Barney Inc..........................
CIBC World Markets Corp...........................
Prudential Securities Incorporated................
------------------
Total.......................................... 8,500,000
==================
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and other conditions. The underwriters are
obligated to purchase all the shares (other than those covered by the
over-allotment option described below) if they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., CIBC World Markets
Corp. and Prudential Securities Incorporated are acting as representatives,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
shares to certain dealers at the public offering price less a concession not in
excess of $________ per share. The underwriters may allow, and such dealers may
reallow, a concession not in excess of $_________ per share on sales to other
dealers. If all of the shares are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms. 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 a 30-day option to purchase up to an
additional 1,275,000 shares to cover over-allotments, if any. The underwriters
may exercise such option solely for the purpose of covering over-allotments, if
any, in connection with this offering. To the extent such option is exercised,
each underwriter will be obligated, subject to the conditions stated above, to
purchase a number of additional shares approximately proportionate to such
underwriter's initial purchase commitment.
Our officers, directors and substantially all of our stockholders have
agreed that, for a period of 180 days from the date of this prospectus, they
will not, without the prior written consent of Salomon Smith Barney Inc.,
dispose of or hedge any shares of our common stock or any securities convertible
into or exchangeable for common stock. Salomon Smith Barney Inc. in its sole
discretion may release any of the securities subject to these lock-up agreements
at any time without notice.
The underwriters have reserved for sale, at the initial public offering
price, up to _______ common shares for customers, directors, employees and other
persons associated with us who have expressed an interest in purchasing common
shares in the offering. 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 our common
stock. Consequently, the initial public offering price for our shares will be
determined by negotiations among us and the representatives. Among the factors
to be considered in determining the initial public offering price will be 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. There can be no assurance,
however, that the prices at which our 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 our common stock will
develop and continue after this offering.
We have applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "WLSS."
77
<PAGE>
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 shares of common stock.
PAID BY WIRELESS
--------------------------------
NO EXERCISE FULL EXERCISE
-------------- ----------------
Per share.................... $ $
Total........................ $ $
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of common stock 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 stock 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 stock made for the purpose of preventing or retarding a
decline in the market of price of the common stock while the offering is in
progress.
The underwriters also may impose a penalty bid. 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.
Any of these activities may cause the price of the common stock 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.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. The underwriters may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders. The representatives will allocate shares to underwriters that
may make Internet distribution on the same basis as other allocations.
Prudential Securities Incorporated facilitates the marketing of new
issues online through its PrudentialSecurities.com division. Clients of
Prudential AdvisorSM, a full service brokerage firm program, may view offering
terms and a prospectus online and place orders through their financial advisors.
We estimate that the total expenses, excluding underwriting discounts and
commissions, of this offering will be approximately $2.6 million.
We have agreed to indemnify the underwriters against liabilities to which
they may become subject, including liabilities that may arise under the
Securities Act of 1933, the Securities Exchange Act of 1934 or other federal or
state statutory law or regulation, at common law or otherwise or to contribute
to payments the underwriters may be required to make in respect of any of those
liabilities.
78
<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. Attorneys associated
with Brobeck, Phleger & Harrison LLP and two investment funds associated with
Brobeck, Phleger & Harrison LLP beneficially own 200,000 shares of our common
stock. Pillsbury Madison & Sutro LLP, Palo Alto, California is acting as counsel
for the underwriters in connection with selected legal matters relating to the
shares of common stock offered by this prospectus.
EXPERTS
The financial statements and the related financial statement schedule of
Wireless, Inc. as of December 31, 1998 and 1999 and for the period May 7, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and 1999
have been included in this prospectus and registration statement in reliance
upon the reports of KPMG LLP, independent auditors, appearing elsewhere in the
prospectus and registration statement, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Multipoint Networks, Inc. for the period
January 1, 1998 to August 25, 1998 have been included in this prospectus and
registration statement in reliance upon the report of KPMG LLP, independent
auditors, appearing elsewhere in the prospectus, and upon the authority of said
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act a registration statement on Form S-1 relating to
the common stock offered. This prospectus does not contain all of the
information set forth in the registration statement and its exhibits and
schedules. For further information with respect to us and the shares we are
offering through this prospectus, you should refer to the registration statement
and its exhibits and schedules. You may read or obtain a copy of the
registration statement at the commission's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the commission at
1-800-SEC-0330. The commission maintains a web site that contains reports, proxy
information statements and other information regarding registrants that file
electronically with the commission. The address of this web site is
http://www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. We intend to furnish other reports as we may determine or as may be
required by law.
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
WIRELESS, INC.
Independent Auditors' Report........................................................................... F-2
Balance Sheets as of December 31, 1998 and 1999 and June 30, 2000 and pro forma stockholders' equity
as of June 30, 2000................................................................................. F-3
Statements of Operations for the period from May 7, 1997 (inception) to December 31,1997, the years
ended December 31, 1998 and 1999 and the six month periods ended June 30, 1999 and 2000............. F-4
Statements of Stockholders' Equity for the period from May 7, 1997 (inception) to December 31, 1997,
the years ended December 31, 1998 and 1999 and the six month period ended June 30, 2000............. F-5
Statements of Cash Flows for the period from May 7, 1997 (inception) to December 31, 1997, the years
ended December 31, 1998 and 1999 and the six month ended June 30, 1999 and 2000..................... F-6
Notes to Financial Statements.......................................................................... F-7
MULTIPOINT NETWORKS, INC.
PAGE
------
Independent Auditors' Report.......................................................................... F-25
Statement of Operations for the period from January 1, 1998 to August 25, 1998........................ F-26
Statement of Stockholders' Equity for the period from January 1, 1998
to August 25, 1998................................................................................. F-27
Statement of Cash Flow for the period from January 1, 1998 to August 25, 1998......................... F-28
Notes to the Statement of Operations.................................................................. F-29
</TABLE>
F-1
<PAGE>
FORM OF INDEPENDENT AUDITORS' REPORT
When the event referred to in Note 11(b) of the Wireless, Inc. financial
statements has been consummated, we will be in a position to render the
following report.
/s/ KPMG LLP
The Board of Directors
Wireless, Inc.:
We have audited the accompanying balance sheets of Wireless, Inc. as of December
31, 1998 and 1999, and the related statements of operations, stockholders'
equity, and cash flows for the period from May 7, 1997 (inception) to December
31, 1997 and the years ended December 31, 1998 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wireless, Inc. as of December
31, 1998 and 1999, and the results of their operations and their cash flows for
the period from May 7, 1997 (inception) to December 31, 1997 and the years ended
December 31, 1998 and 1999 in conformity with generally accepted accounting
principles.
Mountain View, California
February 23, 2000, except for Note 11
which is as of July , 2000
F-2
<PAGE>
WIRELESS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
2000
-------------
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
------------------------- JUNE 30, EQUITY
1998 1999 2000 (NOTE 1)
----------- ------------ ---------- ------------
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents, including restricted cash of
$80,000 at December 31, 1998, 1999 and June 30, 2000....... $ 357,580 $ 1,140,409 $ 4,289,293
Accounts receivable, net of allowance of $299,223,
$1,193,635 and $1,350,621 at December 31, 1998, 1999,
and June 30, 2000, respectively.......................... 3,732,846 4,877,834 3,951,245
Inventory.................................................... 3,787,376 4,962,346 5,384,825
Prepaid expenses and other current assets.................... 416,840 1,148,724 2,017,855
----------- ----------- -----------
Total current assets................................... 8,294,642 12,129,313 15,643,218
----------- ------------- -----------
Lease receivable, long-term..................................... -- 184,077 --
Property and equipment, net..................................... 692,640 1,245,350 2,139,310
Goodwill and intangible assets net of amortization.............. 4,228,103 3,125,939 14,193,854
----------- ------------ -----------
Total assets........................................... $13,215,385 $16,684,679 $31,976,382
=========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 5,129,710 $ 3,420,662 $ 3,468,618
Line of credit............................................... 1,500,000 -- --
Accrued liabilities.......................................... 832,790 1,458,653 3,495,512
Due to TRW................................................... -- -- 11,010,699
Sales commission payable..................................... 804,086 1,512,882 464,639
Current portion of capital lease obligations................. 41,128 171,254 134,932
Convertible notes payable.................................... 4,161,064 1,000,000 1,000,000
----------- ----------- -----------
Total current liabilities.............................. 12,468,778 7,563,451 19,574,400
Capital lease obligations, less current portion ................ 84,193 239,306 239,306
----------- ------------ ----------
Total liabilities...................................... 12,552,971 7,802,757 19,813,706
----------- ------------ ----------
Commitments
Stockholders' equity:
Series A convertible preferred stock; 6,000,000 shares
authorized; 4,300,000 shares issued and outstanding
at December 31, 1998 and 1999 and June 30, 2000; aggregate
liquidation preference of $2,150,000 for all periods
presented ($0.50 per share) ............................... 2,150,000 2,150,000 2,150,000 $ --
Series B convertible preferred stock; 750,000 shares
authorized; 750,000 shares issued and outstanding at
December 31, 1998 and 1999 and June 30, 2000; aggregate
liquidation preference of $1,500,000 for all periods
presented ($2.00 per share)................................ 1,500,000 1,500,000 1,500,000 --
Series C convertible preferred stock, 2,400,000 shares
authorized; 2,146,868 at December 31, 1998 and 2,086,885
shares issued and outstanding at December 31, 1999 and June
30, 2000; aggregate liquidation preference of $2,855,333,
$2,775,556 and $2,775,556 at December 31,
1998, 1999 and June 30, 2000 respectively ($1.33 per share) 2,855,333 2,775,556 2,775,556 --
Series D convertible preferred stock, 6,600,000 shares
authorized; 6,541,013 issued and outstanding at December
31, 1999 and June 30, 2000, aggregate liquidation
preference of $8,176,266 at December 31,1999 and June 30,
2000 ($1.25 per share)..................................... -- 8,161,966 8,161,966 --
Series E convertible preferred stock, 4,000,000 shares
authorized; 3,600,000 issued and outstanding at December
31, 1999 and June 30, 2000; aggregate liquidation
preference of $9,000,000 at December 31, 1999 and
June 30, 2000 ($2.50 per share)........................... -- 8,173,442 8,173,442 --
Series F convertible preferred stock, 3,000,000 shares
authorized; 3,000,000 issued and outstanding at June 30,
2000; aggregate liquidation preference of $15,000,000 at
June 30, 2000 ($5.00 per share)........................... -- -- 14,536,287
Common stock, $0.001 par value; 30,000,000 shares authorized
at December 31, 1998 and 50,000,000 shares authorized at
December 31, 1999 and June 30, 2000; 3,625,702, 7,894,548
and 12,071,838 shares issued and outstanding at December
31, 1998, 1999 and June 30, 2000, actual; 100,000,000
shares authorized, 32,736,665 shares issued and
outstanding, pro forma..................................... 3,626 7,895 12,072 32,737
Additional paid-in capital................................... 5,985,597 16,553,996 36,546,573 74,273,159
Note receivable from stockholder............................. -- (168,750) (168,750) (168,750)
Deferred stock-based compensation............................ (711,867) 5,286,105) (4,852,451) (4,852,451)
Accumulated deficit.......................................... (11,120,275) (24,986,078) (56,672,019) (56,672,019)
----------- ----------- ----------- -------------
Total stockholders' equity............................. 662,414 8,881,922 12,162,676 $ 12,612,676
----------- ----------- ----------- -------------
Total liabilities and stockholders' equity ............ $13,215,385 $16,684,679 $31,976,382
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
WIRELESS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
FROM
MAY 7,
1997
(INCEPTION) SIX MONTH PERIOD ENDED
TO YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------------- --------------------------
1997 1998 1999 1999 2000
------------ ------------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................................... $ 200,736 $ 11,172,235 $ 20,328,854 $ 9,505,076 $ 11,851,249
Cost of revenue (excludes amortization of
deferred stock-based compensation of
$12,972, $47,699, $252,563, $100,375
and $188,251, respectively)............ 420,906 9,091,133 15,356,585 6,453,504 9,612,939
------------ ------------- ------------- ------------ -------------
Gross profit (loss).............. (220,170) 2,081,102 4,972,269 3,051,572 2,238,310
------------ ------------- ------------- ------------ -------------
Operating expenses:
Research and development (excludes
amortization of deferred stock-based
compensation of $13,672, $119,874,
$1,517,576, $196,516 and $941,657,
respectively)........................ 708,278 2,323,589 3,220,850 1,492,417 15,863,604
Sales and marketing (excludes
amortization of deferred stock-based
compensation of $19,266 and $81,366,
$513,033, $150,290, and $383,745,
respectively)........................ 902,004 3,811,338 7,443,454 3,079,726 4,326,395
General and administrative (excludes
amortization of deferred stock-based
compensation of $23,090, $391,254,
$1,672,715, $295,697 and $963,733,
respectively)........................ 258,412 1,316,072 2,688,924 514,358 2,014,325
In-process research and development
costs acquired....................... -- 817,058 -- -- 7,600,000
Amortization of intangibles............ -- 359,097 1,102,164 497,049 1,655,333
Impairment of an intangible asset...... 1,500,000 -- -- -- --
Amortization of deferred stock
compensation......................... 69,000 640,193 3,955,887 742,878 2,477,386
------------ ------------- ------------- ------------ -------------
Total operating expenses........... 3,437,694 9,267,347 18,411,279 6,326,428 33,937,043
------------ ------------- ------------- ------------ -------------
Operating loss............................ (3,657,864) (7,186,245) (13,439,010) (3,274,856) (31,698,733)
Interest expense (income), net............ (13,953) 290,119 426,793 221,725 (12,792)
------------ ------------- ------------- ------------ -------------
Net loss........................... $(3,643,911) $ (7,476,364) $(13,865,803) $(3,496,581) $(31,685,941)
============ ============= ============= ============ =============
Net loss per share:
Basic and diluted...................... $ -- $ (6.02) $ (4.18) $ (1.07) $ (3.33)
============ ============= ============= ============ =============
Weighted average number of shares used
in computation....................... -- 1,242,617 3,316,344 3,269,763 9,513,156
============ ============= ============= ============ =============
</TABLE>
F-4
<PAGE>
WIRELESS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY PERIOD FROM MAY 7, 1997 (INCEPTION)
TO DECEMBER 31, 1997 AND THE YEARS ENDED DECEMBER 31, 1998
AND 1999, AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
------------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ------------- ---------- --------------
<S> <C> <C> <C>
Issuance of Series A convertible preferred stock... 6,000,000 $3,000,000 -- $ --
Issuance of Series B convertible preferred stock... -- -- 750,000 1,500,000
Unearned compensation for options granted to
employees and nonemployees....................
