<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 2000
REGISTRATION NO. 333-39446
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
OMNISKY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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<S> <C> <C>
DELAWARE 4812 77-0516363
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1001 ELWELL COURT
PALO ALTO, CALIFORNIA 94303
(650) 969-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PATRICK S. MCVEIGH
CHIEF EXECUTIVE OFFICER
OMNISKY CORPORATION
1001 ELWELL COURT
PALO ALTO, CALIFORNIA 94303
(650) 969-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Aaron J. Alter, Esq. Danielle Carbone, Esq.
John L. Donahue, Esq. Shearman & Sterling
Richard S. Arnold, Jr., Esq. 1550 El Camino Real, Suite 100
Wilson Sonsini Goodrich & Rosati Menlo Park, California 94025
Professional Corporation (650) 330-2200
650 Page Mill Road
Palo Alto, California 94304
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act 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, 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,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF NUMBER OF SHARES OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PER SHARE PRICE(1) REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.001 par value... 10,465,000 $12.00 $125,580,000 $33,154(2)
------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 2000
9,100,000 Shares
[OmniSky logo]
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $10.00 and $12.00 per share. Our common stock has been approved for
listing on The Nasdaq Stock Market's National Market under the symbol "OMNY".
The underwriters have an option to purchase a maximum of 1,365,000
additional shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 9.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS TO OMNISKY
------------- ------------- -------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
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.
CREDIT SUISSE FIRST BOSTON
CHASE H&Q
DONALDSON, LUFKIN & JENRETTE
SALOMON SMITH BARNEY
DLJDIRECT INC.
The date of this prospectus is , 2000.
<PAGE> 3
[INSIDE FRONT COVER]
The inside front cover of the prospectus includes the following text which
appears centered at the top of the page in large font:
OmniSky. Internet and e-mail on the go.
Below the above text appears two columns of text. The first column reads:
OmniSky helps you make things happen when your life and work take you
beyond the walls of a traditional office. Stay in touch with your
e-mail. Access the Internet. Receive news, get stock quotes,
The second column reads:
phone numbers and traffic reports. Order goods and services when you are
on the go. We completed beta testing of our service in April 2000 and
commercially launched our service in May 2000.
To the right of the two columns of text is a picture of a Palm V hovering over a
wireless modem with the OmniSky logo. The antenna on the modem is shown fully
extended. The screen on the Palm V shows a screen shot from the E*Trade web
site.
Centered on the page is a large picture of a Palm V shown being attached to a
wireless modem with the OmniSky logo. An arrow demonstrates how the Palm V
attaches to the wireless modem. The screen on the Palm V shows the OmniSky user
interface.
Starting at the upper left hand corner of the above picture of the Palm V and
moving counterclockwise, the following paragraphs are positioned around the Palm
V with dotted lines pointing from each paragraph to the Palm V:
Convenient User Interface
- Designed to organize wireless content into useful topic areas
- Can be customized to provide faster access to selected content
E-mail Access
- Send and receive e-mail on the go from up to six existing e-mail
accounts accessed directly through our service
- Preview the sender, subject and beginning of an e-mail or download
the entire message
The Web in Your Hand
- Access almost 1,000 links to content modified for display on handheld
devices
- Access Web sites whose content has not been modified
- Visit some of the most popular Web sites by directly entering their
Web addresses
<PAGE> 4
Wireless Modem
- We purchase airtime on AT&T Wireless, Verizon Wireless and other
carriers' Cellular Digital Packet Data networks to deliver our service
E-commerce
- Purchase products and services online
- Comparison shop to find the best prices
Popular Content
- Some of the most recognized names on the Internet are prominently
positioned in our service
Nationwide Coverage
- 118 metropolitan areas, encompassing 160 million people
- Unlimited usage
- Flat rate monthly pricing
- No roaming fees
Below the picture of the Palm V appear the words "Think it. Do it.(TM)"
The following text appears on the bottom of the page against a dark background:
To receive our wireless service, a subscriber must purchase a wireless
modem from us. Subscribers must provide their own handheld mobile
device, such as the Palm V(TM). Content that has been optimized for
handheld mobile devices will typically be received by a subscriber, when
browsing the Internet on their handheld mobile device, faster than might
be the case with non-optimized content. Non-optimized content that has
been developed for platforms other than a handheld mobile device, such
as personal computers, is unlikely to be as easily used or viewed on
handheld mobile devices as optimized content.
To the left of the above text appears the OmniSky logo.
<PAGE> 5
------------------
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 4
RISK FACTORS.......................... 9
USE OF PROCEEDS....................... 21
DIVIDEND POLICY....................... 21
CORPORATE INFORMATION................. 21
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 22
CAPITALIZATION........................ 23
DILUTION.............................. 25
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 28
BUSINESS.............................. 38
</TABLE>
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PAGE
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MANAGEMENT............................ 54
STOCK PLANS........................... 61
RELATED PARTY TRANSACTIONS............ 65
PRINCIPAL STOCKHOLDERS................ 67
DESCRIPTION OF CAPITAL STOCK.......... 70
SHARES ELIGIBLE FOR FUTURE SALE....... 73
UNDERWRITING.......................... 75
NOTICE TO CANADIAN RESIDENTS.......... 78
LEGAL MATTERS......................... 79
EXPERTS............................... 79
WHERE YOU CAN FIND MORE INFORMATION
ABOUT US............................ 79
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
3
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information you
should consider before buying shares in the offering. You should read the entire
prospectus carefully. Except where we state otherwise, all information in this
prospectus (1) reflects the conversion of all outstanding shares of our
preferred stock into 46,054,619 shares of common stock effective automatically
upon the closing of this offering and (2) assumes no exercise of the
underwriters' over-allotment option.
OMNISKY CORPORATION
OUR COMPANY
We offer a wireless service under the OmniSky brand for use on handheld
mobile devices. We enable our subscribers to access and navigate the Internet,
send and receive e-mail messages and securely conduct e-commerce transactions.
To make our service easy-to-use, we have designed a wireless Internet portal
specifically for use with handheld mobile devices that organizes information
into categories, including entertainment, finance, news, shopping, sports,
travel and local information. Our portal, which serves as our subscribers'
gateway to the Internet, also allows for text based searches and can be
customized by the subscriber. We provide our subscribers with Internet content,
consisting of text and in some cases related graphics, in a format that has been
modified, or optimized, for viewing and use on the relatively small display
screens of handheld mobile devices. We receive that optimized content from
almost 1,000 links to popular data sources and content providers, including, for
example, CNBC, eBay, ESPN, E*Trade, Ticketmaster, Fox Sports and Yahoo!. In
addition to the optimized content that our subscribers can access through our
wireless service, our subscribers also have the ability to browse web sites
whose content has not been optimized.
Subscribers obtain access to our service by attaching a wireless modem that
they purchase from us to their handheld mobile device. For a fixed monthly fee,
we provide our subscribers with unlimited usage, nationwide access covering 118
metropolitan statistical areas, encompassing over 160 million people, and
full-time customer support. So far, we have derived nearly all of our revenue
from our monthly subscription fees and the sale of wireless modems. As a result
of many of our agreements with content providers and new agreements that we
expect to enter into with content providers, advertising agencies and others as
our subscriber base increases, we expect to receive a growing percentage of our
revenue from advertising fees, sponsorships and mobile e-commerce transactions
that are conducted with our wireless service. We also expect our revenues from
the sale of wireless modems to our subscribers to decrease significantly as
wireless modems become increasingly available to our subscribers through
channels other than us and as the price of the modems decreases.
We currently provide our wireless service for use on the Palm V and Palm Vx
handheld mobile devices manufactured by Palm, Inc. We recently demonstrated our
service at the 2000 PC Expo on another handheld mobile device called the
Handspring Visor, which is manufactured by Handspring Inc. We announced at that
demonstration that our wireless service would be available on the Handspring
Visor in the fall of this year. We also recently signed an agreement with
Hewlett Packard Company to make our wireless service available by the fall of
this year on Hewlett Packard's Jornada 540 Series of handheld mobile devices. We
are actively engaged in discussions with other handheld mobile device
manufacturers to make our service available on their devices.
Internet usage, including e-mail messaging, information services and
e-commerce, is becoming an increasingly important part of everyday life. To
date, desktop computers have been the primary means of accessing the Internet.
As individuals, in both their personal and professional lives, become more
mobile, we believe there is a growing trend toward remote wireless access to the
Internet. As this trend builds momentum, we believe that individuals will
increasingly demand real-time access to highly personalized Internet content,
including e-mail, information services and e-commerce, on handheld mobile
devices.
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<PAGE> 7
Individuals seeking wireless Internet access today are faced with a number
of challenges, including the limited availability of Internet data and content
that has been specifically modified, or optimized, for use and viewing on the
relatively small display screens of handheld mobile devices. Much of the
Internet data and content available today has been developed for platforms, such
as desktop computers, which use larger display screens than handheld mobile
devices. It is not possible to simply deliver non-modified content to a handheld
mobile device and expect to be able to use and view that information in the same
manner as one would on their desktop. To address this challenge, we provide our
subscribers with access to Internet data and content that has been optimized for
viewing on handheld mobile devices. Optimized data and content from specific Web
sites is typically reformatted or compressed to fit the small display screens of
handheld mobile devices; this generally allows subscribers to quickly access the
data and content from those Web sites in a form that is easy to view and use. In
addition to optimized content, and in an effort to enhance the overall
experience that our subscribers have when using our wireless service, we also
provide our subscribers the ability to browse, through our wireless Internet
portal, non-modified content. The formatting and readability of non-modified
content, when viewed on a handheld mobile device, will generally be poorer than
that of optimized content. Non-modified content may also contain more extensive
graphics than optimized content, resulting in longer download times or, in some
cases, inaccessibility. As part of our wireless service, we attempt, in
real-time, to adapt, or convert, non-optimized content for use and viewing on
handheld mobile devices. We do this in some cases by reformatting text and
automatically screening out graphics. In a sense, we seek to translate
non-modified content into optimized content in real-time. Although subscribers
may not have the same ability to use and view non-modified content as they do
with optimized content, we believe that providing our subscribers with the
ability to access both optimized and non-optimized data and content offers them
a more complete wireless Internet experience.
Individuals seeking Internet access on their handheld mobile devices also
tend to face high and unpredictable costs when using wireless network
technologies, limited geographic coverage areas, data security concerns and a
variety of different devices and services that, individually, do not typically
provide all of the functionality that we believe many individuals are seeking.
We provide our subscribers with Internet access, arrange for the wireless
connectivity, or carriage, with wireless carriers and deliver optimized content
through our wireless portal. Our subscribers do not need to make independent
arrangements with any Internet service provider, wireless carrier, content
provider or other third party to receive our wireless service.
WE RECENTLY LAUNCHED OUR WIRELESS SERVICE NATIONALLY
We began preliminary, or beta, testing of our wireless service in December
1999 and stopped accepting new beta orders on March 31, 2000. During our beta
test, our wireless service was selected from among five nominees as the best
software/service for wireless data in 2000 by Mobile Insights, Inc., a leading
information source for the mobile computing and data communications market. We
were nominated for the Mobile Insights' award without our prior knowledge and
were selected by a panel of 35 mobile computing industry analysts and
journalists designated by Mobile Insights. We formally launched our wireless
service nationally in May 2000. On August 26, 2000, we had 21,300 subscribers.