Amortization of unearned compensation..............
Exercise of stock options.......................... -- -- -- --
Net loss........................................... -- -- -- --
-------------- ------------- ---------- --------------
Balance as of December 31, 1997.................... 6,000,000 3,000,000 750,000 1,500,000
Redemption of Series A convertible preferred stock. (1,700,000) (850,000) --
Exercise of stock options.......................... -- -- -- --
Issuance of common stock for interest on financing
and consulting services....................... -- -- -- --
Issuance of Series C convertible preferred stock,
common stock, warrants and stock options as
consideration for the acquisition of
Multipoint.................................... -- -- -- --
Unearned compensation for options granted to
employees and nonemployees.................... -- -- -- --
Amortization of unearned compensation.............. -- -- -- --
Net loss........................................... -- -- -- --
-------------- ------------- ---------- --------------
Balance as of December 31, 1998.................... 4,300,000 2,150,000 750,000 1,500,000
Issuance of Series D convertible preferred stock,
net of issuance costs......................... -- -- -- --
Issuance of Series E convertible preferred stock,
net of issuance costs......................... -- -- -- --
Repurchase of Series C convertible preferred and
common shares................................. -- -- -- --
Exercise of stock options.......................... -- -- -- --
Exercise of stock options for note receivable...... -- -- -- --
Unearned compensation for options granted to
employees and nonemployees.................... -- -- -- --
Amortization of unearned compensation.............. -- -- -- --
Warrants issued for services.......................
Net loss........................................... -- -- -- --
-------------- ------------- ---------- --------------
Balance as of December 31, 1999.................... 4,300,000 2,150,000 750,000 1,500,000
-------------- ------------- ---------- --------------
Exercise of Stock Options.......................... -- -- -- --
Issuance of Series F Convertible Preferred Stock,
net of issuance costs......................... -- -- -- --
Common Stock issued to TRW for License agreement... -- -- -- --
Unearned compensation for options granted to
employees and non-employees................... -- -- -- --
Exercise of warrants............................... -- -- -- --
Warrants issued for services....................... -- -- -- --
Amortization of unearned compensation.............. -- -- -- --
Net loss........................................... -- -- -- --
Balance as of June 30, 2000........................ 4,300,000 2,150,000 750,000 1,500,000
============== ============= ========== ==============
<CAPTION>
SERIES C SERIES D
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Issuance of Series A convertible preferred stock... -- $ -- -- $ --
Issuance of Series B convertible preferred stock... -- -- -- --
Unearned compensation for options granted to
employees and nonemployees....................
Amortization of unearned compensation..............
Exercise of stock options.......................... -- -- -- --
Net loss........................................... -- -- -- --
------------ ------------- ------------ --------------
Balance as of December 31, 1997.................... -- -- -- --
Redemption of Series A convertible preferred stock. -- -- -- --
Exercise of stock options.......................... -- -- -- --
Issuance of common stock for interest on financing
and consulting services....................... -- -- -- --
Issuance of Series C convertible preferred stock,
common stock, warrants and stock options as
consideration for the acquisition of
Multipoint.................................... 2,146,868 2,855,333 -- --
Unearned compensation for options granted to
employees and nonemployees.................... -- -- -- --
Amortization of unearned compensation.............. -- -- -- --
Net loss........................................... -- -- -- --
------------ ------------- ------------ --------------
Balance as of December 31, 1998.................... 2,146,868 2,855,333 -- --
Issuance of Series D convertible preferred stock,
net of issuance costs......................... -- -- 6,541,013 8,161,966
Issuance of Series E convertible preferred stock,
net of issuance costs......................... -- -- -- --
Repurchase of Series C convertible preferred and
common shares................................. (59,983) (79,777) -- --
Exercise of stock options.......................... -- -- -- --
Exercise of stock options for note receivable...... -- -- -- --
Unearned compensation for options granted to
employees and nonemployees.................... -- -- -- --
Amortization of unearned compensation.............. -- -- -- --
Warrants issued for services.......................
Net loss........................................... -- -- -- --
------------ ------------- ------------ --------------
Balance as of December 31, 1999.................... 2,086,885 2,775,556 6,541,013 8,161,966
------------ ------------- ------------ --------------
Exercise of Stock Options.......................... -- -- -- --
Issuance of Series F Convertible Preferred Stock,
net of issuance costs......................... -- -- -- --
Common Stock issued to TRW for License agreement... -- -- -- --
Unearned compensation for options granted to
employees and non-employees................... -- -- -- --
Exercise of warrants............................... -- -- -- --
Warrants issued for services....................... -- -- -- --
Amortization of unearned compensation.............. -- -- -- --
Net loss........................................... -- -- -- --
Balance as of June 30, 2000........................ 2,086,885 2,775,556 6,541,013 8,161,966
============ ============= ============ ==============
<CAPTION>
SERIES E SERIES F
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
---------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Issuance of Series A convertible preferred stock... -- $ -- -- --
Issuance of Series B convertible preferred stock... -- -- -- --
Unearned compensation for options granted to
employees and nonemployees....................
Amortization of unearned compensation..............
Exercise of stock options.......................... -- -- -- --
Net loss........................................... -- -- -- --
------------ -------------- ---------------- --------------
Balance as of December 31, 1997.................... -- -- -- --
Redemption of Series A convertible preferred stock. -- -- -- --
Exercise of stock options.......................... -- -- -- --
Issuance of common stock for interest on financing
and consulting services....................... -- -- -- --
Issuance of Series C convertible preferred stock,
common stock, warrants and stock options as
consideration for the acquisition of
Multipoint.................................... -- -- -- --
Unearned compensation for options granted to
employees and nonemployees.................... -- -- -- --
Amortization of unearned compensation.............. -- -- -- --
Net loss........................................... -- -- -- --
------------ -------------- ---------------- --------------
Balance as of December 31, 1998.................... -- -- -- --
Issuance of Series D convertible preferred stock,
net of issuance costs......................... -- -- -- --
Issuance of Series E convertible preferred stock,
net of issuance costs......................... 3,600,000 8,173,442 -- --
Repurchase of Series C convertible preferred and
common shares................................. -- -- -- --
Exercise of stock options.......................... -- -- -- --
Exercise of stock options for note receivable...... -- -- -- --
Unearned compensation for options granted to
employees and nonemployees.................... -- -- -- --
Amortization of unearned compensation.............. -- -- -- --
Warrants issued for services.......................
Net loss........................................... -- -- -- --
------------ -------------- ---------------- --------------
Balance as of December 31, 1999.................... 3,600,000 8,173,442
------------ -------------- ---------------- --------------
Exercise of Stock Options.......................... -- -- -- --
Issuance of Series F Convertible Preferred Stock,
net of issuance costs......................... -- -- 3,000,000 14,536,287
Common Stock issued to TRW for License agreement... -- -- -- --
Unearned compensation for options granted to
employees and non-employees................... -- -- -- --
Exercise of warrants............................... -- -- -- --
Warrants issued for services....................... -- -- -- --
Amortization of unearned compensation.............. -- -- -- --
Net loss........................................... -- -- -- --
Balance as of June 30, 2000........................ 3,600,000 8,173,442 3,000,000 14,536,287
============ ============== ================ ==============
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE
-------------------------- PAID-IN STOCK BASED FROM
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDER
------------- ---------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Series A convertible preferred stock... -- $ -- $ -- $ -- $ --
Issuance of Series B convertible preferred stock... -- -- -- -- --
Unearned compensation for options granted to
employees and nonemployees.................... 152,000 (152,000) --
Amortization of unearned compensation.............. 69,000 --
Exercise of stock options.......................... 599,500 600 29,375 -- --
Net loss........................................... -- -- -- -- --
------------- --------- -------------- ------------- -------------
Balance as of December 31, 1997.................... 599,500 600 181,375 (83,000) --
Redemption of Series A convertible preferred stock. -- -- 630,210 -- --
Exercise of stock options.......................... 229,750 230 24,487 -- --
Issuance of common stock for interest on financing
and consulting services....................... 50,000 50 37,698 -- --
Issuance of Series C convertible preferred stock,
common stock, warrants and stock options as
consideration for the acquisition of
Multipoint.................................... 2,746,452 2,746 3,842,767 -- --
Unearned compensation for options granted to
employees and nonemployees.................... -- -- 1,269,060 (1,269,060) --
Amortization of unearned compensation.............. -- -- -- 640,193 --
Net loss........................................... -- -- -- -- --
------------- --------- -------------- ------------- -------------
Balance as of December 31, 1998.................... 3,625,702 3,626 5,985,597 (711,867) --
Issuance of Series D convertible preferred stock,
net of issuance costs......................... -- -- -- -- --
Issuance of Series E convertible preferred stock,
net of issuance costs......................... -- -- 691,200 -- --
Repurchase of Series C convertible preferred and
common shares................................. (118,239) (118) (88,562) -- --
Exercise of stock options.......................... 4,387,085 4,387 899,686 --
Exercise of stock options for note receivable...... -- -- 168,750 -- (168,750)
Unearned compensation for options granted to
employees and nonemployees.................... -- -- 8,530,125 (8,530,125) --
Amortization of unearned compensation.............. -- -- -- 3,955,887 --
Warrants issued for services....................... 367,200
Net loss........................................... -- -- -- -- --
------------- --------- -------------- ------------- -------------
Balance as of December 31, 1999.................... 7,894,548 7,895 16,553,996 (5,286,105) (168,750)
------------- --------- -------------- ------------- -------------
Exercise of Stock Options.......................... 701,938 702 275,860 -- --
Issuance of Series F Convertible Preferred Stock,
net of issuance costs......................... -- -- -- -- --
Common Stock issued to TRW for License agreement... 3,429,352 3,429 17,143,331 -- --
Unearned compensation for options granted to
employees and non-employees................... -- -- 2,292,132 (2,043,732) --
Exercise of warrants............................... 46,000 46 34,454 -- --
Warrants issued for services....................... -- -- 246,800 -- --
Amortization of unearned compensation.............. -- -- 2,477,386 --
Net loss........................................... -- -- -- -- --
Balance as of June 30, 2000........................ 12,071,838 12,072 36,546,573 4,852,451 (168,750)
============= ========= ============== ============= =============
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
--------------- ----------------
<S> <C> <C>
Issuance of Series A convertible preferred stock... $ -- $ 3,000,000
Issuance of Series B convertible preferred stock... -- 1,500,000
Unearned compensation for options granted to
employees and nonemployees.................... -- --
Amortization of unearned compensation.............. -- 69,000
Exercise of stock options.......................... -- 29,975
Net loss........................................... (3,643,911) (3,643,911)
--------------- ----------------
Balance as of December 31, 1997.................... (3,643,911) 955,064
Redemption of Series A convertible preferred stock. -- (219,790)
Exercise of stock options.......................... -- 24,717
Issuance of common stock for interest on financing
and consulting services....................... -- 37,748
Issuance of Series C convertible preferred stock,
common stock, warrants and stock options as
consideration for the acquisition of
Multipoint.................................... -- 6,700,846
Unearned compensation for options granted to
employees and nonemployees.................... -- --
Amortization of unearned compensation.............. -- 640,193
Net loss........................................... (7,476,364) (7,476,364)
--------------- ----------------
Balance as of December 31, 1998.................... (11,120,275) 662,414
Issuance of Series D convertible preferred stock,
net of issuance costs......................... -- 8,161,966
Issuance of Series E convertible preferred stock,
net of issuance costs......................... -- 8,864,642
Repurchase of Series C convertible preferred and
common shares................................. -- (168,457)
Exercise of stock options.......................... -- 904,073
Exercise of stock options for note receivable...... -- --
Unearned compensation for options granted to
employees and nonemployees.................... -- --
Amortization of unearned compensation.............. -- 3,955,887
Warrants issued for services....................... 367,200
Net loss........................................... 13,865,803 (13,865,803)
--------------- ----------------
Balance as of December 31, 1999.................... (24,986,078) 8,881,922
--------------- ----------------
Exercise of Stock Options.......................... -- 276,562
Issuance of Series F Convertible Preferred Stock,
net of issuance costs......................... -- 14,536,287
Common Stock issued to TRW for License agreement... -- 17,146,760
Unearned compensation for options granted to
employees and non-employees................... -- 248,400
Exercise of warrants............................... -- 34,500
Warrants issued for services....................... -- 246,800
Amortization of unearned compensation.............. -- 2,477,386
Net loss........................................... (31,685,941) (31,685,941)
Balance as of June 30, 2000........................ (56,672,019) 12,162,676