OUR STRATEGY
Our mission is to become the leading global provider of wireless service to
users of handheld mobile devices. To achieve our objective, we intend to:
- aggressively market the OmniSky brand;
- continue to extend our service offerings to additional types of handheld
mobile devices, operating systems and wireless data network technologies;
- leverage our easy-to-use wireless Internet portal to generate e-commerce
and advertising revenues;
- expand our wireless service internationally through a joint venture we
have created with News Corporation, in which we each own a 50% stake;
5
<PAGE> 8
- leverage the experience that our management team has in the Internet,
wireless and handheld mobile device industries by generating
opportunities from the industry relationships they have developed over
many years;
- further develop our web-based and retail sales and distribution channels;
and
- pursue selected acquisitions of businesses or technologies that may
enable us to increase our subscriber base or enhance our wireless service
offerings.
WE HAVE A LIMITED OPERATING HISTORY, HAVE A LARGE ACCUMULATED DEFICIT AND EXPECT
TO INCUR CONTINUING LOSSES
We have a limited operating history and only formally launched our wireless
service in May 2000. Through June 30, 2000, we had generated only $2.1 million
of revenues and had an accumulated deficit of $46.8 million. We have incurred
increasing losses and had an operating loss for the six month period ended June
30, 2000 of $40.8 million and an operating loss before interest, taxes,
depreciation and amortization (including amortization of deferred stock
compensation) of $29.4 million for that same period. We expect to continue to
incur net losses for the foreseeable future and may never achieve profitable
operations. The market for our wireless service has not yet developed, and we
cannot assure you that it will develop or that, if it develops, individuals will
use our wireless service. We will not have sufficient capital to fund our
operations in a manner consistent with our current intentions and plans without
the net proceeds from this offering. Without the proceeds from this offering, we
would likely initiate material changes to our business plan to conserve cash
resources, including, reductions of advertising and marketing expenditures. We
believe that our cash, cash equivalents and the net proceeds from this offering
will provide sufficient capital to fund our operations for at least the next 12
months if our assumptions about our revenues and expenses are generally
accurate. Since we have a limited operating history, however, we cannot be
certain that those assumptions will prove to be accurate. Even if we
successfully complete this offering, we will likely need to raise additional
funds in the future through public or private financings or other arrangements
to continue the development and operation of our business.
AS WE CONTINUE TO ROLL OUT OUR WIRELESS SERVICE, WE EXPECT TO FACE INTENSE
COMPETITION
The market for wireless services is becoming increasingly competitive. We
expect that we will compete primarily on the basis of the functionality,
breadth, quality and price of our wireless service. We expect to encounter
competition from wireless Internet service providers, popular web portals,
wireless telecommunications carriers and many others that may decide to enter
the wireless service industry. Many of our competitors may have substantially
greater financial, technical, marketing and distribution resources than we do.
CONCURRENT PRIVATE PLACEMENT AND MARKETING RELATIONSHIP WITH AMERICA ONLINE
America Online, Inc. has agreed to purchase from us shares of our common
stock, having an aggregate value of $5 million, in a private placement that will
occur concurrently with the closing of this offering. Based on an assumed
purchase price of $11.00 per share, which represents the mid-point of our
estimated initial public offering price range, less the estimated underwriting
discount which America Online will not pay, America Online will purchase 488,759
shares from us. We have also entered into a Strategic Marketing and Content
Agreement with America Online, which provides for the delivery of America Online
interactive services, including AOL e-mail and instant messaging, Web content,
Internet content and e-commerce services through our wireless service and the
development of a customized wireless service for America Online users.
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<PAGE> 9
THE OFFERING
Common stock offered......... 9,100,000 shares
Common stock to be
outstanding after this
offering..................... 65,153,622 shares
Nasdaq National Market
symbol....................... OMNY
Use of proceeds.............. We plan to use the net proceeds from this
offering to fund:
- sales, marketing and engineering and
development programs, including national
advertising and branding campaigns that we
began in May 2000 in connection with the formal
launch of our wireless service;
- expenses we expect to incur in connection with
our international joint venture with News
Corporation;
- the continued development of our
infrastructure, network and support services;
and
- working capital and general corporate purposes.
See "Use of Proceeds."
The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding as of August 30, 2000, and
includes 488,759 shares of common stock which will be issued to America Online
concurrent with the closing of this offering at an assumed purchase price of
$10.23, based on the mid-point of our estimated price range less the estimated
underwriting discount. The number of shares of our common stock to be
outstanding excludes:
- 9,508,134 shares of common stock subject to outstanding options at a
weighted average exercise price of $4.48 per share;
- 150,429 additional shares of common stock reserved for future issuance
under our existing stock option plan;
- 4,750,000 additional shares of common stock reserved for future issuance
under the new stock option and employee stock purchase plans that will become
effective upon the closing of this offering; and
- 95,901 shares of common stock issuable upon the exercise of an
outstanding warrant.
Except where we state otherwise, all information in this prospectus
reflects two common stock splits effected on April 4, 2000 and August 1, 2000,
respectively. Such stock splits resulted in the net issuance of 1.4613 shares
for each one share outstanding prior to April 4, 2000.
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<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The pro forma information in the following table gives effect to the
automatic conversion of all outstanding shares of our preferred stock into
shares of our common stock upon the closing of this offering.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1999 SIX MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, JUNE 30,
1999 2000
-------------- -----------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ 2,100
Cost of revenue............................................. -- 6,316
Other operating expenses.................................... 6,951 36,535
Loss from operations........................................ (6,951) (40,751)
Net loss.................................................... (6,929) (39,853)
Net loss per share:
Basic and diluted......................................... $ -- $ (30.48)
Weighted average shares................................... -- 1,307,330
Pro forma net loss per share:
Basic and diluted (unaudited)............................. $ (0.43) $ (1.03)
Weighted average shares (unaudited)....................... 16,182,742 38,765,224
</TABLE>
The following table summarizes:
- actual balance sheet data;
- pro forma balance sheet data after giving effect to the conversion of all
outstanding shares of our preferred stock into shares of our common stock
upon the closing of this offering; and
- pro forma as adjusted balance sheet data, adjusted to give effect to our
sale of 9,100,000 shares of common stock in this offering at an assumed
initial public offering price of $11.00 per share, the mid-point of our
price range, and after deducting estimated underwriting discounts and
estimated offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ---------
<S> <C> <C> <C>
BALANCE SHEET DATA (UNAUDITED):
Cash, cash equivalents and investments..................... $ 83,719 $ 83,719 $175,812
Working capital............................................ 70,492 70,492 162,585
Total assets............................................... 106,092 106,092 198,185
Convertible preferred stock................................ 118,866 -- --
Total stockholders' (deficit) equity....................... (35,657) 83,209 175,302
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below before buying
shares in this offering. The risks and uncertainties described below are not the
only risks we face. These risks are the ones we consider to be material to your
decision whether to invest in our common stock at this time. If any of the
following risks actually occur, our business, results of operations and
financial condition could be seriously harmed, the trading price of our common
stock could decline and you may lose all or part of your investment.
RISK FACTORS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, HAVING LAUNCHED OUR WIRELESS SERVICE
NATIONALLY IN MAY 2000 AFTER SEVERAL MONTHS OF BETA TESTING. IT MAY, THEREFORE,
BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND FUTURE PROSPECTS.
We founded our company in May 1999 and only began beta testing our wireless
service in December 1999. We formally launched our wireless service nationally
in May 2000. As a result of our limited operating history and the recent
national launch of our wireless service, your evaluation of our business and an
investment in our company will be more difficult. Since we have limited
meaningful historical data upon which to base our planned operating expenses,
and since our wireless service is still relatively new, it is difficult for us
and for you to assess whether our business will be profitable or whether we will
be able to adjust our business model to meet the demands of our subscribers over
time. When making an investment decision regarding our common stock, you should
consider the risks, expenses and difficulties that may be encountered or
incurred by us as a young company in a new and rapidly evolving market.
WE HAVE A HISTORY OF LOSSES SINCE OUR FORMATION, EXPECT TO INCUR SIGNIFICANT
OPERATING EXPENSES AND LOSSES IN THE FUTURE AS WE ROLL-OUT OUR WIRELESS SERVICE
AND MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY.
We are not, and have never been, profitable, and if we continue to incur
net losses, our stock price will likely suffer. Through June 30, 2000, we had
generated only $2.1 million of revenues and had an accumulated deficit of
approximately $46.8 million. We have incurred increasing losses and had an
operating loss for the six month period ended June 30, 2000 of $40.8 million and
an operating loss before interest, taxes, depreciation and amortization
(including amortization of deferred stock compensation) of $29.4 million for
that same period. We expect to continue to incur losses and to have negative
cash flow on a quarterly and annual basis for the foreseeable future. We also
anticipate that our expenses will increase substantially as we continue to
increase our sales and marketing efforts, expand our research and development
programs, extend our wireless service to new platforms and devices and enhance
our administrative operations. Since we have only limited experience in managing
our business, these efforts may prove more expensive than we currently
anticipate. We cannot predict if we will ever achieve profitability and if we
do, we may not be able to sustain or increase our profitability.
IF WE ARE UNABLE TO INCREASE SUBSTANTIALLY THE NUMBER OF OUR SUBSCRIBERS IN THE
FUTURE, WE WILL BE UNABLE TO GENERATE THE INCREASED REVENUE NECESSARY TO ACHIEVE
PROFITABILITY.
We had 21,300 subscribers for our wireless service as of August 26, 2000.
We will have to increase substantially the number of our subscribers in order to
achieve profitability. In addition to increasing our subscriber base, we will
have to limit the number of subscribers who deactivate our service. Adding new
subscribers will depend to a large extent on the success of our marketing
campaigns and the future development by manufacturers of handheld mobile devices
that support our wireless service and that are widely accepted by consumers.
Limiting the number of customer deactivations requires that we provide our
subscribers with a favorable and cost-effective experience in using our wireless
service. Our subscribers' experience may be unsatisfactory to the extent that
our service malfunctions or our wireless portal, customer care efforts or other
aspects of our wireless service do not meet our subscribers' expectations.
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WE RELY UPON WIRELESS NETWORKS OWNED AND OPERATED BY OTHERS TO DELIVER OUR
WIRELESS SERVICE. IF WE DO NOT HAVE CONTINUED ACCESS TO SUFFICIENT CAPACITY ON
RELIABLE WIRELESS NETWORKS, WE MAY BE UNABLE TO DELIVER OUR WIRELESS SERVICE AND
OUR SALES COULD DECREASE.
We rely on wireless carriers to transmit our wireless service to our
subscribers and must purchase airtime from them for that purpose. Our ability to
grow and achieve profitability depends partly on our ability to obtain
sufficient capacity, at reasonable prices, on the networks of those carriers,
including AT&T Wireless Services and Verizon Wireless, and on the reliability,
compatibility and security of their systems. We depend on these networks to
provide uninterrupted service and would not be able to satisfy our customers'
needs if these carriers fail to provide the required capacity or needed levels
of service. In addition, our expenses would increase and our profitability could
be materially adversely affected if wireless carriers were to increase the
prices of their services and we were unable to pass along increased prices to
our customers. Some of these wireless carriers are, or could become, our
competitors and if they compete with us they may refuse to provide us with
access to their networks.
OUR BUSINESS DEPENDS ON THE COMPATIBILITY OF THE WIRELESS MODEMS USED TO RECEIVE
OUR WIRELESS SERVICE WITH HANDHELD MOBILE DEVICES. CURRENTLY, WE ONLY OFFER A
WIRELESS MODEM COMPATIBLE WITH THE PALM V AND PALM VX HANDHELD MOBILE DEVICES.