=============== ================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
WIRELESS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1997
(INCEPTION) SIX MONTH PERIOD ENDED
TO YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------------- --------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(3,643,911) $(7,476,364) $(13,865,803) $(3,496,581) $(31,685,941)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 29,746 238,188 335,249 139,972 368,292
Amortization of deferred stock-based
compensation.................................... 69,000 640,193 3,955,887 742,878 2,477,386
In-process research and development costs --
acquired........................................ 817,058 -- -- 7,600,000
Amortization of intangibles....................... -- 359,097 1,102,164 497,049 1,655,333
Impairment of an intangible asset................. 1,500,000 -- -- -- --
Allowance for doubtful accounts................... -- 299,223 894,412 36,000 223,730
Write off of property and equipment............... -- -- -- 99,963 --
Noncash deferred stock-based compensation......... -- -- -- -- 495,200
Noncash interest expense.......................... -- 25,348 283,248 20,000 95,095
Changes in operating assets and liabilities
(net of effect of non-cash investing and
financing activities):
Accounts receivable........................... (145,805) (1,766,384) (2,039,400) 490,202 702,859
Inventory..................................... (244,382) (507,796) (1,174,970) (251,624) (422,479)
Prepaid expenses and other current assets..... (424,195) 147,982 (423,652) -- (964,226)
Lease receivable, long term................... -- -- (184,077) (105,795) 184,077
Accounts payable.............................. 273,642 3,719,729 (1,709,048) (2,398,926) 47,956
Accrued and other liabilities................. 350,201 709,255 1,334,659 1,028,908 1,041,583
Due to TRW.................................... -- -- -- -- 8,510,699
------------ ------------ ------------- ------------ ------------
Net cash used in operating activities....... (2,235,704) (2,794,471) (11,491,333) (3,197,954) (9,670,436)
------------ ------------ ------------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment.................... (173,453) (178,539) (481,883) (283,256) (1,263,740)
Proceeds from sale of equipment....................... -- -- -- 23,142 --
Purchase of other acquired technology................. -- -- -- -- (675,000)
Acquisition of cash from Multipoint................... -- 237,781 -- -- --
Advance to Multipoint................................. (300,000) -- -- -- --
------------ ------------ ------------- ------------ ------------
Net cash (used in) provided by investing
activities................................ (473,453) 59,242 (481,883) (260,114) (1,938,740)
------------ ------------ ------------- ------------ ------------
Cash flows from financing activities:
Proceeds from (payments of) lines of credit........... -- 415,897 (1,500,000) -- --
Proceeds from (payments of) bridge financing and --
convertible notes................................... 2,411,064 1,820,461 (4,720,370) --
Proceeds from issuance of common stock................ 29,975 24,717 904,074 -- 311,062
Proceeds from issuance of preferred stock, net of 3,000,000
issuance costs...................................... -- 11,820,803 8,111,842 14,536,287
Repurchase of common and preferred stock.............. -- -- (168,457) -- --
Payments for capital lease obligations................ (24,071) (55,616) (120,836) (32,257) (89,289)
------------ ------------ ------------- ------------ ------------
Net cash provided by financing activities... 3,005,904 2,796,062 12,756,045 3,359,215 14,758,060
------------ ------------ ------------- ------------ ------------
Net increase in cash and cash equivalents................ 296,747 60,833 782,829 (98,853) 3,148,884
Cash and cash equivalents, beginning of period........... -- 296,747 357,580 357,580 1,140,409
------------ ------------ ------------- ------------ ------------
Cash and cash equivalents, end of period................. $ 296,747 $ 357,580 $ 1,140,409 $ 258,727 $ 4,289,293
============ ============ ============= ============ ============
Supplementary cash flow information:
Cash paid for interest................................ $ 2,423 $ 81,762 $ 63,020 $ 221,950 $ 89,289
Supplementary disclosure of non-cash investing and
financing activities:
The Company acquired Multipoint Networks, Inc.
during 1998. Note 4 outlines details of the
purchase price and the allocation of the
purchase price to the net assets acquired.
Property and equipment acquired under capital
lease obligations................................... $ 36,255 168,753 406,075 -- --
Redemption of Series A preferred stock................ -- 219,790 -- -- --
Unearned compensation for options granted to
employees and nonemployees.......................... 152,000 1,269,060 9,022,663 712,162 2,043,732
Licensed technology acquired for issuance of
preferred and common stock.......................... 1,500,000 -- -- -- 17,146,760
Issuance of Series D preferred stock for
convertible notes and accrued interest.............. -- -- 5,205,805 5,205,805 --
Commitment to TRW..................................... -- -- -- -- 2,500,000
Warrants issued for services.......................... -- -- 367,200 -- 246,800
Options exercised for note receivable................. -- -- 168,750 -- --
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) THE COMPANY
Wireless, Inc. (the Company) was incorporated in California on May
7, 1997 to develop broadband wireless access solutions that enable
Internet and communication service providers, telephone operating
companies and private network operators to deliver voice and
high-speed data services to their customers. The operations of the
Company include the design, manufacture and marketing of
high-speed, wireless, point-to-point and point-to-multipoint
telecommunications access equipment. The Company's products are
distributed through a network of worldwide independent
distributors, system integrators, local resellers and a direct
sales force.
The financial information for the six-months ended June 30, 1999
and 2000 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 six-months ended June 30, 2000 are
not necessarily indicative of results that may be expected for the
entire year.
(B) REVENUE RECOGNITION
Revenue on products is recognized when all of the following have
occurred: the product has been shipped; title and risk of loss have
passed to the customer; the Company has the right to invoice the
customer and collection of the receivable is probable; and all
obligations have been fulfilled. The only post-sale obligation is a
12 month warranty. Revenue from services is recognized when the
service is completed. Trial sales made directly to the end users
are not recognized as revenue until the trial has been completed
and the product has been accepted.
Estimated warranty costs are accrued at the time of the sale based
upon the Company's historical experience.
(C) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of expenses during the reporting period. Actual
results could differ from these estimates.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments at
the inception of the lease. Depreciation and amortization of
property and equipment is provided using the straight-line method
over the estimated useful lives of the respective assets, which
range from three to five years. Equipment held under capital leases
is amortized using the straight-line method over the shorter of the
lease term or the estimated useful life of the asset.
(E) INTANGIBLE ASSETS
Intangible assets include developed technology, assembled
workforce, core technology and goodwill all related to the
acquisition of Multipoint Networks, Inc. as discussed in notes 3
and 4. Intangible assets also includes other acquired licensed
technology used in research and development which has alternative
future use. Intangibles are amortized on a straight line basis over
their estimated useful lives which range from two to five years.
F-7
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(F) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with remaining
maturities of three months or less at the date of acquisition to be
cash equivalents.
Restricted cash consists of amounts held as security for an
outstanding letter of credit.
(G) 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.
The following table summarizes information relating to the
Company's significant customers with revenues comprising greater
than 10% of total revenue for the period and/or balances greater
than 10% of accounts receivable at year end:
<TABLE>
<CAPTION>
REVENUE FOR
PERIODS ENDED DECEMBER 31, ACCOUNTS RECEIVABLE AT
--------------------------------------- DECEMBER 31,
CUSTOMER 1997 1998 1999 1999
------------- ----------- ------------ ------------- ------------------------
<S> <C> <C> <C> <C>
A................ $ * $ * $2,955,072 *
B................ * * * 903,900
C................ 21,158 2,563,290 * *
D................ 108,609 2,354,907 * *
E................ * 1,881,258 * *
</TABLE>
--------------
* Revenue and/or accounts receivable accounted for less than 10%
in these years.
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, accounts receivable, accounts
payable, and borrowings approximate their carrying values due to
their short maturity or variable-rate structure. The interest rates
on the capital lease obligations are deemed to be at market rates
and the carrying amounts approximate fair value.
(I) RESEARCH AND DEVELOPMENT
Costs incurred in the research and development of new products and
enhancements to existing products are expensed as incurred until
the technological feasibility of the product or enhancement has
been established. Technological feasibility is established when a
product design and a working model have been completed and the
completeness of the working model, and its consistency with the
product design, have been confirmed by testing. After establishing
technological feasibility, material development costs are
capitalized. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or is
amortized based on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between
completion of a working model and the general release of the
product has been short and development costs qualifying for
capitalization have been insignificant. Accordingly, the Company
has not capitalized any development costs. The Company also
expenses as research and development licenses acquired relating to
specific product development which has no alternative future use.
(J) INVENTORY
Inventory is stated at the lower of cost, determined on a first-in
first-out basis or net realizable value.
(K) INCOME TAXES
The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are
F-8
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
established when necessary to reduce deferred tax assets to the
amounts expected to be recovered.
(L) STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION. This
statement establishes financial accounting and reporting standards
for stock based compensation, including employee stock option
plans. As allowed by SFAS 123, the Company measures compensation
expense under the provisions of Accounting Principles Board (APB)
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25),
and related interpretations. Compensation for goods or services
from non-employees is recognized based upon the fair value of the
issued options. Where such options contain future vesting
associated with future services the Company applies variable
accounting in the measurement of such compensation. The Company
follows Financial Accounting Standards Board Interpretation No. 28,
ACCOUNTING FOR STOCK APPRECIATION RIGHTS AND OTHER VARIABLE STOCK
OPTION OR AWARD Plans in amortizing unearned compensation during
the service period.
(M) COMPREHENSIVE INCOME
The Company does not have any components of comprehensive income,
consequently comprehensive loss consists entirely of net loss for
all periods presented.
(N) LONG-LIVED ASSETS, INCLUDING INTANGIBLE ASSETS
The Company accounts for long-lived assets under SFAS No. 121,
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may 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 loss to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell. The Company estimates fair value based on the best
information available, making judgments and projections as
considered necessary.
(O) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. For
a derivative not designated as a hedging instrument, changes in the
fair value of the derivative are recognized in earnings in the
period of change. This statement will be effective for all annual
and interim periods beginning after January 1, 2001. Management
does not believe the adoption of SFAS No. 133 will have a material
effect on the Company's consolidated financial position or results
of operations.
F-9
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(P) NET LOSS PER SHARE
Net loss per share is computed based on SFAS No. 128, EARNINGS PER
SHARE. The basic net loss per share is computed by dividing the net
loss attributable to common stockholders by the weighted average
number of common shares outstanding. Potential weighted average
common shares relating to stock options, convertible preferred
stock and weighted average unvested restricted shares have been
excluded from the calculations of net loss per share as their
impact would be anti-dilutive. Thus, the diluted net loss per share
in these years is the same as the basic net loss per share. The
potentially dilutive average common shares excluded are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1997
(INCEPTION) TO YEARS ENDED DECEMBER 31, SIX MONTH PERIOD ENDED JUNE 30,
DECEMBER 31, ----------------------------- -----------------------------
1997 1998 1999 1999 2000
----------------- -------------- ------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Stock options................... 63,000 214,000 845,000 2,279,000 1,754,000
Convertible preferred stock..... 6,243,000 5,858,000 13,115,000 8,951,000 20,268,000
Unvested restricted shares...... 405,000 531,000 735,000 377,000 2,544,000
----------------- -------------- ------------- -------------- -------------
6,711,000 6,603,000 14,695,000 11,607,000 24,566,000
================= ============== ============= ============== =============
</TABLE>
Net loss per share is not presented in the period from May 7, 1997
(inception) to December 31, 1997 as all common share as of December
31, 1997 were unvested and subject to repurchase and accordingly
are not considered outstanding for the computations of net loss per
share.
(Q) PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Unaudited pro forma basic and diluted net loss per share was $0.85
and $1.06 for the year ended December 31, 1999 and for the six
month period ended June 30, 2000 based on pro forma
weighted-average shares outstanding of 16,334,797 and 29,996,681
for the year and the period. This information reflects per share
data assuming the exercise of 150,000 common stock warrants and the
conversion of all outstanding shares of convertible preferred stock
at the respective conversion rate for each preferred share of
Series A, B, C, D, E and F as if the conversion of the preferred
stock had taken place at January 1, 1999 or at the date of
issuance, if later. Pro forma common equivalent shares, comprised
of incremental common shares issuable upon exercise of stock
options and warrants are not included in pro forma diluted net loss
per share because they would be antidilutive.