IF THE FORMS OF THE PALM DEVICES OR OTHER DEVICES ON WHICH WE PROVIDE SERVICE OR
THE METHODS BY WHICH THE MODEM CAN BE ATTACHED TO THOSE DEVICES CHANGE, WE MAY
INCUR SIGNIFICANT COSTS TO MAINTAIN THE COMPATIBILITY OF THE WIRELESS MODEMS
WITH THOSE DEVICES.
In order to use our wireless service, our subscribers must attach their
handheld mobile device to a wireless modem. At this time, the wireless modem we
offer is compatible only with the Palm V and Palm Vx handheld mobile devices. If
we are unsuccessful in our efforts to become compatible with handheld mobile
devices introduced in the future, our business may fail. We do not have an
agreement with Palm regarding the compatibility of the wireless modem that our
subscribers use with the Palm devices. We have designed and developed that modem
with the assistance of Novatel Wireless Inc., an independent modem manufacturer.
Handheld mobile devices evolve quickly and can become obsolete in a short period
of time. Since the introduction of the Palm V and Palm Vx, Palm has introduced
the Palm VII and the m100 series of devices and is likely to continue to
introduce new versions of its handheld mobile devices with which the wireless
modems we currently use are not compatible. In order to make the wireless modem
compatible with devices of other handheld mobile device manufacturers, such as
Hewlett-Packard and Handspring, we will need to develop or have developed new
modems and arrange for their manufacture. To the extent that manufacturers of
handheld mobile devices, including Palm, change the form of their handheld
mobile devices or modify the serial ports by which the modem attaches, we may
need to modify the wireless modems we use to maintain the compatibility of our
wireless service with these handheld mobile devices. Any modification to the
wireless modems we use may involve significant research and development and
production costs as well as long lead-times resulting in lost revenue.
WE CURRENTLY RELY ON ONE SUPPLIER FOR THE WIRELESS MODEMS THAT OUR SUBSCRIBERS
NEED TO RECEIVE OUR WIRELESS SERVICE ON THE PALM V AND PALM VX DEVICES. IF THAT
SUPPLIER IS UNABLE TO TIMELY MEET OUR NEEDS, OUR ABILITY TO EXPAND OUR
SUBSCRIBER BASE WILL BE SEVERELY LIMITED AND WE WILL LOSE REVENUE.
Novatel is currently the single source of supply for the wireless modems
that our subscribers require to receive our wireless service on the Palm V and
Palm Vx handheld mobile devices. Any difficulties encountered by our supplier
that result in product defects or poor quality, production delays, cost
overruns, or the inability to fulfill orders or provision modems on a timely
basis would hurt our reputation, result in loss of revenue and limit our ability
to expand our subscriber base. If we cannot obtain an adequate supply of
wireless modems, we will be unable to timely deliver our wireless service to
subscribers. Neither we nor our supplier maintains an extensive inventory of
wireless modems. We have experienced delays in receiving modems from Novatel,
although those delays have not affected our results of operations so far.
However, if we continue to experience delays and, as a result, we are unable to
timely deliver wireless modems to our potential subscribers, our business will
be seriously harmed. Under our agreement with Novatel, we have a right to
acquire 100,000 wireless modems built by Novatel for the Palm V and Palm Vx
devices, of which
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30,647 wireless modems had been delivered through July 31, 2000. Although our
agreement with Novatel has expired by its terms, Novatel continues to ship and
provision wireless modems in accordance with the agreement and has informed us
that it intends to honor its contractual commitments to provide us with the
100,000 modems that we have ordered. We have discussed and are continuing to
discuss with Novatel modifications to, and extensions of, the agreement,
although no definitive agreements regarding those matters have been reached.
While we are engaged in discussions with potential alternative supply sources,
we have not yet qualified any sources other than Novatel for the supply of our
Palm V and Palm Vx wireless modems.
WE RELY ON LICENSED TECHNOLOGY TO PROVIDE OUR SUBSCRIBERS WITH ACCESS TO
NON-OPTIMIZED CONTENT. OUR FAILURE TO MAINTAIN THOSE LICENSES COULD CAUSE US TO
INCUR SIGNIFICANT EXPENSE AND TIME DELAYS TO FIND REPLACEMENTS FOR THOSE
TECHNOLOGIES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
We rely on technologies that we have licensed from Palm and Aether Systems,
Inc. to provide our subscribers with access to content that has not been
optimized for use on handheld mobile devices, which we believe is an important
aspect of the wireless service that we provide. If we did not have those
licenses, we would not be able to deliver non-optimized content to our
subscribers without finding replacements for those technologies. While we
believe that we could find replacement technologies, we might not be able to
obtain those technologies on terms and conditions that are as favorable to us as
our current arrangements with Palm and Aether. Our license agreement with Palm
for its technology that helps to modify non-optimized content, which is known as
its "web clipping technology," expires in 2005, with automatic one year renewals
if neither party objects at least six months prior to the scheduled expiration
date. The Palm license may also be terminated for material breaches and other
customary defaults. Our license with Aether for its pertinent technology is
perpetual but may be terminated if a material breach occurs which is not cured
within 30 days after receipt of notice. Both of those licenses are
non-exclusive.
WE RELY ON THIRD PARTIES TO BILL OUR SUBSCRIBERS, TO PROVIDE A SIGNIFICANT
PORTION OF OUR CUSTOMER SUPPORT, TO PROVIDE US WITH INTERNET CONTENT AND TO
PERFORM OTHER CRITICAL BUSINESS FUNCTIONS. REPEATED FAILURES BY THOSE THIRD
PARTIES TO DELIVER THEIR PRODUCTS AND SERVICES TO US COULD HARM OUR BUSINESS.
OUR RELIANCE ON THOSE THIRD PARTIES MAY ALSO LESSEN THE CONTROL WE HAVE OVER OUR
RESULTS OF OPERATIONS.
In designing, developing and supporting our wireless service, we rely on
third parties to provide many of the products and services that are essential to
delivering our wireless service. As a result of the critical business functions
performed for us by third parties, we may have less control over our results of
operations than if we performed all of those functions by ourselves. We rely on:
- a third party billing and customer support company to bill our
subscribers and to provide a significant portion of our customer support;
- Aether, one of our principal stockholders, to host our network operations
center and co-locate our monitoring equipment; and
- many content providers and content aggregators to provide us with the
Internet data and content that we make available, on a modified basis, to
our subscribers.
Repeated failures on the part of third parties to deliver and support
reliable products and services, enhance their current products and services,
develop new products and services on a timely and cost-effective basis and
respond to emerging industry standards and other technological changes could
ultimately cause a decline in our sales or an increase in deactivations. Third
parties may also experience difficulty in supplying us products or services
sufficient to meet our needs as our subscriber base grows, or they may terminate
or fail to renew contracts for supplying us these products or services on terms
we find acceptable.
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OVER THE PAST SEVERAL MONTHS, WE HAVE ADDED MANY NEW EMPLOYEES, INTRODUCED NEW
SYSTEMS AND EFFECTED OTHER CHANGES TO ADDRESS OUR RAPID GROWTH. THAT GROWTH HAS
PLACED A SIGNIFICANT STRAIN ON OUR MANAGEMENT AND RESOURCES.
We have grown from 25 employees as of December 31, 1999 to 151 as of August
30, 2000. During that period, we also began to introduce new internal accounting
systems, began to prepare for the national launch of our wireless service, which
included testing various technologies and coordinating the national media
campaign for our wireless service, leased additional office space and undertook
many other initiatives in connection with the ongoing development of our
business. Our growth has placed, and any further growth is likely to continue to
place, a significant strain on our management and resources. Our ability to
achieve and maintain profitability will depend on our ability to manage our
growth effectively, implement and expand operational and customer support
systems and hire additional personnel. We may not be able to augment or improve
existing systems and controls or implement new systems and controls to respond
to any future growth. We may also face difficulties integrating and collecting
information from third-party providers that we need to manage our business
effectively. In addition, future growth may result in increased responsibilities
for our management personnel, which may limit their ability to effectively
manage our business.
OUR SUBSCRIBERS MUST INSTALL OUR USER INTERFACE ON THEIR HANDHELD MOBILE DEVICES
TO RECEIVE OUR WIRELESS SERVICE. IF THAT USER INTERFACE CONTAINS DEFECTS OR
ERRORS, OUR REPUTATION WOULD BE ADVERSELY AFFECTED.
Our wireless service depends on software in our network and a user
interface that is installed on our subscribers' handheld mobile devices. The
technology necessary to support our wireless service is complex and must meet
stringent technical requirements. Services that are as complex as ours are
likely to contain undetected errors or defects, especially when first introduced
or when new versions are released. In addition, our user interface may not
properly operate when integrated with the systems of our subscribers and content
providers, or when used to deliver services to a large number of our
subscribers.
While we continually test our wireless service for errors and work with
subscribers through our customer support services to identify and correct bugs,
errors in the service may be found in the future. Testing for errors is
complicated in part because it is difficult to simulate or fully anticipate the
computing environments in which our subscribers use our wireless service. Our
wireless service may not be free from errors or defects even after it has been
tested, which could result in the rejection of our service and damage to our
reputation, as well as lost revenue, diverted development resources and
increased support costs.
WE HAVE EXPERIENCED AND MAY CONTINUE TO EXPERIENCE NEGATIVE GROSS MARGINS ON OUR
SUBSCRIBER REVENUE AS A RESULT OF THE FLAT MONTHLY FEE WE CHARGE OUR SUBSCRIBERS
FOR UNLIMITED USAGE.
We provide our subscribers with unlimited Internet access across the United
States for a fixed monthly fee. To the extent our cost of providing unlimited
Internet access to a subscriber exceeds the fixed monthly fee that we charge, we
may experience negative gross margins and, in fact, have historically
experienced negative gross margins to date. Our costs depend in large part on
the fees we pay to wireless carriers for transmitting our wireless service over
their networks. Wireless carriers currently charge us based on the aggregate
usage per month of our subscribers. One rate is charged to us while our
subscribers are in their home market and a significantly higher rate is charged
to us as our subscribers travel outside of their home market and incur roaming
fees. Our pricing strategy contemplates that many of our subscribers will be
usage-intensive subscribers and/or travel frequently outside of their home
market. However, our business is new, and we have little historical experience
with which to predict usage patterns of our subscribers. If we fail to
accurately predict subscribers' usage patterns outside of their home market, we
may incur higher than expected roaming fees and increased costs of providing our
service. The operating systems that we currently use to monitor airtime charges
do not permit us to timely and effectively respond to changes in volume and
geographic location of subscriber usage. Our inability to make timely changes in
our overall use of airtime could directly affect our costs. While we may look to
acquire or develop automated control systems to help us manage our airtime
usage, we may not be able to
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do so in the near term on a cost-effective basis. Even if we do obtain those
systems, we still may not be able to effectively monitor all subscriber usage or
to improve our gross margins.
WE OFFER OUR SUBSCRIBERS AN UNCONDITIONAL 30-DAY CUSTOMER REFUND PERIOD DURING
WHICH SUBSCRIBERS MAY CANCEL OUR WIRELESS SERVICE WITHOUT ANY COST TO THEM,
ALTHOUGH WE WILL STILL INCUR SHIPPING AND OTHER COSTS THAT WE CANNOT RECOVER.
We offer our subscribers an unconditional 30-day customer refund period
within which they may test our wireless service without obligation. At the end
of this period, subscribers may cancel our wireless service and receive a
complete refund. We incur a significant amount of shipping and other product
fulfillment costs in connection with such service cancellations that we will not
be able to recover. Consequently, the higher the rate of service cancellation,
the greater the adverse effect will be on our gross margins.