(R) PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
The unaudited pro forma stockholders' equity gives effect to the
exercise of warrants to purchase 150,000 shares of common stock at
an average exercise price of $3.00, prior to the consummation of
the Company's initial public offering. It also gives effect to the
conversion of Series A, B, C, D, E, and F convertible preferred
stock expected to be outstanding at the consummation of the
Company's initial public offering, into 20,514,827 shares of common
stock, upon the closing of the Company's initial public offering.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
-------------------------
1998 1999
----------- -------------
Office furniture and equipment..................... $ 74,941 $ 185,623
Machinery equipment and fixtures................... 574,139 829,852
Computer equipment and software.................... 207,750 363,303
Leasehold improvements............................. 79,147 425,454
----------- -------------
935,977 1,804,232
Less: accumulated depreciation and amortization.... (243,337) (558,882)
----------- -------------
Property and equipment, net........................ $ 692,640 $1,245,350
=========== =============
F-10
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) INTANGIBLE ASSETS
Intangible assets relate to the acquisition of Multipoint, technology
acquired from TRW, Inc. and other licensed technology. A summary of
intangibles is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30, ESTIMATED
1998 1999 2000 USEFUL LIVES
------------- ------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Developed technology..................... $ 3,175,590 $ 3,175,590 3,175,590 5 years
Assembled workforce...................... 610,208 610,208 610,208 2 years
Core technology.......................... 463,169 463,169 463,169 5 years
Goodwill................................. 338,233 338,233 338,233 5 years
Other acquired technology................ -- -- 675,000 3 years
TRW license and technology (Note 4)...... -- -- 12,066,998 5 years
------------- ------------- --------------
4,587,200 4,587,200 17,329,198
Less: accumulated amortization........... (359,097) (1,461,261) (3,135,344)
------------- ------------- --------------
$ 4,228,103 $ 3,125,939 14,193,854
============= ============= ==============
</TABLE>
In May 1997, the Company acquired licensed technology for the issuance of
3,000,000 shares of Series A Convertible Preferred Stock valued at $0.50
per share. An intangible asset of $1,500,000 was recorded for the
acquired technology. Subsequent to its acquisition, it was determined
that the licensed technology did not have value to the Company,
accordingly, the Company began negotiations to restructure the licensed
technology agreement. For the year ended December 31, 1997, the Company
recorded an impairment charge of $1,500,000 related to the acquired
technology.
(4) ACQUISITION AND STRATEGIC INVESTMENT
(A) MULTIPOINT ACQUISITION
On August 26, 1998 Wireless, Inc. acquired the net assets of
Multipoint Networks, Inc. (Multipoint). Multipoint was incorporated
in California in 1987 and designed, manufactured and marketed
wireless metropolitan-area data network products based on unique
patented digital transceiver technology. The acquisition has been
accounted for by the purchase method and accordingly, the operating
results of Multipoint form part of the operating results of the
Company from August 26, 1998.
The $7,253,312 purchase price for the acquisition was comprised as
follows:
There were no contingent payments or other commitments specified in the
acquisition agreement.
Issuance of Series C preferred stock.............................. $2,855,333
Issuance of common stock.......................................... 3,481,198
Receivable forgiven............................................... 300,000
Issuance of stock options......................................... 326,754
Issuance of stock warrants........................................ 37,561
Acquisition costs................................................. 252,466
-------------
$7,253,312
=============
The purchase price was more than the fair value of the net assets
acquired of $6,915,079 resulting in goodwill of $338,233. This goodwill
is included as a component of intangibles and is being amortized over its
useful life of five years.
F-11
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The purchase price was allocated as follows:
Cash and cash equivalents......................................... $ 237,781
Inventory......................................................... 3,035,198
Accounts receivable............................................... 2,082,035
Prepaid expenses and other current assets......................... 398,260
Property and equipment............................................ 395,287
Developed technology.............................................. 3,175,590
In-process research and development............................... 817,058
Assembled workforce............................................... 610,208
Core technology................................................... 463,169
Goodwill.......................................................... 338,233
Liabilities....................................................... (4,299,507)
-------------
$ 7,253,312
=============
In-process research and development was fully expensed upon acquisition
as the Company determined that the acquired technology had not yet
achieved technological feasibility and that the technology did not have
an alternative future use. As a result, the purchased in-process research
and development was fully expensed upon acquisition in accordance with
FASB Interpretation No. 4. The in-process research and development was
specifically related to Multipoint's WaveNet Access 2458 technology which
was under development at the time of acquisition. WaveNet Access was a
new technology and was designated to be the next generation,
high-capacity point-to-multipoint router with greater bandwidth than the
existing WaveNet Access 2400.
The value of the purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products; estimating the resulting net cash flows
from WaveNet Access 2458 and related products; and discounting the net
cash flows back to its present value. The technology was approximately
85% complete as of the acquisition date. A discount rate of 25% was used
for the developed technology and 30% was used for the in-process
technology. These rates of return reflected Multipoint's historical
results as of the acquisition date, and the risks associated revenue
growth and profitability. These rates of return were also consistent with
the Company's overall weighted average cost of capital due to the
estimated revenues attributable to future, as yet unidentified, products.
The estimated costs to be incurred to develop the purchased in-process
technology into commercially viable products were approximately $1.0
million in the aggregate through 1999. The Company completed the
development of WaveNet Access 2458 in March 1999 with actual costs
incurred since the acquisition for approximately $840,000.
Developed and core technology are being amortized on a straight-line
basis over five years. Assembled workforce is being amortized on a
straight line basis over two years.
F-12
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table shows unaudited pro forma results of operations for the
Company, assuming the acquisition of Multipoint had been consummated as of
January 1, 1998 and excludes the write-off of in-process research and
development costs because of the non-recurring nature of this charge. The
unaudited pro forma information is not necessarily indicative of the
combined results that would have occurred had the acquisition taken place
as of the beginning of the period presented, nor is it necessarily
indicative of results that may occur in the future:
YEAR ENDED
DECEMBER 31,
1998
---------------
(UNAUDITED)
Pro forma basis:
Total revenue.................................. $ 17,044,735
Net loss....................................... 8,809,019
Net loss per share:
Basic and diluted............................ $ 3.02
Weighted-average shares outstanding:
Basic and diluted............................ 2,917,000
(B) TRW AGREEMENTS
In January 2000 the Company entered into the following agreements with
TRW which resulted in an investment by TRW in the Company in the form
of Series F preferred stock, a technology purchase and license
agreement giving the Company rights to TRW developed technology being
the foundation to the Company's StarPort product offering, and a
letter agreement specifying a time and materials based agreement for
TRW to perform contract research and development services for the
Company. A summary of the agreements follows:
1) The Company sold 2,300,000 shares of Series F preferred stock to
TRW for cash of $5 per share. The preferred stock has a
liquidation preference equal to its purchase price and is
convertible into common stock. The Company also sold 700,000
shares of Series F preferred stock to CECAP Wireless; a company
unrelated to TRW.
2) The Company issued 3,429,352 of common stock valued at $5 per
share in exchange for the purchase and license agreement granting
the Company the right to further develop and commercialize TRW
technology, the result of which the Company and TRW would jointly
own. Under the agreement, the Company purchased and obtained an
exclusive royalty-free worldwide license in a point-to-multipoint
wireless networking technology. Any products developed by the
Company based on such technology may only be sold with base
stations configured for outdoor use. Sales of products containing
the technology with base stations configured for indoor use or
sales to the U.S. Government, including organizations in which
the U.S. Government is a member, must be made through the owner
of the technology (TRW) or its licensees. The agreement provides
TRW with a royalty-free worldwide non-exclusive license in any
improvements made by the Company upon the technology for the
manufacture and sale of products to the U.S. Government. The
license agreement calls for revocation in the event that a
commercial version of the technology is not achieved by July
2001, unless the delay is the fault of TRW or attributable to
certain specified reasons. Additionally, in consideration of the
rights and licenses provided under the agreement and the
technical assistance to be provided by TRW, the Company has
agreed to pay TRW 10% of the net proceeds of the initial public
offering or any private placement of equity occurring on or
before October 14, 2000, until the Company has paid TRW an
aggregate of $2.5 million. The balance of this amount is due on
January 1, 2001, if it has not previously been paid.
3) The Company entered into a letter contract specifying a time and
materials arrangement for TRW to perform research and development
services for the Company to commercialize certain TRW
F-13
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
technology. The rates contained in this time and materials
arrangement are believed to be the same as standard rates used by
TRW for other unrelated agreements. This agreement is cancelable
by either party and if canceled would not negate the license
agreement.
While the Company and TRW entered into the three agreements at the same
time, the negotiations that lead to the agreements were determined based on
reasonable and fair values related to each of the agreements entered into.
The Company has accounted for the technology and license agreements based
upon a value of common stock of $5 per share and the $2.5 million
commitment, resulting in a value assigned to the technology of $19.6
million. The Company conducted an independent valuation of the value of the
technology which corroborates the value of the common stock issued and
liability incurred.
As part of the Company's independent valuation of the technology, the
Company also conducted an independent valuation of the acquired technology
resulting in a $7.6 million allocation to in-process technology which was
immediately expensed. At the time of the agreement, StarPort technology was
an in-process technology under development for a number of years at TRW
which had not yet achieved technology feasibility and was not expected to
generate any significant sales for one to three years.
The value of the purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into a
commercially viable product. The Company estimated the resulting net cash
flows from StarPort, assuming an expected economic product life of 5 years,
the revenue generated in each future period and the corresponding operating
expenses. These cash flows were adjusted for taxes and charges related to
fixed assets and working capital. These cash flows were then discounted to
their present value to estimate the fair market value of the acquired
in-process technology. The technology was approximately 45% complete as of
the acquisition date based on the ratio of costs incurred to total
development. A discount rate of 25% was used for the in-process technology,
reflecting a weighted average cost of capital of 17% for industry
comparable companies and an 8% premium for technological and market risk
associated with commercializing the acquired technology.
The estimated costs to be incurred to develop the purchased in-process
technology into commercially viable products were approximately $25-30
million in the aggregate through 2001. The Company expected to begin
realizing the benefit of the purchased in-process research and development
during 2001 with estimated total revenues from the purchased in-process
technology expected to peak in its as- developed state during 2004. The
estimated selling, general and administrative costs were expected to more
closely approximate the Company's future cost structure. These projections
of revenue growth and ultimate earning projections are only achievable
based on the assumptions that the purchased in-process technology could be
commercialized and mass produced by the Company.
The Company has capitalized approximately $12 million as capitalized
license and technology which it expects to amortize over a period of 5
years representing what the Company believes to be a reasonable estimate of
the technology life. Costs incurred associated with the letter agreement
with TRW will be charged to research and development expense as incurred or
capitalized upon the technology achieving commercial feasibility.
(5) BORROWINGS
(A) LINE OF CREDIT
The Company had available a line of credit which allowed for
borrowings up to 80% of eligible accounts receivable with a maximum
borrowing of $2,000,000. The line is renewable annually at the option
of the bank and the Company. In consideration for the renewal in 1999,
the Company issued the bank a warrant to purchase 48,000 shares of the
Series D Convertible Stock at $1.25 per share. The warrant value of
$37,400 is being amortized as interest expense over the term of the
line of credit. The amount of $37,400 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 5
years. The line is secured by substantially all of the Company's
assets. Borrowings under the line of
F-14
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
credit bear interest at 2.5% above the bank's prime rate. At December
31, 1999 and June 30, 2000, no borrowings were outstanding on the line
of credit.
The Company issued a five year warrant to purchase 37,500 shares of
common stock at $4.00 per share in connection with an amendment to
this credit line. The fair value of the warrant will be expensed over
the remaining period of the line of credit.
(B) CONVERTIBLE NOTES PAYABLE
During 1998, the Company assumed $1,950,000 of short-term financing as
part of the acquisition of Multipoint and obtained $2,004,400 from
existing Wireless shareholders in exchange for convertible notes
payable. The bridge loans carried an interest rate of 10%. The
convertible notes stated that the outstanding principal and interest
would be convertible at the option of the holder into shares of the
Company's equity at the closing of the Company's next equity
financing. The conversion price was to be determined at the time of
the next equity financing and was to be consistent with the price and
terms of that financing.
On May 21, 1999, the notes and related accrued interest were converted
to Series D preferred stock at a price of $1.25 per share.
In August 1999, the Company borrowed $1,000,000 under a convertible
promissory note. The principal amount, together with interest accrued
at 10% per annum, will become due and payable on September 1, 2004. At
the option of the holder, the note may be converted into shares of the
next series of the Company's preferred stock at a conversion price
based on the underlying terms of that financing. In September 1999,
the Company issued Series E Convertible Preferred stock at $2.50 per
share with an attached 10% warrant to purchase common stock at $0.75
per share. This financing qualified as the next financing in
accordance with the terms of the promissory note. Based on this
financing, the promissory note is convertible into 320,000 shares of
Series E Convertible Preferred Stock at $3.125 per share and, if
converted, the holder will receive a warrant to purchase 32,000 shares
of common stock at $0.75 per share. These Series E preferred shares
will be convertible at any time into common shares at a rate of 1.0331
common shares for each preferred share.