WE FACE COMPETITION FROM EXISTING AND NEW COMPETITORS AND FROM NEW PRODUCTS THAT
COULD CAUSE US TO LOSE MARKET SHARE AND CAUSE OUR REVENUE TO DECLINE.
The widespread adoption of open industry standards in the wireless data
communications market, together with the lack of exclusivity provisions in many
of our agreements, may make it easier for new market entrants and existing
competitors to introduce products that compete with our wireless service and
rapidly acquire market share. In addition, many competitors and potential
competitors have greater resources than we have, which may enable them to
penetrate the market more rapidly than we can.
We developed our wireless service using mostly standard industry
development tools. Many of our agreements with wireless network carriers and
content providers, and our agreement with Palm, are non-exclusive. Our
competitors, therefore, may be able to use many of the same products and
services in competition with us. In addition, our competitors may market their
products and services more effectively than we do, which could decrease demand
for our product and cause our revenue to decline. Currently, some of our
competitors include:
- Palm.net, a service provided by Palm, Inc.;
- Research in Motion, a provider of wireless e-mail;
- GoAmerica, a wireless Internet service provider; and
- wireless and other network service providers, such as Sprint PCS.
We may also face competition in the future from established companies,
including popular web portals, wireless application service providers and
wireless network carriers, who have not previously entered the market for
wireless Internet and data services.
DURING THE BETA TEST, WE SUBSIDIZED THE PURCHASE BY OUR SUBSCRIBERS OF THE
WIRELESS MODEMS THAT ARE NECESSARY TO RECEIVE OUR WIRELESS SERVICE. WE ARE
CONTINUING TO SUBSIDIZE THOSE PURCHASES. THOSE SUBSIDIES HAVE ADVERSELY AFFECTED
OUR GROSS MARGINS AND MAY CONTINUE TO DO SO.
To help market our wireless service during the beta test that we conducted,
we sold wireless modems to the participants in the beta test at prices which
were below the costs that we paid to the manufacturer of those devices. For
promotional purposes, we are currently offering a 50% incentive program rebate
on the price of a wireless modem to subscribers after six continuous months of
paid service, including subscribers who purchased modems prior to the beginning
of the promotion. Beta period revenue and equipment revenue for the six months
ended June 30, 2000 are net of $0.9 million and $0.1 million, respectively,
related to a liability we recorded for these rebates on sales through June 30,
2000. Providing our subscribers with wireless modems at prices below our costs
will likely have an adverse effect on our gross margins.
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WE EXPECT THAT OUR QUARTERLY OPERATING RESULTS WILL BE SUBJECT TO FLUCTUATIONS
AND SEASONALITY. IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR
INVESTORS, OUR SHARE PRICE MAY DECREASE SIGNIFICANTLY.
Our revenues may be lower in the second and third quarters of the year.
This weakness may be due to the fact that our wireless service is highly
consumer-oriented, and consumer buying is traditionally lower in these quarters.
We also anticipate timing our marketing campaigns to coincide with relatively
higher consumer spending in the first and fourth quarters, which would
contribute to these seasonal variations. In addition, as we expand our
operations, we expect that our operating expenses, particularly our sales,
marketing and research and development costs, will continue to increase. If
revenues decrease and we are unable to reduce those costs rapidly, our operating
results would be adversely affected. Over the next several quarters we expect
expenses to grow more rapidly than revenues, which will hurt our quarterly
operating results. As a result of seasonality and increasing operating expenses,
our future quarterly operating results may fluctuate significantly and may not
meet the expectations of securities analysts or investors. If this occurs, the
price of our stock would likely decline.
WE BELIEVE THAT WE NEED TO DEVELOP MARKET AWARENESS OF OUR WIRELESS SERVICE AND
BRAND TO ACHIEVE PROFITABILITY. IF WE FAIL TO DEVELOP THE OMNISKY BRAND, WE MAY
NEVER ACHIEVE PROFITABILITY.
If we are unable to develop market awareness of our wireless service and
brand, we may not be able to increase our subscriber base by the amount
necessary to achieve profitability. For the six months ended June 30, 2000, we
incurred approximately $19.6 million in advertising expenses and would expect
our total spending on advertising for fiscal 2000 to be in the range of $40
million to $60 million. We intend to invest significantly in promoting our brand
over time, which will require us to increase substantially the amount we spend
on sales and marketing. We have also committed in connection with our
international joint venture with News Corporation to spend $30.0 million over
the next five years for advertising services with News Corporation's affiliates
in the United States. We may not be successful in our efforts to promote our
brand. In addition, we have applied for, but have not received, federal
trademark registrations for the OmniSky logo, OmniSky and Think it. Do it., and
we may not be able to use these trademarks effectively or at all if we fail to
obtain such registrations.
IF WE FAIL TO EXPAND OUR SALES CHANNELS, OUR ABILITY TO INCREASE REVENUE AND OUR
SUBSCRIBER BASE WILL BE LIMITED.
In order to grow our business, we need to expand our sales channels, which
currently consist of sales through our web site, through a toll-free telephone
number and a limited number of retail outlets. We intend to establish reseller
relationships with stores owned by telecommunications carriers, as well as a
variety of additional retail outlets, but we may be unsuccessful in such
efforts. We will need to train store personnel on how to sell our wireless
service to potential customers. If we fail to expand our sales channels or
properly train store sales personnel, our ability to increase our revenue and
subscriber base will be limited.
WE MAY SEEK TO ACQUIRE TECHNOLOGIES OR COMPANIES IN THE FUTURE TO DEVELOP OUR
BUSINESS. THESE ACQUISITIONS COULD DISRUPT OUR BUSINESS AND DILUTE OUR
INVESTORS' HOLDINGS.
We may acquire technologies or companies in the future to further develop
our business. Entering into an acquisition entails many risks, any of which
could materially harm our business, including:
- diversion of management's attention from other business concerns;
- failure to effectively integrate the acquired technology or company into
our business;
- the loss of key employees from either our current business or the
acquired business; and
- assumption of significant liabilities of the acquired company.
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To date, we have not completed any acquisitions, and we may not be able to
do so in the future in an effective manner. In addition, our investors' holdings
will be diluted if we issue equity securities or securities convertible into
equity in connection with any acquisition.
ANY OF OUR KEY EMPLOYEES COULD TERMINATE THEIR EMPLOYMENT WITH US AT ANY TIME.
We depend in large part on the continued services and performance of our
senior management team and other key personnel. The loss of any member of our
senior management team, particularly Patrick McVeigh, our Chairman and Chief
Executive Officer, or Barak Berkowitz, our President, would adversely affect us
and impair our ability to achieve our business objectives. We do not currently
have employment agreements with any of our officers or employees. Any of our
officers or employees could terminate their employment with us at any time. The
loss of any of those individuals could seriously interrupt our business.
WE MAY BE SUBJECT TO LIABILITY FOR DISSEMINATING INFORMATION TO OUR SUBSCRIBERS,
AND OUR INSURANCE COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY.
We may be subject to claims relating to information disseminated to our
subscribers through our wireless service. These claims could take the form of
lawsuits for defamation, negligence, copyright or trademark infringement or
other actions based on the nature and content of the materials. The law relating
to the liability of services like ours is unsettled, although some cases have
been decided which imposed liability on Internet service providers for
disseminating defamatory statements through their service. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or may not be adequate to cover all costs incurred in defense of
potential claims or to indemnify us for all liability that may be imposed.
WE DEPEND ON RECRUITING, TRAINING AND RETAINING KEY PERSONNEL WITH INTERNET,
WIRELESS DATA AND TECHNOLOGY EXPERIENCE. WE MAY NOT BE ABLE TO DEVELOP NEW
PRODUCTS OR SUPPORT EXISTING PRODUCTS IF WE CANNOT HIRE OR RETAIN QUALIFIED
EMPLOYEES.
Our future success will depend, in large part, on our ability to recruit
and retain experienced research and development, sales and marketing, customer
service and management personnel. Because of the technical nature of our
wireless service and the dynamic market in which we compete, our performance
depends on attracting and retaining highly qualified employees. Competition for
these personnel in the wireless data and technology industries is intense and
attracting personnel with experience in both industries is even more difficult,
especially in the Silicon Valley region of California in which we are located.
We are in a relatively new market and there are a limited number of people with
the appropriate combination of skills needed to provide the services that our
subscribers demand. In addition, new employees generally require substantial
training, which requires significant resources and management attention. Even if
we invest significant resources to recruit, train and retain qualified
personnel, we may not be successful in our efforts.
A PROLONGED DEPRESSION IN OUR STOCK PRICE COULD MAKE IT DIFFICULT FOR US TO
RETAIN AND RECRUIT QUALIFIED PERSONNEL.
A major part of the compensation received by our employees is in the form
of stock option grants. We cannot assure you that we will be able to retain
existing personnel if our stock price is near or below their option exercise
prices for a prolonged period. Moreover, a prolonged depression in our stock
price may make our company less attractive to potential employees in which case
we would have difficulty recruiting additional qualified personnel.
IF OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED, WE MAY LOSE OUR
COMPETITIVE ADVANTAGE.
We depend on our ability to develop and maintain important proprietary
aspects of our technology. We seek to protect our software, documentation and
other written materials under trade secret and
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copyright laws, as well as confidentiality provisions in contracts with our
customers, all of which afford limited protection. We may seek to protect our
proprietary technology under patent laws.
Despite the measures we have taken to protect our intellectual property, we
cannot assure you that these steps will be adequate, that we will be able to
secure patent or trademark registrations for all of our patent applications or
trademarks in the United States or other countries, or that third parties will
not breach the confidentiality provisions in contracts or infringe or
misappropriate our copyrights, pending patents, trademarks and other proprietary
rights. In the event that a third party breaches the confidentiality provisions
in our contracts or misappropriates or infringes on our intellectual property,
we may not have adequate remedies. In addition, third parties may independently
discover or invent competing technologies or reverse engineer our trade secrets,
software or other technology. Moreover, the laws of some foreign countries may
not protect our proprietary rights to the same extent as do the laws of the
United States. Therefore, the measures that we are taking to protect proprietary
rights may not be adequate.
THIRD PARTIES MAY CLAIM THAT OUR SERVICE INFRINGES ON THEIR INTELLECTUAL
PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSES FOR LITIGATION OR FOR
DEVELOPING OR LICENSING NEW TECHNOLOGY.
Although we are not currently aware of any claims asserted by third parties
that we infringe on their intellectual property, in the future such third
parties may assert a claim that our current or future service infringes on their
intellectual property. We cannot predict whether third parties will assert these
types of claims against us or against the licensors of technology licensed to
us, or whether those claims will harm our business. If we are forced to defend
against these types of claims, whether they are with or without any merit or
whether they are resolved in favor of or against us or our licensors, we may
face costly litigation and diversion of management's attention and resources. As
a result of these disputes, we may have to develop costly non-infringing
technology, or enter into licensing agreements. These agreements, if necessary,
may not be available on terms acceptable to us, or at all, which could increase
our expenses or make our service less attractive to customers.
WE MAY BE SUBJECT TO LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT COSTS.
We may be subject to claims for damages related to any errors in our
wireless service, including hardware manufactured for us by third parties and
failures to complete e-commerce transactions over our wireless service. A major
liability claim could materially adversely affect our business because of the
costs of defending against these types of lawsuits, diversion of key employees'
time and attention from the business and potential damage to our reputation. Our
license agreements with customers contain provisions designed to limit exposure
to potential liability claims. Limitation of liability provisions contained in
our license agreements may not be effective under the laws of some
jurisdictions. As a result, we could be required to pay substantial amounts of
damages in settlement or upon the determination of any of these types of claims.
SOME OF OUR DIRECTORS AND SIGNIFICANT STOCKHOLDERS MAY HAVE CONFLICTS OF
INTEREST WITH RESPECT TO CERTAIN PROJECTS THAT WE MAY PURSUE.
In addition to serving on our board, David Oros, Janice Roberts and Thomas
Wheeler serve on the board of Aether Systems, Inc. Aether provides wireless
service to enterprises, which is similar in some respects to our service. Due to
these similarities, Mr. Oros, Ms. Roberts and Mr. Wheeler may, in the course of
their service on our board, be faced with issues that could pose a conflict of
interest for them involving transactions or opportunities that both we and
Aether might be interested in pursuing. Mr. Oros, Ms. Roberts and Mr. Wheeler
would likely recuse themselves from participating in board decisions regarding
those transactions and opportunities, which would deprive us of their experience
and judgment. In addition, Aether, 3Com Corporation and News Corporation each
hold significant amounts of our capital stock. There may be transactions which
we intend to pursue that could also be of interest to those stockholders and
which could therefore pose conflicts between those stockholders and us.
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WE HAVE FORMED AN INTERNATIONAL JOINT VENTURE WITH NEWS CORPORATION THAT WILL
REQUIRE SIGNIFICANT ATTENTION FROM OUR MANAGEMENT. AS PART OF OPERATING THE
JOINT VENTURE, WE WILL NEED TO ADDRESS MANY IMPORTANT ISSUES THAT WERE NOT
ADDRESSED IN DETAIL WHEN WE AGREED TO FORM THE JOINT VENTURE.
We formed an international joint venture with News Corporation in April
2000 to pursue business opportunities outside of the United States. Although we
each have an equal equity interest in the joint venture and have signed an
agreement establishing our relationship, there are many details that remain to
be decided regarding the operation of the business, including the timing for
entering various jurisdictions, the nature of the services that will be provided
in those jurisdictions, the overall management structure and many other similar
matters. Developing the joint venture will require that we devote significant
management attention to it, which will be difficult for us to do because of our
limited resources. We cannot be certain as to whether the joint venture will be
profitable or not.
ALTHOUGH WE HAVE FORMED AN INTERNATIONAL JOINT VENTURE WITH NEWS CORPORATION TO
PURSUE INTERNATIONAL BUSINESS OPPORTUNITIES, NEITHER WE NOR NEWS CORPORATION IS
EXCLUSIVELY OBLIGATED TO PURSUE THOSE OPPORTUNITIES THROUGH THE JOINT VENTURE.
Although we have formed an international joint venture with News
Corporation to pursue international business opportunities, our agreement with
News Corporation does not impose exclusivity obligations on either party.
Consequently, News Corporation could decide in good faith that it would be
inappropriate to conduct business through the joint venture in any market, and
without liability to the joint venture or us, News Corporation could conduct
that business outside of the joint venture. If that occurs, our ability to
pursue business opportunities in that market could be materially harmed and the
value of the joint venture may be adversely affected.
WE EXPECT OUR JOINT VENTURE TO EXPERIENCE MANY BARRIERS AS IT ROLLS OUT WIRELESS
SERVICE IN EUROPE AND ASIA.
To date, we have derived all of our revenues from sales to subscribers in
the United States. We plan to expand our international operations in the future,
principally through a joint venture that we formed with News Corporation. We
expect the joint venture to develop its business in Europe over the next 12
months, and possibly Asia over the next 24 months, although we are not yet
certain in which countries the venture will first roll out its wireless service.
We expect to face many barriers when competing in various countries in Europe
and Asia, including:
- costs of customizing products for foreign countries;
- restrictions on the use of technology;
- dependence on local vendors;
- difficulties in protecting intellectual property rights;
- compliance with multiple, conflicting and changing governmental laws and
regulations and potential political instability;
- foreign currency fluctuations;
- locally-based competitors who are more familiar with local interests and
practices;
- financing our international business opportunities; and
- import and export restrictions and tariffs.
IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE FORCED TO
DISCONTINUE PRODUCT DEVELOPMENT, REDUCE SALES AND MARKETING EFFORTS OR FOREGO
ATTRACTIVE BUSINESS OPPORTUNITIES.
We will not have sufficient capital to fund our operations in a manner
consistent with our current intentions and plans without the net proceeds from
this offering. Without the proceeds from this offering
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we would likely initiate material changes to our business plan to conserve cash
resources, including, reductions of advertising and marketing expenditures. We
believe that our cash, cash equivalents and the net proceeds from this offering
will provide sufficient capital to fund our operations for at least the next 12
months if our assumptions about our revenues and expenses are generally
accurate. Since we have a limited operating history, however, we cannot be
certain that those assumptions will prove to be accurate. Our actual funding
requirements may differ materially as a result of many factors, including the
success of our service launch, the development of new products and technologies
and the continued growth of the company. Even if we successfully complete this
offering, we anticipate requiring additional funds within the next 12 to 24
months to continue the development and operation of our business. We do not
expect to be profitable in the next 12 months, so we will likely need to raise
additional funds in the future through public or private financings or other
similar arrangements. Additional financing may not be available on acceptable
terms, if at all, and the inability to obtain that financing could adversely
affect the continued operation of our business. We may also require additional
capital to acquire or invest in complementary businesses or products or obtain
the right to use complementary technologies. If we issue additional equity
securities or securities convertible into equity to raise funds, your ownership
percentage in us will be reduced.
UNDISCOVERED YEAR 2000-RELATED COMPUTER PROBLEMS COULD DISRUPT OUR OPERATIONS.
We believe that the software we use in our wireless service is year 2000
compliant. We have not, so far, experienced any disruptions to our operations as
a result of year 2000 compliance issues. If any such computer problems arise, we
could experience disruptions in our wireless service or other adverse
consequences to our business.
RISK FACTORS RELATED TO OUR INDUSTRY
OUR BUSINESS WILL NOT GROW IF USE OF THE INTERNET DOES NOT CONTINUE TO GROW.
Our future revenue growth is substantially dependent on continued growth in
the use of the Internet. Our business may be adversely affected if the number of
users on the Internet does not increase or if commerce over the Internet does
not become more accepted and widespread. The use and acceptance of the Internet
may not increase for a number of reasons, including the cost and availability of
Internet access.
Published reports have also indicated that capacity constraints caused by
growth in the use of the Internet may impede further development of the Internet
to the extent that users experience delays, transmission errors and other
difficulties. If the necessary infrastructure, products, services or facilities
are not developed, or if the Internet does not become a viable and widespread
commercial medium, we will not be able to grow our business.
OUR BUSINESS WILL NOT GROW IF THE USE OF WIRELESS SERVICES DOES NOT CONTINUE TO
GROW.
The markets for wireless services and related products are still evolving,
and continued growth in demand for, and acceptance of, these services remains
uncertain. Our product depends on the acceptance by consumers of wireless
services and Internet-enabled devices. Current barriers to market acceptance of
these services include cost, reliability, platform and distribution channel
constraints, functionality and ease-of-use. We cannot be certain that these
barriers will be overcome. Since the market for our wireless service is new and
evolving, it is difficult to predict the size of this market or its future
growth rate, if any. We cannot assure you that a sufficient volume of
subscribers will demand wireless services on handheld mobile devices. If the
market for wireless services grows more slowly than currently anticipated, our
revenue may not grow.
18
<PAGE> 21
RISK FACTORS RELATED TO OUR OFFERING
OUR EXISTING STOCKHOLDERS HOLD A MAJORITY OF OUR STOCK AND WILL BE ABLE TO
CONTROL MATTERS REQUIRING STOCKHOLDER APPROVAL.
Upon completion of this offering, our executive officers, directors and
their affiliates will beneficially own, in the aggregate, approximately 76.9% of
our outstanding capital stock. Aether Systems Inc., 3Com Ventures Inc., an
affiliate of 3Com Corporation, and Omni Holdings, Inc., an affiliate of News
Corporation, will beneficially own 25.7%, 22.4% and 10.3%, respectively, at that
time. As a result, these stockholders will be able to exercise significant
control over all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions, which may have
the effect of delaying or preventing a third party from acquiring control over
us even if our other stockholders believe that it is desirable.
WE ARE AT RISK OF SECURITIES CLASS ACTION LAWSUITS ALLEGING FRAUD DUE TO OUR
EXPECTED STOCK PRICE VOLATILITY.
An active public market for our common stock may not develop or be
sustained after this offering. The initial public offering price will be
determined by negotiations between us and representatives of the underwriters,
and we cannot assure you that the trading price of our common stock will not
decline below the initial public offering price. The market price of our common
stock may fluctuate significantly in response to a number of factors such as
changes in accounting rules and regulations, market trends and company
performance, some of which are beyond our control. In the past, securities class
action lawsuits alleging fraud have often been filed against a company following
periods of volatility in the market price of its securities. We may in the
future be the target of similar lawsuits. Regardless of its outcome, securities
litigation may result in substantial costs and divert management's attention and
resources, which could harm our business and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR EXISTING STOCKHOLDERS MAY ADVERSELY
AFFECT OUR STOCK PRICE.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. In
addition, such sales could create the perception to the public of difficulties
or problems with our products and services. As a result, these sales also might
make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate.
Upon completion of this offering, we will have outstanding 65,153,622
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants after August 30, 2000.
Of these shares, the 9,100,000 shares sold in this offering are freely tradable.
The remaining 56,053,622 shares will become eligible for sale in the public
market as follows, with certain exceptions that are described in the paragraph
following the table:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE OF AVAILABILITY FOR SALE
---------------- -----------------------------
<C> <S>
0 At the date of this prospectus
0 90 days after the date of this prospectus
42,585,947 180 days after the date of this prospectus, subject to
restrictions under the federal securities laws
13,467,675 More than 180 days after the date of this prospectus,
subject to restrictions under the federal securities laws
</TABLE>
The above table assumes the effectiveness of lock-up arrangements with the
underwriters, under which our employees, directors and substantially all of our
stockholders have agreed not to sell or otherwise dispose of their shares of
common stock for a period of 180 days after the date of this prospectus. Our
underwriters may waive the lock-up provisions on a case-by-case basis. We have
been informed by our underwriters that among the factors they may consider in
waiving any lock-up provisions are any economic hardship that the particular
individual requesting the waiver might be under, as well as the market
conditions at the time of the request. Our underwriters have informed us that
they have no
19
<PAGE> 22
current intention to grant any waivers to the lock-up provisions. Most of the
shares that will be available for sale after the 180th day after the date of
this prospectus will be subject to certain volume restrictions because they are
held by our affiliates. In addition, we cannot assure you that some or all of
these lock-up restrictions will not be removed prior to 180 days after the date
of this prospectus without prior notice by the underwriters.
WE MAY ALLOCATE THE NET PROCEEDS FROM THIS OFFERING IN WAYS THAT DIFFER FROM
THOSE DESCRIBED IN THIS PROSPECTUS.
While we intend to allocate the net proceeds of this offering to certain
uses described in this prospectus under the heading "Use of Proceeds," there may
be unforeseen factors or circumstances that arise which cause us to change our
current allocations. Our management may decide to use the net proceeds of this
offering in ways that differ from those described in this prospectus and with
which you may not agree.
PROVISIONS OF DELAWARE LAW, OUR CERTIFICATE OF INCORPORATION AND BYLAWS COULD
DELAY OR PREVENT A TAKEOVER OF US, EVEN IF DOING SO WOULD BENEFIT OUR
STOCKHOLDERS.