(C) BANK LOAN
In 1999, the Company borrowed $1,000,000 at an interest rate of prime
plus 3%. As additional consideration, the Company issued the bank a
warrant to purchase 20,000 shares of Series E Convertible Preferred
Stock at $2.50 per share. The warrant is valued at $27,800 and has
been recorded as interest expense. The amount of $27,800 ascribed to
the warrants was estimated using the Black-Scholes option pricing
model with the following assumptions: no expected dividend yield; risk
free interest rate of 5.5%; expected volatility of 70%; and
contractual term of 5 years. All principal and interest was repaid
from proceeds of the Series E financing.
(D) LETTERS OF CREDIT
The Company has letters of credit outstanding instead of security
deposits on leased facilities. Letters of credit outstanding were
$80,000 and $302,000 at December 31, 1998 and 1999, respectively.
(6) STOCKHOLDERS' EQUITY
(A) CONVERTIBLE PREFERRED STOCK
The Company designated and issued convertible preferred stock as
follows:
In May 1997, the Company issued 6,000,000 shares of Series A Preferred
at $0.50 per share of which 3,000,000 shares were issued for cash and
3,000,000 shares were issued in exchange for a technology license
agreement. In 1998, as a result of a subsequent restructuring of the
license agreement and cancellation of a note receivable, 1,700,000
shares were returned to the Company.
F-15
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In October 1997, the Company issued 750,000 shares of Series B
Preferred Stock for $2.00 per share.
In August 1998, the Company issued 2,146,868 shares of Series C
Preferred Stock at $1.33 per share in connection with the acquisition
of Multipoint.
In March 1999, the Company issued 6,541,013 shares of Series D
Preferred Stock for $1.25 per share. In connection with this issuance,
convertible notes and accrued interest of $5,205,805 was converted to
Series D Preferred Stock. The Series D Preferred Stock has been
recorded net of issuance costs.
In September 1999, the Company issued 3,600,000 shares of Series E
Preferred Stock for $2.50 per share and warrants to purchase 360,000
shares of common stock at $0.75 per share. The conversion price was
subsequently reduced to $2.42 per share by a resolution by the board
of directors on December 21, 1999. The net proceeds were allocated to
the preferred shares and the warrants based on their respective fair
values. The warrants were valued at $691,200 which is recorded as
additional paid in capital. The warrants expire 5.5 years from the
date of issue. The amount of $691,200 ascribed to the warrants was
estimated using the Black-Scholes option pricing model with the
following assumptions: no expected dividend yield; risk free interest
rate of 6.0%; expected volatility of 70%; and contractual term of 5.5
years.
On January 14, 2000, the Company issued 3,000,000 shares of Series F
Preferred Stock for $5.00 per share.
The rights, preferences, and privileges of the holders of Series A, B,
C, D, E and F preferred stock are as follows:
The holders of Series A and B preferred stock are entitled to
receive dividends in an amount equivalent to that which they
would receive if their shares were converted to common stock. The
holders of Series C, D, E and F preferred stock are entitled to
receive preferential dividends at a rate of $0.12, $0.11, $0.23
and $0.45 per share, respectively. All dividends require board of
director approval and are noncumulative. The conversion price is
the original issue price subject to adjustments for dilution in
the event that there is a stock split, subdivision or combination
of the outstanding shares of common stock. In addition the
conversion price is subject to adjustment in the event that
securities are subsequently sold at a lower price, subject to
certain exceptions. Holders of Series E have the right to reduce
the conversion price to as low as $1.25 in the event the Company
fails to achieve certain performance criteria relative to its
December 31, 2000 financial results and fails to complete an
initial public offering in which gross proceeds exceeds
$25,000,000 and the offering price equals or exceeds $7.50 per
share (Qualified IPO) by March 31, 2001. In addition, in the
event that the Company fails to conclude a Qualified IPO by March
31, 2001, a change in control will likewise reduce the conversion
price to $1.25. No dividends are paid or set aside for holders of
common stock until all dividends have been paid or set aside for
holders of Series A, B, C, D, E and F preferred stock. No
dividends have been declared to date.
Shares of Series A, B, C, D, E and F preferred stock have a
liquidation preference of $0.50, $2.00, $1.33, $1.25, $2.50 and
$5.00 per share, respectively, plus any declared but unpaid
dividends.
Each holder of preferred stock has voting rights equal to common
stock on an "as if converted" basis.
Each share of preferred stock is convertible at any time into one
share of common stock at the option of the holder with the
exception of Series B, C and E which each share converts into
1.1078, 1.0153 and 1.0331 shares of common stock. All shares of
preferred stock automatically convert upon the closing of the
sale of the Company's common stock in a public offering in which
gross proceeds exceed $25,000,000 and the offering price equals
or
F-16
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
exceeds $7.50 per share. Each series of preferred stock also
converts upon the written consent of a specified majority of the
holders of such series into common stock.
(B) WARRANTS
As of December 31, 1999, there were warrants outstanding to purchase
390,460 shares of common stock at a weighted average exercise price of
$2.34 per share, 48,000 shares of Series D preferred stock at $1.25
per share, and 20,000 shares of Series E preferred stock at $2.50 per
share. The warrants contain provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the
exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganizations, consolidations and certain
dilutive issuances of securities at prices below the then existing
warrant exercise price.
In November 1999, the Company issued warrants to purchase 100,000
common shares for $2.50 per share for fees related to the Series F
Convertible Preferred Stock financing that is discussed in note 11.
The warrants are valued at $302,000 which is recorded as a deferred
financing fee at December 31, 1999. The amount of $302,000 ascribed to
the warrants was estimated using the Black-Scholes option pricing
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.
(C) COMMON STOCK
The Company is authorized to issue 50,000,000 shares of common stock.
During 1997, 1998 and 1999 the Company issued 599,500, 229,750 and
4,387,085 shares of common stock upon the exercise of stock options
granted under the Company's 1997 Incentive Stock Option Plan. Shares
issued under the Plan are subject to repurchase until they are fully
vested.
Of the 1999 stock option exercises, 625,000 shares were issued to an
officer of the Company in exchange for a full recourse promissory
note. The recourse promissory note bears interest at 6.47% per year
and is due on December 10, 2009.
(D) 1997 STOCK PLAN
By resolution of the Board of Directors (the Board), effective June
11, 1997 the Company adopted the 1997 Stock Plan (the 1997 Plan) which
allowed for the issuance of up to 1,500,000 shares of common stock.
The 1997 plan has subsequently been amended, increasing the authorized
number of shares to 3,650,000 and 7,450,000 at December 31, 1998 and
1999. The 1997 Plan will terminate on June 11, 2007, or an earlier
date when all of the shares of common stock set aside for issuance
under the 1997 Plan have been issued, or when there has been a merger,
sale, transfer, or other disposition of all or substantially all of
the Company's assets in a liquidation or dissolution of the Company.
At the Board's discretion, employees, directors, and consultants may
be granted options that allow for the purchase of shares of the
Company's common stock, or they may be issued common stock directly,
either through the immediate purchase of such shares, or as a bonus
for services rendered to the Company.
Both non-statutory and incentive options may be granted under the 1997
Plan. Incentive options are options which satisfy the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended.
Non-statutory options do not satisfy these requirements. Non-statutory
options may be granted to employees, directors, and consultants at a
price not less than 85% of the fair market value of common stock on
the date the option is granted, or 110% of the fair market value of
common stock where the options are granted to those individuals owning
more than 10% of the total combined voting power of all classes of
stock of the Company (a 10% shareholder). Incentive options may only
be granted to employees at a price not less than 100% of the fair
market value of common stock on the date the option is granted.
F-17
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Direct issues of shares of the Company's common stock may be granted
to employees, directors, and consultants at a price not less than 85%
of the fair market value of common stock on the date of grant, or 110%
of the fair market value of common stock where the shares are granted
to a 10% shareholder.
Vesting schedules may vary at the Board's discretion however, no
option shall have a term in excess of ten years from the date of
grant, except where incentive options are granted to a 10%
shareholder, then the option term shall not exceed five years. Shares
of common stock issued to employees must vest at a rate of at least
20% per year from the date of issuance. Stock options are immediately
exercisable for all of the option shares. The Company has the right to
repurchase, at the exercise price paid per share, any shares purchased
under the option which are not vested. Shares subject to repurchase at
December 31, 1999 was 2,348,380.
The Company has reserved 7,450,000 common shares for issuance under
the 1997 Plan. A summary of the Company's share option plan activity
is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year/period -- $ -- 902,000 $0.09 2,076,607 $0.16
Granted.................................... 1,501,500 0.08 1,681,620 0.26 4,149,209 0.42
Exercised.................................. (599,500) 0.05 (229,750) 0.11 (4,387,085) 0.26
Cancelled.................................. -- -- (277,263) 0.16 (132,684) 0.22
---------- ---------- ---------- ---------- ----------- ----------
Outstanding at year-end.................... 902,000 0.09 2,076,607 0.16 1,706,047 0.53
========== ========== ========== ========== =========== ==========
Options outstanding for which vested
shares are issuable at period/year end.. -- $ -- 1,011,140 $0.24 664,190 $0.25
========== ========== ========== ========== =========== ==========
</TABLE>
The options assumed from the Multipoint acquisition are included in
the 1998 shares granted.
At the time of grant, all stock options were granted at the then
determined fair value. In consideration of the Company's proposed
initial public offering, the Company re-evaluated all option grants
and determined that all stock options had been granted when the fair
value of the underlying common stock on the grant date had exceeded
the exercise price of the stock option. During fiscal 1997, 1998 and
1999, the Company granted options with a weighted-average exercise
price of $0.08, $0.26 and $0.42, respectively, compared to the
weighted-average fair value of approximately $0.19, $1.07 and $2.31
for the same periods. The following table summarizes information about
stock options outstanding and exercisable under the 1997 Plan as of
December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- ------------- -------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$0.05 191,042 7.54 $0.05 147,812 $0.05
0.16 84,840 7.92 0.16 47,472 0.16
0.20 32,854 8.06 0.20 23,697 0.20
0.27 946,304 9.29 0.27 440,313 0.27
1.00 163,500 9.88 1.00 -- 1.00
2.00 282,500 9.97 2.00 -- 2.00
4.10 1,840 6.50 4.10 1,840 4.10
5.74 3,167 6.50 5.74 3,056 5.74
------------- -------------- ----------- ------------- -----------
1,706,047 8.76 $0.53 664,190 $0.25
============= ============== =========== ============= ===========
</TABLE>
At December 31, 1999, options available for grant under the 1997 Plan
were 828,000.
F-18
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A portion of the Company's shares of common stock was not qualified or
exempted under applicable state securities laws and so a portion of
the stock option grants may be in violation of those laws. If it is
determined that the issuance of the affected options constitutes a
violation of state securities laws, certain shareholders may have the
right to recover from the Company any consideration paid for those
shares which were not qualified or exempted under applicable state
securities laws. The outcome of this matter has not yet been
determined, however any potential liability is not expected to exceed
$275,000 in the aggregate.
(E) 2000 STOCK INCENTIVE PLAN
On January 18, 2000, the Company's board of directors adopted and its
shareholders subsequently approved, the 2000 Stock Incentive Plan (the
2000 Plan). The 2000 Plan will become effective upon the signing of
the underwriting agreement for the Company's initial public offering.
At that time, all outstanding options under the 1997 Plan will be
transferred to the 2000 Plan and no further grants shall be made under
the 1997 Plan. Transferred options shall continue to be governed by
their existing terms, unless the compensation committee decides to
extend one or more features of the 2000 Plan to those options.
A total of 8,750,000 shares of the Company's common stock have been
reserved for issuance under the 2000 Plan. The initial share reserve
includes 7,450,000 shares which are expected to be available under the
1997 Stock Plan upon the closing of the Company's initial public
offering. The share reserve will be increased annually on the first
trading day in January of each calendar year, by an amount equal to 3%
of the total number of shares of common stock outstanding on the last
trading day of December in the prior calendar year, up to a maximum of
2,000,000 shares per year. When a grant expires or is terminated
before it is exercised, the shares not acquired under the grants shall
again become available for issuance under the 2000 Plan.
(F) 2000 EMPLOYEE STOCK PURCHASE PLAN
On January 18, 2000, the Company's board of directors adopted and its
shareholders subsequently approved the 2000 Employee Stock Purchase
Plan (the Employee Plan). The Employee Plan will become effective upon
the signing of the underwriting agreement for the Company's initial
public offering. A total of 250,000 shares of the Company's common
stock have been reserved for issuance under the Employee Plan. The
share reserve will be increased annually on the first trading day in
January of each calendar year, by an amount equal to 2% of the total
number of shares of common stock outstanding on the last trading day
of December in the prior calendar year, up to a maximum of 1,300,000
shares per year.