Provisions of Delaware law, our certificate of incorporation and bylaws
could have the effect of delaying or preventing a third party from acquiring us,
even if a change in control would be beneficial to our stockholders. These
provisions include:
- authorizing the issuance of preferred stock without stockholder approval;
- providing for a classified board of directors with staggered, three-year
terms;
- requiring two-thirds of the outstanding shares to approve amendments to
some provisions of our certificate of incorporation and bylaws; and
- prohibiting stockholder actions by written consent.
NEW INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION FROM THIS
OFFERING.
We expect that the initial public offering price of our common stock will
be substantially higher than the book value per share of the outstanding common
stock. As a result, as of June 30, 2000, investors purchasing stock in this
offering would have experienced an immediate dilution in the net tangible book
value of the common stock of $8.30 per share, assuming conversion of all
outstanding shares of our preferred stock into common stock on the closing of
this offering.
THE TERMS OF ANY FUTURE FINANCING ARRANGEMENTS MAY RESTRICT OUR OPERATIONS.
We may in the future enter into financing arrangements with equipment
lessors, financial institutions or other lenders. These financing arrangements
would likely require that we satisfy many financial covenants and could limit
our ability to incur other indebtedness, pay dividends or engage in certain
other types of transactions in the future. We may also be required to pledge
certain assets to secure some of these financing arrangements, which would allow
our lenders under those arrangements, in the event of a default, to foreclose
upon the assets securing their obligations.
INVESTORS SHOULD NOT EXPECT TO RECEIVE DIVIDENDS.
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future.
20
<PAGE> 23
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 9,100,000 shares of
common stock we are offering will be approximately $92.1 million (approximately
$106.1 million if the underwriters' over-allotment option is exercised in full),
at an assumed initial public offering price of $11.00 per share (less
underwriting discounts and commissions and estimated offering expenses).
We plan to use the net proceeds from this offering as follows:
- approximately $75.0 million for sales, marketing, and engineering and
development programs, including national advertising and branding
campaigns that we began in May 2000 in connection with the formal launch
of our wireless service;
- approximately $5.0 million to help finance our international joint
venture with News Corporation;
- approximately $9.0 million in connection with the continued development
of our infrastructure, network and support services; and
- the remainder for working capital and general corporate purposes.
The actual amount of net proceeds that we spend on any particular use may
change depending upon many factors, including our future subscriber growth and
the amount of cash generated by our business. We also may use a portion of the
net proceeds to acquire technology or businesses that are complementary to our
business, although we currently have no commitments or agreements to do so.
Until we use the net proceeds from this offering, we plan to invest those
proceeds in short-term, interest-bearing, U.S. government and investment grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
CORPORATE INFORMATION
We were incorporated in Delaware in May 1999 under the corporate name
AirWeb Corporation. In November 1999, we changed our corporate name to OmniSky
Corporation. Our principal executive offices are located at 1001 Elwell Court,
Palo Alto, California 94303 and our telephone number is (650) 969-7700. Our web
site is located at http://www.omnisky.com. Information contained on our web site
does not constitute part of this prospectus.
We have applied for federal trademark registration of the OmniSky logo,
OmniSky and Think it. Do it. All other trademarks or service marks appearing in
this prospectus are trademarks or service marks of the companies that use them.
21
<PAGE> 24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements involve risks, uncertainties, and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "continue" or the negative of these terms or other comparable
terminology. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
22
<PAGE> 25
CAPITALIZATION
The following table sets forth:
- our actual cash, cash equivalents, investments, restricted cash and
capitalization as of June 30, 2000;
- our pro forma capitalization after giving effect to the automatic
conversion of all outstanding shares of preferred stock into common stock
upon the closing of this offering; and
- our pro forma as adjusted capitalization to give effect to the sale of
9,100,000 shares of common stock at an assumed initial public offering
price of $11.00 per share in this offering, the mid-point of our price
range, after deducting the underwriting discount and estimated offering
expenses payable by us.
<TABLE>
<CAPTION>
JUNE 30, 2000
(UNAUDITED)
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
Cash, cash equivalents and investments...................... $ 83,719 $ 83,719 $175,812
======== ======== ========
Restricted cash............................................. $ 800 $ 800 $ 800
======== ======== ========
Convertible preferred stock:
Series A, $0.001 par value, 25,000,000 authorized; issued
and outstanding: 20,219,335 actual, zero pro forma, and
zero pro forma as adjusted............................. $ 15,707 $ -- $ --
Series B, $0.001 par value, 5,000,000 authorized; issued
and outstanding: 4,319,427 actual, zero pro forma, and
zero pro forma as adjusted............................. 19,973 -- --
Series C; $0.001 par value, 14,500,000 shares authorized;
13,953,012 shares issued and outstanding actual, zero
pro forma, and zero pro forma as adjusted.............. 84,521 -- --
Receivable from stockholders.............................. (1,335) -- --
-------- -------- --------
Total convertible preferred stock...................... 118,866 -- --
-------- -------- --------
Stockholders' (deficit) equity :
Common stock, $0.001 par value, 73,067,149 shares
authorized; 8,000,853 actual, 54,055,472 pro forma, and
63,155,472 pro forma as adjusted....................... 8 54 63
Additional paid-in capital................................ 38,844 158,999 251,083
Receivable from stockholders.............................. (4,500) (5,835) (5,835)
Deferred stock compensation............................... (23,216) (23,216) (23,216)
Accumulated other comprehensive income(loss).............. (11) (11) (11)
Accumulated deficit....................................... (46,782) (46,782) (46,782)
-------- -------- --------
Total stockholders' (deficit) equity................... (35,657) 83,209 175,302
-------- -------- --------
Total capitalization................................... $ 83,209 $ 83,209 $175,302
======== ======== ========
</TABLE>
23
<PAGE> 26
The table above excludes the following shares:
- the issuance in August 2000 of 519,332 shares of restricted common stock
to employees at purchase prices of $4.79, $4.80 and $10.00 per share in
exchange for recourse notes receivable totaling approximately $2.8
million;
- the issuance in July 2000 of 990,059 shares of restricted common stock to
employees at purchase prices of $4.79 per share in exchange for recourse
notes receivable totaling approximately $4.7 million;
- 488,759 shares of common stock which will be issued to America Online at
an assumed purchase price of $10.23, based on the mid-point of our
estimated price range less the estimated underwriting discount,
concurrently with the closing of this offering;
- 6,238,105 shares of common stock subject to outstanding options as of
June 30, 2000 with an average exercise price of $2.03 per share of which
no options had been exercised subsequent to June 30, 2000;
- 3,516,359 additional shares of common stock reserved as of June 30, 2000
for future issuances under our existing stock option plan;
- 4,750,000 additional shares of common stock reserved for future issuance
under the new stock option and employee stock purchase plans that will
become effective upon the closing of this offering; and
- 95,901 shares of common stock issuable upon the exercise of a warrant
that was issued in July 2000.
24
<PAGE> 27
DILUTION
The pro forma net tangible book value of our common stock, on June 30, 2000
after giving effect to the conversion of all outstanding shares of our preferred
stock into common stock, was approximately $78.5 million, or approximately $1.45
per share. Pro forma net tangible book value per share represents the amount of
our total tangible assets less total liabilities, divided by the number of
shares of common stock outstanding and assumes the automatic conversion of all
outstanding shares of preferred stock into common stock upon the closing of this
offering;
This calculation excludes:
- all options that will remain outstanding upon completion of this
offering. As of June 30, 2000, there were options outstanding to purchase
a total of 6,238,105 shares of common stock with an average exercise
price of $2.03 per share. The exercise of outstanding options having an
exercise price less than the offering price would increase the dilutive
effect to new investors;
- the issuance in August 2000 of 519,332 shares of restricted common stock
to employees at purchase prices of $4.79, $4.80 and $10.00 per share in
exchange for recourse notes receivable totaling approximately $2.8
million;
- the issuance in July 2000 of 990,059 shares of restricted common stock to
employees at a purchase price of $4.79 per share in exchange for recourse
notes receivable totaling approximately $4.7 million;
- the issuance in July 2000 of a warrant to purchase 95,901 shares of
common stock at an exercise price of $8.91 per share; and
- 488,759 shares of common stock which will be issued to America Online at
a purchase price of $10.23, based on the mid-point of our estimated price
range less the estimated underwriting discount, concurrently with the
closing of this offering.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock in
this offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of 9,100,000 shares of
common stock offered by this prospectus at an assumed initial public offering
price of $11.00 per share and after deducting the underwriting discounts and
estimated offering expenses payable by us, our net tangible book value would
have been approximately $170.6 million, or $2.70 per share. This represents an
immediate increase in net tangible book value of $10.12 per share to existing
stockholders and an immediate dilution in net tangible book value of $8.30 per
share to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of June 30,
2000................................................... $1.45
Increase per share attributable to new investors.......... 1.25
-----
As adjusted pro forma net tangible book value per share
after this offering....................................... 2.70
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $ 8.30
======
</TABLE>
The following table sets forth, as of June 30, 2000, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and average price per share paid by
existing stockholders and by the new investors in this offering at an assumed
initial public offering price of $11.00 per share, calculated before deducting
the underwriting discount and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 54,055,472 85.6% $130,748,000 56.6% $ 2.42
New investors........................... 9,100,000 14.4 100,100,000 43.4% 11.00
---------- ----- ------------ ----- ------
Total................................. 63,155,472 100.0% $230,848,000 100.0% $ 3.66
========== ===== ============ ===== ======
</TABLE>
25
<PAGE> 28
If the underwriters' over-allotment option is exercised in full, the
following will occur:
- the number of shares of common stock held by existing stockholders will
represent approximately 83.8% of the total number of shares of our common
stock outstanding after this offering, and
- the number of shares held by new public investors will increase to
10,465,000 or approximately 16.2% of the total number of shares of our
common stock outstanding after this offering.
26
<PAGE> 29
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The statement of operations data for the period from May 7, 1999
(inception) to December 31, 1999, and the balance sheet data at December 31,
1999 are derived from our consolidated financial statements, which have been
audited by PricewaterhouseCoopers LLP, independent accountants, and the balance
sheet data as of June 30, 2000 and the statement of operations data for the six
months ended June 30, 2000 have been derived from our unaudited consolidated
financial statements, all of which are included elsewhere in this prospectus.
When you read this selected consolidated financial data, it is important that
you also read the historical consolidated financial statements and related notes
included in this prospectus, in particular, Note 5 which describes our long-term
commitments, as well as the section of this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
pro forma information in the following table gives effect to the automatic
conversion of all outstanding shares of our preferred stock into shares of our
common stock upon the closing of this offering. The unaudited financial
statements at June 30, 2000 and for the six months then ended have been prepared
on substantially the same basis as the audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. Historical results are not necessarily indicative
of future results, and results of interim periods are not necessarily indicative
of results for the entire year or any future period.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1999
(INCEPTION) TO SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1999 2000
-------------- --------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue..................................................... $ -- $ 2,100
Operating costs and expenses:
Cost of revenue........................................... -- 6,316
Engineering, development and operations................... 2,352 4,125
Sales and marketing....................................... 1,978 15,146
General and administrative................................ 1,342 5,931
Amortization of deferred stock compensation............... 660 10,340
Depreciation and amortization............................. 619 993
----------- -----------
Loss from operations........................................ (6,951) (40,751)
Interest income, net........................................ 22 898
----------- -----------
Net loss.................................................... $ (6,929) $ (39,853)
=========== ===========
Net loss per share.......................................... -- $ (30.48)
=========== ===========
Weighted average shares outstanding (basic and diluted)..... -- 1,307,330
=========== ===========
Pro forma net loss per share -- basic and diluted
(unaudited)............................................... $ (0.43) $ (1.03)
=========== ===========
Shares used in calculation of pro forma net loss per
share -- basic and diluted (unaudited).................... 16,182,742 38,765,224
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments...................... $ 6,767 $ 83,719
Working capital............................................. 3,501 70,492
Total assets................................................ 21,445 106,092
Convertible preferred stock................................. 15,707 118,866
Total stockholders' (deficit) equity........................ (6,269) (35,657)
</TABLE>
---------------
(1) There are no results for the period from May 7, 1999 (inception) to June 30,
1999.
27
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in forward-looking statements for many reasons, including the risks described in
"Risk Factors" and elsewhere in this prospectus. You should read the following
discussion with the "Selected Financial Data" and our financial statements and
related notes included elsewhere in this prospectus.
OVERVIEW
We formed our company in May 1999 to develop a wireless service for
handheld mobile devices. From May 1999 through April 2000, we were in a
development phase, which included conducting a beta test of our wireless
service. In May 2000, we formally launched our wireless service nationally.
In December 1999, we began beta testing our wireless service. During the
beta period, which was December 1999 through April 2000, our subscribers
received for a price of $299:
- a wireless modem that attaches to a Palm V or Palm Vx handheld mobile
device that is necessary for our subscribers to receive our wireless
service;
- our wireless service through April 2000; and
- a lifetime discount of 15% off of the flat monthly subscriber fee that we
charge.
We stopped accepting new orders for our beta test on March 31, 2000.
During May, 2000, we began shipping wireless modems to individuals who
subscribed to our service after the formal launch. At August 26, 2000, we had
21,300 subscribers, including 5,500 subscribers who continued their service from
our beta period.
We provide our subscribers, for a fixed monthly subscriber fee, with a
comprehensive wireless service for their handheld mobile devices by offering:
- access to a broad range of Internet content and data and the ability to
manage through our wireless portal up to six of their existing e-mail
accounts and securely conduct e-commerce transactions;
- Internet data and content that has been modified for viewing and use on
handheld mobile devices and the ability to browse many popular web sites
whose content has not been modified;
- an easy-to-use wireless Internet portal which, as the automatic homepage
for all of our subscribers, serves as our subscribers' gateway to the
Internet;
- nationwide access covering 118 metropolitan statistical areas across the
United States, encompassing over 160 million people; and
- full-time customer support.
To obtain our wireless service, subscribers can purchase a wireless modem
from us that we initially priced at $299. Beginning in June 2000, we began
offering our subscribers, until August 31, 2000, an incentive program rebate of
$150 on the modem purchase after six continuous months of paid service. This
offer is also being made available to subscribers who purchased a wireless modem
prior to June 2000. We anticipate that other offers of this nature may be made
in the future. Our subscribers must separately purchase a handheld mobile
device, such as the Palm V or Palm Vx, to receive our service; we do not provide
the handheld mobile device. Our subscribers currently pay us a flat monthly fee
of $39.95 to receive our wireless service.
We formed a joint venture with News Corporation in April 2000 to pursue
international opportunities for our business outside of the United States. We
expect the joint venture to develop its business in Europe over the next 12
months, and possibly Asia over the next 24 months, although we are not yet
certain in which countries the venture will first roll-out its wireless
services. We have agreed to contribute
28
<PAGE> 31
$5.0 million in cash to the venture and expect to contribute additional funding,
and provide additional technical and related support, to the venture over time.
We have not yet quantified any future costs that we may incur in connection with
the joint venture, although the joint venture is intended to be self-financing
after a period of time.
STOCK SPLITS
On April 4, 2000 and August 1, 2000, we effected common stock splits that
resulted in the net issuance of 1.4613 shares for each one share outstanding
prior to April 4, 2000. The consolidated financial statements and all references
to common stock contained in this prospectus give retroactive effect to those
stock splits.
REVENUE RECOGNITION AND POLICIES
Revenue and deferred revenue
We derive revenue from providing wireless service, including content, for
handheld mobile devices and from the sale of related equipment and accessories.
We offer our subscribers an unconditional 30-day refund period within which they
may test our service and equipment without obligation. At the end of that refund
period, subscribers may cancel our wireless service without any cost to them. As
a result, we defer service and equipment revenue for the first month of a
subscriber's service until the 30-day refund period has been completed. We
record amounts billed or received in advance of revenue as deferred revenue. We
currently do not require our subscribers to commit to a minimum term of service.
During our beta test, which ran from December 1999 through April 2000, we
charged our subscribers a flat rate that covered both the wireless modem and our
wireless service for the duration of the beta test period. In light of that
pricing structure, we have recognized revenue and the related cost of revenue
for each subscriber ratably from the first date after the end of the 30-day
customer refund period to the end of the beta test period.
Wireless service revenue subsequent to our beta test period consists of a
flat monthly rate for unlimited use of our service. We bill our subscribers
monthly in advance and recognize revenue ratably over the service period
beginning with the expiration of the 30-day customer refund period. Although
insignificant for the periods through June 30, 2000, service revenue will also
consist of our content revenue, which includes sponsorships and slotting fees
which we receive for positioning web sites in agreed upon locations in our
wireless portal, advertising fees related to advertisements delivered through
our wireless portal and revenue from mobile e-commerce, which may include fees
we receive from transactions that are conducted through our wireless service.
Service revenue is recorded ratably over the service period. We recognize any
discounts provided to customers as a reduction of revenue at the time the
related revenue is recorded. We anticipate that advertising, e-commerce and
other content revenue will grow in importance as we begin to leverage our
customer base.
Equipment revenue consists of the fees we charge for the wireless modem our
subscribers can purchase from us in order to receive our service, for related
accessories such as power adaptors, and for any shipping charges. We recognize
equipment revenue upon shipment or the end of the customer refund period,
whichever is later. Where we offer customer incentive programs, we defer the
amount of the potential rebate. If a customer terminates before the end of the
period in which they would be entitled to a rebate, we recognize the revenue at
the time of customer termination. Otherwise, we rebate the amounts due to the
customers and therefore do not recognize the revenue.
Cost of revenue
Our cost of wireless service revenue includes the activation fees, airtime
and network operations costs we incur to provide our wireless service, as well
as costs related to providing technical support. It also includes fees we pay to
content providers for information carried on our service. We recognize each of
these costs as they are incurred. We currently receive network operations
support from Aether, which is
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one of our stockholders. From the Aether network operations center, which hosts
monitoring and related communications equipment of ours, we maintain high speed
data transmission lines, known as T-1 connections, to the Internet, our content
providers, third party vendors and wireless network carriers that we use. We
transmit our wireless service through the wireless data networks of several
different wireless carriers. We incur activation charges when we initiate a
subscriber's service with the wireless network carriers. The airtime costs we
incur from those wireless network carriers are based on the volume of data and
content that we transmit over their data networks to our subscribers. Our
agreements with our wireless network carriers provide for a flat rate charge per
subscriber for a specified amount of service. We incur additional charges from
the wireless network carriers when our aggregate subscribers' usage exceeds
those specified contractual limits. To date, average usage levels have generally
fallen within the flat rate charge and any additional charges have not been
significant. We permit our subscribers to use our wireless service on a
nationwide basis covering 118 metropolitan statistical areas across the United
States, encompassing over 160 million people, without incurring additional
charges. Our costs are lower when our subscribers use our wireless service in
their home area and higher when they roam outside of that home area as we incur
roaming fees from our wireless network carriers in those instances. To date, our
roaming charges have not materially affected us. We do not receive any credits
from any of our wireless network carriers if our subscribers' usage is below the
contractual limits that we have established with our carriers.
During our beta test, we deferred recognition of the cost of equipment
revenue for any subscriber until completion of the 30-day customer refund
period. We recognized those costs ratably over the beta period due to the
bundled nature of our offering during that period. We now recognize the cost of
equipment revenue for any new subscribers upon completion of the 30-day customer
refund period.
Our cost of equipment revenue consists of the cost of the wireless modems
that our subscribers use to receive our service, the cost of accessories we sell
such as power adaptors, and the shipping costs and the direct provisioning costs
that we incur when we initiate service with the wireless network carriers.
RESULTS OF OPERATIONS
We have a limited operating history, having formed our company in May 1999
and launched our beta test in December 1999. We began shipping wireless modems
and providing wireless service to our beta test participants at the end of
December 1999. We did not recognize any revenue for the period from our
inception in May 1999 through December 31, 1999.
We have experienced cumulative losses since our inception as a result of
our efforts to develop and market our wireless service. From inception in May
1999 through June 30, 2000, our cumulative net losses totaled $46.8 million. We
expect to incur significant operating expenses over the next several years in
connection with the continued development and expansion of our business. In
particular, we expect our sales and marketing expenses to increase as we
establish our brand and build our infrastructure. We also anticipate incurring
additional expenses in connection with the continued launch of our service, the
introduction of new services, and making our service compatible with new
handheld mobile devices, platforms and networks. During the beta test, we
discounted the price of wireless modems in order to encourage participation.
Currently, we offer an incentive program rebate on the purchase price of the
wireless modems to customers who have completed six continuous months of paid
service, and in the future, we may choose to continue to discount the price of
wireless modems or initiate other incentive programs. Over time, we expect
revenues from the sale of wireless modems to our subscribers as a percentage of
our total revenues to decrease significantly because modems are available to our
subscribers through channels other than us, and due to decreases in the price of
modems.
Due to our short operating history, we do not have meaningful statistics
available regarding an average service life for our customers. Our contracts for
services we purchase generally have a fixed element for a base service level,
but are then mostly subscriber-based and depend on the number of users on the
wireless network or the number of customers being provided with customer care,
billing or other administrative services. Our contracts with our service
providers are generally of a one-to-three year duration.
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We expect to experience seasonality in our business. We anticipate sales of
handheld mobile devices, through which our subscribers receive our service, to
be higher in the fourth fiscal quarter due to increased consumer spending
patterns during the holiday season. We also expect that equipment sales may
decline during the summer months because of typical decreased consumer spending
patterns during this period. The timing of the sale of equipment has an impact
on when we begin to generate service revenue from new customers. In addition, to
the extent that we depend upon sales of handheld mobile devices to enable our
subscribers to receive our wireless service, shortages in the availability of
these devices or other events which affect the availability or desirability of
these devices, could affect our business and revenues. These seasonal variations
may lead to fluctuations in our quarterly operating results.
All of our revenues to date have been derived from operations in the United
States. We had only one operating segment from our inception in May 1999 through
June 30, 2000.
REVENUE
From December 1999 through April 2000, we were conducting our beta test
during which we charged our subscribers a fee of $299 for which they received a
bundled offering consisting of a wireless modem and our wireless service from
the date of their purchase through April 2000. We began shipping wireless modems
to our beta subscribers in December 1999. Because of the bundled nature of our
offering during the beta test, we have recognized the combined equipment and
wireless service revenue ratably from the date of our subscriber's purchase
through the end of the beta test period. We deferred recognition of the first
month's equipment and wireless service revenue to the completion of our 30-day
customer refund period. As a result, although we shipped modems in December
1999, during the period from our inception in May 1999 through December 31, 1999
we did not recognize any revenue and we deferred $0.5 million of revenue from
that period into the six months ended June 30, 2000. For the six months ended
June 30, 2000, we shipped additional modems, for which we recognized $2.1
million of revenue in addition to deferring an additional $1.4 million of
revenue that we will recognize in the third quarter of 2000. Of the $2.1 million
of revenue we recognized for the six months ended June 30, 2000, $0.7 million
related to providing services, $0.2 million related to the sale of equipment,
and $1.2 million related to revenue associated with our beta test period (of
which $0.7 million was for services and $0.5 million was for equipment). Beta
period revenue and equipment revenue are net of $0.9 million and $0.1 million,
respectively, related to a liability we recorded under our customer incentive
program in which we offered a $150 discount on the modem price after six months
of continuous paid service.