The Employee Plan will have a series of successive offering periods,
each with a maximum duration of 24 months. The initial offering period
will commence upon the signing of the underwriting agreement for the
Company's initial public offering and will end on the last business
day in July 2002. Individual employees who are scheduled to work more
than 20 hours per week for more than five calendar months per year are
eligible to purchase shares during the offering periods. Participants
may contribute up to 10% of their cash earnings through payroll
deductions. The accumulated payroll deductions will be applied to the
purchase of shares at the semi-annual entry date which occur on the
first business day of February and August each year. The purchase
price will be equal to the lower of 85% of the fair market value per
share on the participant's entry date into the offering period, or 85%
of the fair market value on the semi-annual entry date.
(G) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account for its option
plan. Deferred stock-based compensation cost has been recognized for
stock option grants to employees when the fair value of the underlying
common stock on the grant date, or other measurement date, exceeds the
exercise price of each stock option. Deferred stock-based compensation
is amortized using the accelerated method set for in Financial
Accounting Standards Board Interpretation No. 28.
F-19
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 its employee stock-based compensation plan.
Had compensation cost for the Company's plans been determined
consistently with the fair value approach described in SFAS 123, the
Company's pro forma net loss and pro forma net loss per share for the
years ended December 31, 1997, 1998, and 1999, would have been changed
as indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Net loss:
As reported...................... $ 3,643,911 $ 7,476,364 $ 13,865,803
Pro forma........................ $ 3,647,677 $ 7,491,029 $ 13,944,985
Net loss per share:
As reported...................... $ -- $ 6.18 $ 4.35
Pro forma........................ $ -- $ 6.19 $ 4.38
</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.................... 5.5% 5.5% 5.5%
Expected life (years).............................. 5 5 5
Volatility......................................... -- -- --
Dividend yield..................................... -- -- --
</TABLE>
(7) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Raw materials......................................................... $ 2,709,906 $ 2,065,910
Work in process....................................................... 282,558 361,175
Finished goods........................................................ 794,912 2,535,261
------------- -------------
Inventories, net................................................. $ 3,787,376 $ 4,962,346
============= =============
</TABLE>
(8) INCOME TAXES
The Company has incurred significant losses since inception and has not
incurred any income tax expense to date. The income tax benefit differed
from the amounts computed by applying the U.S. Federal income tax rate of
34% to pretax loss as a result of the following:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Expected tax benefit at U.S. Federal statutory rate of
34%................................................. $ (1,238,930) $ (2,541,964) $(4,714,373)
Current year net operating losses and temporary
differences for which no tax benefit is recognized.. 719,126 1,912,937 3,147,200
Permanent differences.................................. 519,804 629,027 1,567,173
------------- ------------- -------------
Total............................................. $ -- $ -- $ --
============= ============= =============
</TABLE>
F-20
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and liabilities are
presented below.
1998 1999
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards............. $ 10,902,372 $12,171,670
Reserves and accrued expenses................ 1,167,453 2,558,402
Deferred stock-based compensation............ -- 378,660
Fixed assets and intangibles................. 50,633 143,290
-------------- --------------
Total gross deferred tax assets............ 12,120,458 15,252,022
Valuation allowance.......................... (12,120,458) (15,252,022)
-------------- --------------
Total deferred tax assets....................... $ -- $ --
============== ==============
Management has established a valuation allowance for the full amount of
the deferred tax assets. The net change in the total valuation allowance
for the periods ended December 31, 1997, 1998 and 1999 were net increases
of approximately $909,000, $11,211,000 and $3,132,000, respectively.
As of December 31, 1999, the Company has research and other credit
carryforwards available to reduce future income taxes for federal and
California income tax purposes of approximately $760,000 and $500,000,
respectively. The research credit carryforwards expire from 2003 to 2019
for Federal purposes and are available indefinitely for California.
At December 31, 1999, the Company had net operating loss carryforwards
for Federal and California income tax purposes of approximately
$30,000,000 and $17,000,000, respectively, available to reduce future
income subject to income taxes. The Federal net operating loss
carryforwards expire beginning 2003 through 2019. The California net
operating loss carryforwards expire in 2004.
(9) COMMITMENTS
(A) LEASE COMMITMENTS
The Company is obligated under operating leases for certain
equipment and its facility in Santa Clara, California, and capital
leases for certain equipment. The operating leases require the
Company to pay certain maintenance costs, property taxes, and
insurance.
Future minimum lease payments under capital and operating leases as
of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -------------
<S> <C> <C>
Year ending December 31:
2000........................................................ $ 203,252 $ 1,150,240
2001........................................................ 187,533 1,179,559
2002........................................................ 81,003 1,211,176
2003........................................................ -- 1,101,068
2004........................................................ -- 1,044,612
---------- -------------
Total..................................................... 471,788 $ 5,686,655
=============
Less amount representing interest........................... 61,228
----------
Present value of minimum capital lease payments............. 410,560
Less current portion of capital lease obligations........... 171,254
----------
Long-term portion of capital lease obligations.............. $ 239,306
==========
</TABLE>
Total rent expense for all operating leases was approximately
$183,000, $441,000 and $1,207,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
Included in the future minimum lease payments is a lease obligation
for a facility subleased on an informal basis to a company owned by
an officer of the Company. This Company pays all costs related to
this facility. The sublease arrangement has been conducted at arms
length such that the Company
F-21
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
believes that the terms are the same as would be offered to
unrelated entities. The Company remains obligated under the lease
for monthly lease payments of $18,560 plus certain maintenance,
property tax and insurance charges. The lease expires April 2002.
Equipment recorded under capital leases is included in property and
equipment as follows:
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
----------- -----------
Manufacturing equipment......................... $ 168,753 $ 340,719
Computer and related equipment.................. -- 123,910
Furniture....................................... -- 92,225
----------- -----------
168,753 556,854
Accumulated depreciation..................... (31,515) (131,656)
----------- -----------
$ 137,238 $ 425,198
=========== ===========
Amortization expense associated with assets acquired under capital
leases is included in depreciation expense in the accompanying
financial statements.
(B) CONTRACT MANUFACTURERS
The Company generally commits to purchase products from its
contract manufacturers to be delivered within the next 120 days
covered by forecasts. As of December 31, 1999 and June 30, 2000,
the Company has committed to make purchases totaling $6.5 million
from these manufacturers. In some instances, the Company issues
blanket purchase orders for specific quantities and delivery
schedules over 12 to 18 months to obtain price discounts. If the
Company cancels the purchase order before its term, it would be
obligated for the difference between the regular price and the
discounted price plus the cost of components bought by the
manufacturer specifically for the Company's products. Based on
current sales projections, the Company does not believe that they
will incur any material obligations under these purchase orders.
(10) GEOGRAPHIC SEGMENT INFORMATION
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 broadband wireless access
equipment.
The following table presents information about the Company by geographic
area:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------------
UNITED OTHER LATIN EUROPE/
STATES MEXICO AMERICA PHILIPPINES OTHER ASIA AFRICA CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net revenues $ 16,038 $ 129,767 $ -- $ -- $ -- $ 54,931 $ 200,736
Net loss.......... (291,134) (2,355,628) -- -- -- (997,149) (3,643,911)
Property &
equipment, net. 179,960 -- -- -- -- -- 179,960
Percentage of
reported net
revenue........ 8% 65% -- -- -- 27% 100%
</TABLE>
F-22
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------------------
UNITED OTHER LATIN EUROPE/
STATES MEXICO AMERICA PHILIPPINES OTHER ASIA AFRICA CONSOLIDATED
----------- ---------- ----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net revenues... $1,003,438 $6,082,476 $ 1,642,374 $ 1,938,627 $ 172,768 $ 332,552 $ 11,172,235
Net loss............. (671,492) (4,070,341) (1,099,063) (1,299,320) (130,050) (206,098) (7,476,364)
Property &
equipment, net.... 692,640 -- -- -- -- -- 692,640
Percentage of
reported net
revenue........... 9% 54% 15% 17% 2% 3% 100%
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------------------
UNITED OTHER LATIN EUROPE/
STATES MEXICO AMERICA PHILIPPINES OTHER ASIA AFRICA CONSOLIDATED
----------- ---------- ----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net revenues... $ 2,638,265 $7,638,139 $ 3,892,572 $ 2,953,235 $ 952,183 $ 2,254,460 $ 20,328,854
Net loss............. (2,485,923) (4,913,409) (2,503,987) (1,899,737) (612,514) (1,450,233) (13,865,803)
Property &
equipment, net.... 1,245,350 -- -- -- -- -- 1,245,350
Percentage of
reported net
revenue........... 13% 38% 19% 14% 5% 11% 100%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED)
----------------------------------------------------------------------------------------
UNITED OTHER LATIN EUROPE/
STATES MEXICO AMERICA PHILIPPINES OTHER ASIA AFRICA CONSOLIDATED
----------- ---------- ----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net revenues... $ 1,024,171 $2,261,857 $1,920,824 $2,924,035 $ 651,663 $ 722,526 $ 9,505,076
Net loss............. (349,658) (839,180) (699,316) (1,083,940) (244,760) (279,727) (3,496,581)
Property &
equipment, net.... 814,932 -- -- -- -- --
Percentage of
reported net
revenue........... 10% 24% 20% 31% 7% 8% 100%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
(UNAUDITED)
----------------------------------------------------------------------------------------
UNITED OTHER LATIN EUROPE/
STATES MEXICO AMERICA PHILIPPINES OTHER ASIA AFRICA CONSOLIDATED
----------- ---------- ----------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total net revenues... $2,045,130 $ 6,016,326 $ 1,533,074 $ 140,544 $ 934,854 $ 1,181,321 $ 11,851,249
Net loss............. (5,386,610) (16,159,829) (4,119,173) (316,860) (2,534,875) (3,168,594) (31,685,941)
Property &
equipment, net.... 2,139,310 -- -- -- -- -- 2,139,310
Percentage of
reported net
revenue........... 17% 51% 13% 1% 8% 10% 100%
</TABLE>
Revenue information by product category is as follows:
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
JUNE 30,
---------- ------------ ------------ -------------------------------
1997 1998 1999 1999 2000
---------- ------------ ------------ ------------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
WaveNet Transport...................... $200,736 $ 6,009,901 $ 5,361,992 $2,078,570 $ 3,460,042
WaveNet Access......................... -- 805,574 6,016,653 2,852,053 3,689,749
WaveNet Link........................... -- 306,243 2,769,545 507,470 3,037,369
Legacy and other....................... -- 4,050,517 6,180,664 4,066,983 1,664,089
---------- ------------ ------------ ------------ -----------------
$200,736 $11,172,235 $20,328,854 $ 9,505,076 $ 11,851,249
========== ============ ============ ============ =================
</TABLE>
(11) SUBSEQUENT EVENTS
(A) FINANCING COMMITMENTS
In February 2000, the Company received financing commitments from
certain shareholders for $12.5 million in the event that the
Company does not complete an initial public offering with gross
proceeds of $25 million by May 31, 2000. The $12.5 million in
commitments, if required, will be in the form of convertible
promissory notes bearing interest at a fixed rate of 10% per annum.
If not
F-23
<PAGE>
WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
repaid, the notes will convert into shares of the Company's next
round of equity financing of at least $12.5 million. In connection
with obtaining these commitments, the Company issued warrants to
purchase 50,000 shares of common stock at a price of $4.00 per
share and agreed to issue additional warrants for 150,000 shares of
common stock at the then fair market value per share if the loan
commitments are exercised. These warrants expire upon the earlier
of 5 years or 30 days after the consummation of an initial public
offering. The fair value of these warrants is being expensed over
the remaining commitment period.
(B) REINCORPORATION
On January 18, 2000, the Company's board of directors approved, and
its shareholders subsequently approved the reincorporation of the
Company in Delaware. In conjunction with the reincorporation, the
authorized number of common shares will be increased to
100,000,000, and preferred stock of 5,000,000 shares will be
authorized. The par value of the common shares will decrease to
$0.001 per share. The effects of the reincorporation have been
reflected in the accompanying financial statements.
(C) STOCK OPTION GRANTS
From January 1, 2000 to July 7, 2000 the Company issued 1,229,200
options to employees at a weighted average exercise price of $4.30.
The Company also granted options to its outside counsel for 20,000
shares of common stock at $4.00 per share and 180,000 shares at
$5.00 per share. Such options were fully vested on the date of
grant. One third (1/3) of such options are immediately exercisable.
The remaining two thirds (2/3) are exercisable at the end of two
years subject to earlier exercisability upon the occurrence of
certain events. The Company has expensed the fair value of such
exercisable options in the quarter in which they were granted. The
fair value of the unexercisable shares will be expensed over their
exercise period as they are associated with services to be rendered
in the future.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Multipoint Networks, Inc.
We have audited the accompanying statement of operations of Multipoint Networks,
Inc., and the related statements of stockholders' equity and cash flows for the
period from January 1, 1998 to August 25, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Multipoint
Networks, Inc. for the period January 1, 1998 to August 25, 1998 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
February 18, 2000
F-25
<PAGE>
MULTIPOINT NETWORKS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD
JANUARY 1, 1998 TO AUGUST 25, 1998
Revenue............................................... $ 5,872,500
Cost of revenue....................................... 4,355,426
---------------
Gross profit................................... 1,517,074
---------------
Operating expenses:
Research and development........................... 954,120
Sales and marketing................................ 1,740,433
General and administration......................... 249,963
---------------
Total operating expenses....................... 2,944,516
---------------
Operating loss........................................ (1,427,442)
===============
Interest expense, net................................. 46,003
Other income.......................................... (66,799)
---------------
Net loss....................................... $ (1,406,646)
===============
F-26
<PAGE>
MULTIPOINT NETWORKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD
JANUARY 1, 1998 TO AUGUST 25, 1998
<TABLE>
<CAPTION>
SERIES I NONREDEEMABLE
PREFERRED STOCK COMMON STOCK
--------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
----------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance as of January 1, 1998............ 19,534,200 $ 3,146,304 30,806,754 $ 18,914,000
Proceeds from issuance of common
stock................................. -- -- -- 11,894
Net loss ................................ -- -- -- --
----------------- --------------- -------------- --------------
Balance as of August 25, 1998............ 19,534,200 $ 3,146,304 30,806,754 $ 18,925,894
================= =============== ============== ==============
<CAPTION>
SUBSCRIPTION ACCUMULATED TOTAL STOCKHOLDERS'
RECEIVABLE DEFICIT EQUITY
--------------- --------------- ------------------
<S> <C> <C> <C>
Balance as of January 1, 1998............ $ (5,000) $ (19,124,791) $ 2,930,513
Proceeds from issuance of common
stock................................. 5,000 -- 16,894
Net loss ................................ -- (1,406,646) (1,406,646)
--------------- --------------- ------------------
Balance as of August 25, 1998............ $ -- $ (20,531,437) $ 1,540,761
=============== =============== ==================
</TABLE>
F-27
<PAGE>
MULTIPOINT NETWORKS, INC.
STATEMENT OF CASH FLOW
FOR THE PERIOD
JANUARY 1, 1998 TO AUGUST 25, 1998
<TABLE>
<CAPTION>
<S><C>
Cash flows from operating activities:
Net loss...................................................................................... $ (1,406,646)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation.................................................................................. 164,969
Provision for excess and obsolete inventory................................................... (27,211)
Changes in operating assets and liabilities:
Accounts receivable......................................................................... (1,158,035)
Inventory................................................................................... (1,010,985)
Prepaids and other current assets........................................................... (136,781)
Accounts payable............................................................................ (291,758)
Accrued liabilities......................................................................... 269,487
--------------
Net cash used in operating activities......................................................... (3,596,960)
--------------
Cash flows used in investing activities:
Purchase of property and equipment............................................................ (163,256)
--------------
Cash flows from financing activities:
Proceeds from lines of credit................................................................. 1,084,103
Proceeds from bridge financing................................................................ 1,750,000
Proceeds from issuances of common stock....................................................... 16,894
--------------
Cash provided by financing activities..................................................... 2,850,997
--------------
Net decrease in cash and cash equivalents........................................................ (909,219)
Cash and cash equivalents, beginning of period................................................... 1,147,000
--------------
Cash and cash equivalents, end of period......................................................... $ 237,781
==============
</TABLE>
F-28
<PAGE>
MULTIPOINT NETWORKS, INC.
NOTES TO THE STATEMENT OF OPERATIONS FOR THE PERIOD
JANUARY 1, 1998 TO AUGUST 25, 1998
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) THE COMPANY
Multipoint Networks, Inc. (the "Company") was incorporated in
California in 1987 and designed, manufactured and marketed wireless
metropolitan-area data network products based on unique patented
digital transceiver technology. The Company's products were
distributed through a network of independent distributors and
value-added resellers located throughout Latin America, North
America and Asia-Pacific.
On August 26, 1998 the Company was acquired by Wireless, Inc.
(B) REVENUE RECOGNITION
Revenues are recognized upon product shipment, provided that
significant support obligations, if any, are satisfied and
collection of the resulting receivables is probable. Estimated
warranty costs are accrued at the time of sale based upon the
Company's historical experience.
(C) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(D) PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment is provided
using the straight-line method over the estimated useful lives of
the respective assets, which range from three to five years.
Equipment held under capital leases is amortized using the
straight-line method over the shorter of the lease term or the
estimated useful life of the asset.
(E) CASH EQUIVALENTS
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Cash and cash equivalents are deposited with high credit quality
financial institutions.
(F) RESEARCH AND DEVELOPMENT
Costs incurred in the research and development of new products and
enhancements to existing products are expensed as incurred until
the technological feasibility of the product or enhancement has
been established. Technological feasibility is established when a
product design and a working model have been completed and the
completeness of the working model, and its consistency with the
product design, have been confirmed by testing. After establishing
technological feasibility, material development costs are
capitalized. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or is
amortized based on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between
completion of a working model and the general release of the
product has been short and development costs qualifying for
capitalization have been insignificant. Accordingly, the Company
has not capitalized any development costs.
F-29
<PAGE>
MULTIPOINT NETWORKS, INC.
NOTES TO THE STATEMENT OF OPERATIONS FOR THE PERIOD
JANUARY 1, 1998 TO AUGUST 25, 1998-(CONTINUED)
(G) INVENTORIES
Inventory is stated at the lower of cost, determined on a first-in
first-out basis or net realizable value.
(H) INCOME TAXES
The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be recovered.
(I) COMPREHENSIVE INCOME
The Company does not have any components of comprehensive income,
consequently comprehensive loss consists entirely of net loss for
all periods presented.
(2) STOCKHOLDERS' EQUITY
(A) SERIES 1 NONREDEEMABLE PREFERRED STOCK
At August 25, 1998, the Company had 19,534,200 shares of Series 1
Nonredeemable Convertible Preferred Stock issued and outstanding.
Holders of Series 1 Preferred Stock are entitled to a noncumulative
dividend, when and if declared by the Board of Directors, at the
minimum rate of $0.02 per share per annum, prior and in preference
to any distribution on the Common Stock. In the event of any
liquidation, dissolution or winding up of the Company, the holders
of Series 1 Preferred Stock shall be entitled to receive, prior and
in preference to any distribution on the Common Stock, the amount
of $0.4875 per share plus an amount equal to all declared but
unpaid dividends on such shares.
Each share of Series 1 Preferred Stock is convertible at the option
of the holder at any time in Common Stock at the initial conversion
rate of one share Common Stock for each share of Series 1 Preferred
Stock. The initial conversion rate of the Series 1 Preferred Stock
is subject to adjustment as provided in the Articles of
Incorporation. Each share of Series 1 Preferred Stock shall
automatically be converted into shares of Common Stock at the then
effective conversion rate upon the closing of a firm commitment
underwritten initial public offering of the Company's Common Stock
at a price per share not less than $0.75 per share and an aggregate
offering price to the public of not less than $10,000,000,
exclusive of underwriting commissions and offering expenses.
Each share of Series 1 Preferred Stock is entitled to the number of
votes equal to the number of share of Common Stock into which the
shares of Series 1 Preferred Stock could be converted.
(B) COMMON STOCK
The Company is authorized to issue 60,000,000 shares of no par
value common stock. At January 1, 1998 and August 25, 1998, the
number of shares of common stock outstanding was 30,806,754.
F-30
<PAGE>
MULTIPOINT NETWORKS, INC.
NOTES TO THE STATEMENT OF OPERATIONS FOR THE PERIOD
JANUARY 1, 1998 TO AUGUST 25, 1998-(CONTINUED)
(3) INCOME TAXES
The Company has incurred significant losses since inception and has
not incurred any income tax expense to date. The income tax benefit
differed from the amounts computed by applying the U.S. Federal
income tax rate of 34% to pretax loss as a result of the following:
<TABLE>
<S><C> <C>
Expected tax benefit at U.S. Federal statutory rate of 34%............................... (478,260)
Current year net operating losses and temporary differences for which no tax benefit is
recognized............................................................................ 344,347
Permanent differences.................................................................... 133,913
----------
Total................................................................................. $ --
==========
</TABLE>
F-31
<PAGE>
INSIDE BACK COVER
The page consists of a map of the planet with clusters of yellow dots
appearing in various countries which are colored blue. Below the map are the
words "Our customers have installed our systems in each of the locations noted
above." In the top left corner of the page on the purple background is the
Wireless logo, which consists of the word "Wireless" with the first four letters
in black and the last four in blue, multi-colored dots appearing above the "i",
"r" and "e", the capital letters "INC" in the top right corner, the letters "TM"
in the lower right corner and a semi-circular blue line underneath.
<PAGE>
================================================================================
8,500,000 SHARES
WIRELESS, INC.
COMMON STOCK
[WIRELESS LOGO]
--------------
P R O S P E C T U S
, 2000
--------------
SALOMON SMITH BARNEY
CIBC WORLD MARKETS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts payable by us in connection with the sale of common stock
being registered. All amounts are estimates except the SEC registration fee, the
NASD filing fees and the Nasdaq National Market listing fee.
SEC Registration Fee.............................................. $ 25,806
NASD Filing Fee................................................... 10,275
Nasdaq National Market Listing Fee................................ 95,000
Printing and Engraving Expenses................................... 50,000
Legal Fees and Expenses........................................... 1,600,000
Accounting Fees and Expenses...................................... 630,000
Blue Sky Fees and Expenses........................................ 10,000
Transfer Agent Fees............................................... 8,000
Miscellaneous..................................................... 120,919
------------
Total.......................................................... 2,550,000
============
--------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit the indemnification
under certain circumstances for liabilities (including reimbursement for
expenses incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VII, Section 6 of our bylaws provides for mandatory
indemnification of our directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law Our certificate of incorporation provides that, subject
to Delaware law, our directors will not be personally liable for monetary
damages for breach of the directors' fiduciary duty as directors to Wireless,
Inc. and its stockholders. This provision in the certificate of incorporation
does not eliminate the directors' fiduciary duty, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the company or our stockholders for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. We have entered into indemnification
agreements with our officers and directors, a form of which is attached as
Exhibit 10.3 hereto and incorporated herein by reference. The indemnification
agreements provide our officers and directors with further indemnification to
the maximum extent permitted by the Delaware General Corporation Law. We
maintain directors and officers liabilities insurance. Reference is made to
Section 8 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities and Section 1.7 of the Sixth Amended and Restated Investors Rights
Agreement contained in Exhibit 4.1 hereto, indemnifying the parties thereto,
including certain controlling stockholders, against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:
(a) The Registrant issued and sold 6,050,276 shares of common stock
to employees and consultants for an aggregate purchase price of
$1,624,003.24 pursuant to direct stock issuances and the exercise of
options under its 1997 Stock Option/Stock Issuance Plan.
II-1
<PAGE>
(b) In May 1997, the Registrant issued and sold an aggregate of
6,000,000 shares of Series A Preferred Stock to two investors for an
aggregate of purchase price of $3,000,000.
(c) In May 1997, the Registrant issued a warrant to Imperial Bank
to purchase up to 30,460 shares of its common stock at an exercise price
of $1.22 per share.
(d) In October 1997, the Registrant issued and sold an aggregate of
750,000 shares of Series B Preferred Stock to one investor for an
aggregate of purchase price of $1,500,000.
(e) In June 1998, the Registrant entered into an agreement to
acquire Multipoint Networks, Inc., or Multipoint, whereby the purchase
price was payable in shares of the Registrant's common stock and Series C
Preferred Stock. In August 1998, the Registrant completed the acquisition
and paid an aggregate of 2,746,452 shares of its common stock to the
holders of Multipoint common stock and 2,146,868 shares of its Series C
Preferred Stock to the holders of Multipoint Series 1 Preferred Stock.
The issuance of Registrant's Series C Preferred Stock was exempt from the
registration requirements of the Securities Act by virtue of Section
3(a)(10) thereof. In November 1999, 59,983 shares of Series C Preferred
Stock were repurchased by the Company from a single investor for an
aggregate purchase price of $79,777.
(f) In October 1998, the Registrant issued a warrant to Silicon
Valley Bank to purchase up to 48,000 shares of its Series D Preferred
Stock at an exercise price of $1.25 per share.
(g) In March 1999, the Registrant issued and sold an aggregate of
6,541,013 shares of Series D Preferred Stock to several investors for an
aggregate purchase price of $8,176,266.
(h) In August 1999, the Registrant issued to an investor a
subordinated debenture in a principal amount of $1,000,000 which is
convertible into shares of its Series E Preferred Stock at an exercise
price of $3.125 per share.
(i) In September 1999, the Registrant issued a warrant to Silicon
Valley Bank to purchase up to 20,000 shares of its Series E Preferred
Stock at an exercise price of $2.50 per share. In December 1999, the
Registrant's board of directors reduced the exercise price to $2.42 per
share and adjusted the number of shares issuable upon exercise of the
warrant to 20,662.
(j) In September 1999, the Registrant issued and sold an aggregate
of 3,600,000 shares of Series E Preferred Stock and warrants to purchase
an aggregate of 362,000 shares of common stock at an exercise price of
$0.75 per share (subject to adjustment) to several investors for an
aggregate purchase price of $9,003,600. In December 1999, the
Registrant's board of directors reduced the exercise price of the
warrants to $2.42 per share and adjusted the number of shares issuable
upon exercise of the warrants to 362,000 following the realization that
shares of common stock issuable upon the exercise of options granted to
certain officers should have been considered outstanding when determining
the capitalization for purposes of establishing the purchase price of
Series E Preferred Stock.
(k) In November 1999, the Registrant issued warrants to two
consultants to purchase up to an aggregate of 100,000 shares of its
common stock at an exercise price of $2.50 per share.
(l) In January 2000, the Registrant issued and sold an aggregate of
3,000,000 shares of Series F Preferred Stock to two investors for an
aggregate purchase price of $15,000,000.
(m) In January 2000, the Registrant issued and sold an aggregate of
3,429,352 shares of common stock to TRW in connection with a Purchase and
License Agreement for an aggregate consideration of $17,146,760.
(n) In February 2000, the Registrant issued warrants to several
investors to purchase up to an aggregate of 50,000 shares of its common
stock at an exercise price of $4.00 per share.
(o) In March 2000, the Registrant issued 12,000 shares of stock to
one investor in consideration of services previously rendered at a grant
price of $5.00 per share.
(p) In June 2000, the registrant issued a warrant to Silicon Valley
Bank to purchase up to 37,500 shares of its common stock at an exercise
price of $4.00 per share.
None of the foregoing transactions involved any underwriters,
underwriting discounts or commissions, or any public offering, and we believe
that, except as otherwise noted, each transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof or Rule 701 pursuant to compensatory benefit
II-2
<PAGE>
plans and contracts relating to compensation as provided under Rule 701. The
recipients in each transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in these transactions. All recipients had
adequate access, through their relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits listed in the exhibit Index are filed as part of this
registration statement.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------- -----------------------
1.1** Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization dated as of June 4, 1998 by and
among Multipoint Networks, certain shareholders of Multipoint
Networks, Inc., Wireless, Inc. and certain shareholders of
Wireless, Inc.
3.1* Amended and Restated Certificate of Incorporation, to be effective
upon consummation of this Offering.
3.2* Amended and Restated Bylaws, to be effective upon consummation of
this offering.
4.1* Sixth Amended and Restated Investors' Rights Agreement.
4.2* Form of Registrant's Specimen Common Stock Certificate.
4.3* Reference is made to Exhibits 3.1 and 3.2.
4.4* Form of Warrant to Purchase Common Stock, dated as of October 10,
1999, by and among the Registrant and F the purchasers of Series E
Preferred Stock.
4.5* Warrant to Purchase Common Stock, dated as of May 5, 1997, by and
between the Registrant and Imperial Bank.
4.6* Convertible Promissory Note, dated as of August 17, 1999, by and
between the Registrant and AMT Capital, Ltd., as amended.
4.7* Warrant to Purchase Series D Preferred Stock, dated as of
October 16, 1998, by and between the W Registrant and Silicon
Valley Bank.
4.8* Warrant to Purchase Series E Preferred Stock, dated as of
September 13, 1999, by and between the W Registrant and Silicon
Valley Bank.
4.9* Form of Warrant to Purchase Common Stock, dated as of
November 18, 1999, by and between the Registrant F and each of
Peter Sutherland and Jed Davis.
4.10* Form of Warrant to Purchase Common Stock, dated as of February
14, 2000, by and between the Registrant and each of Dynamics
Technology, Inc., Gemini Investors LLC, Stratford Equity Partners,
L.P., Crossroads Venture Capital, LLC and TRW.
4.11* Warrant to Purchase Common Stock, dated as of June 1, 2000, by and
between the Registrant and Silicon Valley Bank.
4.12* Convertible Promissory Note dated as of August 17, 1999, by and
between the Registrant and AMT Capital, Ltd.
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant, with respect to the common stock being registered.
10.1* Registrant's 2000 Stock Incentive Plan.
10.2* Registrant's 2000 Employee Stock Purchase Plan.
10.3* Form of Registrant's Directors' and Officers' Indemnification
Agreement.
10.4* Lease Agreement, dated June 4, 1999, between the Registrant and W.F.
Batton & Co.
10.5* Loan and Security Agreement, dated as of February 27, 1999, between
the Registrant and Silicon Valley Bank.
10.6* Amendment to Loan Documents, dated as of September 13, 1999, to the
Loan and Security Agreement, dated A as of February 27, 1999,
between the Registrant and Silicon Valley Bank.
10.7* Amendment to Loan Documents, dated as of February 23, 2000, to the
Loan and Security Agreement dated as A of February 27, 1999,
between the Registrant and Silicon Valley Bank.
10.7(a)* Amendment to Loan Documents, dated July 13, 2000, to the Loan and
Security Agreement dated as of February 27, 1999, between the
Registrant and Silicon Valley Bank.
10.8+* Purchase and License Agreement, dated as of January 14, 2000,
between the Registrant and TRW.
10.9+* Master Distributor Agreement, dated April 1, 1999, as amended,
between the Registrant and Digital
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------- -----------------------
Microwave Corporation.
10.10* Promissory Note, dated as of December 10, 1999, executed by William
J. Palumbo in favor of the Registrant.
10.10(a)* Amendment to Promissory Note, dated as of June 22, 2000, to the
Promissory Note, dated as of A December 10, 1999, executed by
William J. Palumbo in favor of the Registrant.
10.11* Lease Agreement dated as of May 12, 1997 by and between the
Registrant and Spieker Properties, L.P.
10.12* Consulting Agreement, dated as of October 18, 1999, by and between
William E. Gibson and the Registrant.
10.13* Employment Agreement, dated March 30, 2000, between Antonio Canova
and the Registrant.
23.1* Consent of KPMG LLP, Independent Auditors relative to Wireless, Inc.
23.2* Consent of KPMG LLP, Independent Auditors relative to Multipoint
Networks, Inc.
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in their
opinion filed as Exhibit 5.1).
24.1* Power of Attorney. Reference is made to Page II-5.
27.1* Financial Data Schedule.
--------------
* Previously filed.
** To be filed by subsequent amendment.
+ Confidential treatment has been requested for certain portions thereof.
(b) Financial Statement Schedule
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriters at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the Delaware General Corporation Law, our certificate of incorporation or our
bylaws, indemnification agreements entered into between the company and our
officers and directors, the underwriting agreement, or otherwise, we have been
advised that in the opinion of the commission such indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable. If a claim for indemnification against such liabilities (other
than the payment by us of expenses incurred or paid by any of our directors,
officers or controlling persons 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, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by us is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) 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 us pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-1 and has duly caused this amendment
to the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Santa Clara, State of California, on
this 17th day of August, 2000.
By: /s/ WILLIAM J. PALUMBO
---------------------------------------------
William J. Palumbo
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the registration statement has been signed by the persons
whose signatures appear below, which persons have signed such registration
statement in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chief Executive Officer and President August 17, 2000
/s/ WILLIAM J. PALUMBO (Principal Executive Officer)
----------------------------------------------
William J. Palumbo Chief Financial Officer, Executive Vice
President and Secretary (Principal
Accounting Officer)
/s/ ANTONIO CANOVA August 17, 2000
----------------------------------------------
Antonio Canova
* Chairman of the Board of Directors August 17, 2000
----------------------------------------------
William E. Gibson
* Director August 17, 2000
----------------------------------------------
Andrew I. Fillat
* Director August 17, 2000
----------------------------------------------
Denny R.S. Ko
* Director August 17, 2000
----------------------------------------------
David F. Millet
* Director August 17, 2000
----------------------------------------------
Patrick A. Rivelli
* Director August 17, 2000
----------------------------------------------
Mark S. Silverman
*By /S/ ANTONIO CANOVA
---------------------------------------
Antonio Canova
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
FORM OF INDEPENDENT AUDITORS' REPORT
When the event referred to in Note 11(b) of the Wireless, Inc. financial
statements has been consummated, we will be in a position to render the
following report.
/s/ KPMG LLP
The Board of Directors
Wireless, Inc.:
Under date of February 23, 2000, except for Note 11 which is as of July
2000, we reported on the balance sheets of Wireless, Inc. as of December 31,
1998 and 1999, and the related statements of operations, stockhholders' equity,
and cash flows for the period from May 7, 1997 (inception) to December 31, 1997
and the years ended December 31, 1998 and 1999, included in the prospectus. In
connection with our audits of the aforementioned financial statements, we also
audited the accompanying financial statement schedule. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
Mountain View, California
February 23, 2000
S-1
<PAGE>
SCHEDULE II
WIRELESS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD MAY 7, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD EXPENSES OTHER ADDITIONS DEDUCTIONS PERIOD
------------------------------------ ------------ ------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1997............................... $ -- $ -- $ -- $ -- $ --
1998............................... -- 200,136 145,351 (46,254) 299,233
1999............................... $ 299,233 $ 1,044,365 $ -- $ (149,963) $ 1,193,635
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF
NUMBER DOCUMENT
--------- -----------------------
1.1** Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization dated as of June 4, 1998 by and
among Multipoint Networks, certain shareholders of Multipoint
Networks, Inc., Wireless, Inc. and certain shareholders of Wireless,
Inc.
3.1* Amended and Restated Certificate of Incorporation, to be effective
upon consummation of this Offering.
3.2* Amended and Restated Bylaws, to be effective upon consummation of
this offering.
4.1* Sixth Amended and Restated Investors' Rights Agreement.
4.2* Form of Registrant's Specimen Common Stock Certificate.
4.3* Reference is made to Exhibits 3.1 and 3.2.
4.4* Form of Warrant to Purchase Common Stock, dated as of October
10, 1999, by and among the Registrant and F the purchasers of Series
E Preferred Stock.
4.5* Warrant to Purchase Common Stock, dated as of May 5, 1997, by and
between the Registrant and Imperial Bank.
4.6* Convertible Promissory Note, dated as of August 17, 1999, by and
between the Registrant and AMT Capital, Ltd., as amended.
4.7* Warrant to Purchase Series D Preferred Stock, dated as of October 16,
1998, by and between the W Registrant and Silicon Valley Bank.
4.8* Warrant to Purchase Series E Preferred Stock, dated as of September
13, 1999, by and between the W Registrant and Silicon Valley Bank.
4.9* Form of Warrant to Purchase Common Stock, dated as of November 18,
1999, by and between the Registrant F and each of Peter Sutherland
and Jed Davis.
4.10* Form of Warrant to Purchase Common Stock, dated as of February 14,
2000, by and between the Registrant and each of Dynamics Technology,
Inc., Gemini Investors LLC, Stratford Equity Partners, L.P.,
Crossroads Venture Capital, LLC and TRW.
4.11* Warrant to Purchase Common Stock, dated as of June 1, 2000, by and
between the Registrant and Silicon Valley Bank.
4.12* Convertible Promissory Note dated as of August 17, 1999, by and
between the Registrant and AMT Capital, Ltd.
5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the
Registrant, with respect to the common O stock being registered.
10.1* Registrant's 2000 Stock Incentive Plan.
10.2* Registrant's 2000 Employee Stock Purchase Plan.
10.3* Form of Registrant's Directors' and Officers' Indemnification
Agreement.
10.4* Lease Agreement, dated June 4, 1999, between the Registrant and W.F.
Batton & Co.
10.5* Loan and Security Agreement, dated as of February 27, 1999, between
the Registrant and Silicon Valley Bank.
10.6* Amendment to Loan Documents, dated as of September 13, 1999, to the
Loan and Security Agreement, dated A as of February 27, 1999,
between the Registrant and Silicon Valley Bank.
10.7* Amendment to Loan Documents, dated as of February 23, 2000, to the
Loan and Security Agreement dated as A of February 27, 1999, between
the Registrant and Silicon Valley Bank.
10.7(a)* Amendment to Loan Documents, dated July 13, 2000, to the Loan and
Security Agreement dated as of February 27, 1999, between the
Registrant and Silicon Valley Bank.
10.8+* Purchase and License Agreement, dated as of January 14, 2000, between
the Registrant and TRW.
10.9+* Master Distributor Agreement, dated April 1, 1999, as amended,
between the Registrant and Digital Microwave Corporation.
10.10* Promissory Note, dated as of December 10, 1999, executed by William
J. Palumbo in favor of the Registrant.
10.10(a)* Amendment to Promissory Note, dated as of June 22, 2000, to the
Promissory Note, dated as of A December 10, 1999, executed by William
J. Palumbo in favor of the Registrant.
10.11* Lease Agreement dated as of May 12, 1997 by and between the
Registrant and Spieker Properties, L.P.
10.12* Consulting Agreement, dated as of October 18, 1999, by and between
William E. Gibson and the Registrant.
10.13* Employment Agreement, dated March 30, 2000, between Antonio Canova
and the Registrant.
23.1* Consent of KPMG LLP, Independent Auditors relative to Wireless, Inc.
<PAGE>
EXHIBIT DESCRIPTION OF
NUMBER DOCUMENT
--------- -----------------------
23.2* Consent of KPMG LLP, Independent Auditors relative to Multipoint
Networks, Inc.
23.3* Consent of Brobeck, Phleger & Harrison LLP (contained in their
opinion filed as Exhibit 5.1).
24.1* Power of Attorney. Reference is made to Page II-5.
27.1* Financial Data Schedule.
--------------
* Previously filed.
** To be filed by subsequent amendment.
+ Confidential treatment has been requested for certain portions thereof.