COST OF REVENUE
We did not recognize any cost of beta revenue from our inception in May
1999 through December 31, 1999. Instead, we deferred $0.5 million of those costs
(all of which related to the cost of equipment) into the six month period ended
June 30, 2000 pending completion of the 30-day customer refund period. For the
six months ended June 30, 2000, we recognized $4.3 million of cost of beta
period revenue (of which $1.9 million was for cost of services and $2.4 million
was for cost of equipment).
For the six months ended June 30, 2000, our cost of service revenue was
$1.7 million and our cost of equipment revenue, which relates to equipment sales
to post-beta customers, was $0.2 million. Of the $1.7 million, approximately
$1.0 million related to airtime and activation charges, and approximately $0.7
million was for network operations and technical support expenses. Due to the
timing of sales relative to our customer refund period, we deferred $1.8 million
of costs of equipment revenue that we will recognize in the third quarter of
2000.
We expect the cost of revenue associated with network operations to
increase as we continue to add subscribers, although we would expect these costs
to decline on a per-subscriber basis as we achieve economies of scale. Our
airtime costs for use of wireless data networks increase as we add new
subscribers, but are expected to decrease on a per-subscriber basis as we
achieve targeted subscriber levels.
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OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses include the costs we
incur to acquire and retain subscribers, the operating expenses associated with
our sales and marketing department and other general marketing costs. These
expenses also include costs incurred in connection with media and other
advertising campaigns intended to develop consumer awareness of our brand.
For the period from our inception in May 1999 through December 31, 1999,
sales and marketing expenses were $2.0 million, which are net of $0.9 million of
co-marketing funds we received from our principal wireless network carrier. For
the six months ended June 30, 2000, sales and marketing expenses were $15.1
million, comprising $19.6 million in advertising, and $4.6 million related to
other internal staff, consulting and associated overhead costs for the marketing
group, offset by $9.1 million in co-marketing funds. At June 30, 2000, we had no
additional co-marketing funds available to us and do not currently have any
additional co-marketing arrangements.
In May 2000, we initiated a national marketing campaign in connection with
the formal launch of our wireless service. For the six months ended June 30,
2000, we incurred approximately $19.6 million in advertising expenses and would
expect our total spending on advertising for fiscal 2000 to be in the range of
$40 million to $60 million. Our sales and marketing expenses will continue to
increase as we expand our advertising programs to increase brand awareness and
as we continue to add sales and marketing personnel. Because of our limited
operating history, we are required in many instances to prepay for our initial
media purchases, resulting in prepaid advertising of $4.0 million at June 30,
2000. We do not expect to continue to prepay for most of our advertising in the
future, although our ability to pay for advertising in arrears will likely
depend on our future success and creditworthiness.
General and Administrative. General and administrative expenses include the
costs we incur for employee salaries and the related costs we incur in
maintaining our executive, administrative, finance, accounting and information
systems functions. General and administrative expenses also include certain of
our facility costs, professional fees and recruiting costs. In addition, we
include in general and administrative expenses the fees we pay to Convergys
Corporation, which provides us with customer care, billing and other
administrative services. General and administrative expenses for the period from
our inception in May 1999 through December 31, 1999 were $1.3 million, and for
the six months ended June 30, 2000 were $5.9 million, primarily resulting from
costs associated with the start-up of our business.
We expect our general and administrative expenses to increase significantly
as we continue to add new subscribers, which we expect will increase our
customer care and billing costs, and as we continue to add personnel and
enhanced facilities to meet the needs of our business.
Engineering, Development and Operations. Engineering, development and
operations expenses include the salaries, fees and related costs we incur for
the design and operation of our wireless service and for the continued
development, operation and management of our technology.
Engineering, development and operations expenses for the period from our
inception in May 1999 through December 31, 1999 were $2.4 million, and $4.1
million for the six months ended June 30, 2000. Costs for the period ended
December 31, 1999 included initial engineering costs in May 1999 to develop the
operations center and test our service. For the period ended June 30, 2000, the
costs included continued development costs to launch our service in addition to
costs for ongoing operations.
We expect our engineering, development and operations expenses to increase
significantly as we continue to develop new wireless services.
Amortization of Deferred Stock Compensation. We granted stock options and
issued shares of restricted stock to certain of our officers and employees at
prices subsequently deemed to be below the fair value of the underlying stock on
the date of grant or issuance. From our inception in May 1999 through June 30,
2000, we recorded aggregate deferred stock compensation of approximately $34.2
million, of which $0.7 million was expensed in the period ended December 31,
1999 and $10.3 million was expensed in the six-month period ended June 30, 2000.
This expense has no impact on our cash flows. With respect
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to employee stock-based compensation, we are amortizing the deferred
compensation expense over the vesting period using the multiple option approach.
The remaining $23.2 million will be expensed in future periods over what is
generally a four-year vesting period. We estimate that our deferred stock
compensation expense from options and shares granted or issued from our
inception in May 1999 through June 30, 2000 will be $7.0 million, $9.3 million,
$4.7 million, $2.0 million and $0.2 million for the remainder of fiscal 2000 and
for the years ending December 31, 2001, 2002, 2003 and 2004, respectively.
Subsequent to June 30, 2000, we have issued shares and granted options that
will result in an additional $13.7 million of deferred stock compensation. We
estimate that our deferred stock compensation expense from options and shares
granted or issued subsequent to June 30, 2000 will be $4.2 million, $4.4
million, $2.7 million, $1.7 million and $0.7 million for the years ending
December 31, 2000, 2001, 2002, 2003 and 2004, respectively, assuming no
cancellations or additional stock option grants below deemed fair value.
Depreciation and Amortization. Because we lease wireless capacity from
wireless network carriers and rely on third parties to provide network
operations and customer care, our expenditures on property and equipment have
been relatively limited to date. As a result, depreciation and amortization
expense primarily relates to amortization of licensed technology associated with
the software we use to provide our wireless service.
For the period from our inception in May 1999 through December 31, 1999 and
for the six months ended June 30, 2000, we amortized $595,000 and $752,000 of
expenses, respectively, for our licensed technology. For those same periods,
depreciation of fixed assets was $24,000 and $242,000, respectively.
We expect our depreciation and amortization expense to increase as we
continue to grow our operations and as we acquire additional facilities and
equipment to meet that growth.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private placement of our equity securities. These private placements included
the issuance of redeemable convertible preferred stock in August 1999 and
subsequent issuances of redeemable convertible preferred stock in January and
April through June 2000, which resulted in aggregate net proceeds to us of
approximately $112.8 million through June 30, 2000. Upon the closing of this
offering, all of our outstanding shares of redeemable convertible preferred
stock will convert into common stock. At June 30, 2000, we had $83.7 million in
cash, cash equivalents and investments, and $70.5 million of working capital. We
have no outstanding indebtedness.
Net cash used in operating activities was $24.3 million for the period from
our inception in May 1999 to June 30, 2000, primarily attributable to a net loss
of $46.8 million, an increase in prepaid and other current assets of $8.8
million related principally to prepaid advertising expenses, and an increase in
inventories of $3.1 million related principally to our receipt of wireless
modems from our manufacturer. These uses of cash were offset by depreciation and
amortization (including amortization of deferred stock compensation) of $12.6
million, an increase in accounts payable of $12.8 million, an increase in
accrued and other current liabilities of $2.9 million, and an increase in
amounts due to an investor of $5.4 million.
Net cash used in investing activities for the period from our inception in
May 1999 to June 30, 2000 was $25.3 million, resulting from net purchases of
investments of $20.5 million to invest funds from the issuance of preferred
stock, $4.0 million of purchases of property and equipment and from a restricted
cash deposit of $0.8 million which collateralizes a letter of credit.
Net cash provided by financing activities for the period from our inception
in May 1999 to June 30, 2000 was $112.8 million, resulting from net proceeds we
received from the issuance of our convertible preferred stock and the exercise
of warrants for our preferred stock.
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CAPITAL STRUCTURE
Our capital structure at June 30, 2000 consisted of common stock and
convertible preferred stock. We had no outstanding indebtedness at June 30,
2000.
In August 1999, we issued 17,219,335 shares of our Series A preferred stock
at a purchase price of $0.75 per share, for aggregate net proceeds to us of
approximately $12.9 million, of which $7.1 million was for cash and $5.8 million
was in exchange for purchased technology licenses. Of those Series A shares, we
sold an aggregate of 17,000,000 shares to 3Com Ventures, Inc. and Aether OpenSky
Investments LLC, which entities appointed Janice M. Roberts and David S. Oros,
respectively, to our board of directors. In August 1999, we also granted a
warrant to Aether OpenSky Investments LLC to purchase up to 3,000,000 shares of
Series A preferred stock at $0.8333 per share. Aether OpenSky Investments LLC
exercised the warrant in November 1999. In January 2000, we issued 4,319,427
shares of our Series B preferred stock at a purchase price of $4.63 per share,
for aggregate net proceeds to us of approximately $20.0 million. Of these Series
B shares, we sold 2,850,970 shares to entities affiliated with The Sprout Group,
which entity appointed Stephen M. Diamond to our board of directors.
The holders of our Series A and B preferred stock are entitled to receive
noncumulative dividends at an annual rate of 8% per share if declared by our
Board of Directors. No dividends have been declared through June 30, 2000. The
holders of our Series A and B preferred stock are entitled to a distribution
upon a liquidation or dissolution in preference to our common shareholders of
$0.75 and $4.63 per share, respectively, plus any declared but unpaid dividends.
Each share of Series A and B preferred stock is convertible, at the option of
the holder, into 1.4613 shares of common stock, subject to adjustment for
dilution. Shares of our Series A and B preferred stock will automatically
convert into shares of our common stock upon the closing of this offering. Our
preferred stockholders also have certain registration rights.
From April through June 2000, we issued 13,953,012 shares of our Series C
preferred stock at a purchase price of $6.51 per share for aggregate net
proceeds to us of approximately $83.2 million. Of these Series C shares, we sold
9,210,337 shares to Omni Holdings, Inc., an indirect wholly-owned subsidiary of
News Corporation, which entity appointed Lachlan K. Murdoch to our board of
directors. The terms of those shares of preferred stock are substantially the
same as our Series A and B preferred stock, except for the liquidation
preference of $6.51 per Series C share, plus any accrued and unpaid dividends
thereon. Each share of Series C preferred stock is convertible at the option of
the holder into 0.7307 shares of common stock, subject to adjustment for
dilution. Of those Series C shares, we sold 225,000 shares to some of our
officers and recorded related recourse notes receivable from those stockholders
of $1.3 million.
During July 2000, we issued an aggregate of 990,059 shares of restricted
common stock to Patrick S. McVeigh, our Chairman and Chief Executive Officer,
Barak Berkowitz, our President, James J. Obot, our Senior Vice President,
Operations, Andy R. Simms, our Vice President, Sales for the Americas, Elan
Amir, our Chief Technology Officer, and Robert Taylor, a director of business
development. The purchase price of such shares was $4.79 per share and we
recorded related recourse notes receivable from those stockholders of $4.7
million. The notes accrue interest at a rate of 6% per year and are due in July
2009. Portions of those shares are subject to a right of repurchase that lapses
over a 36-to-48 month period.
During August 2000, we issued 400,000 shares of restricted common stock to
David K. Rensin, our Chief Product Officer. The purchase price of such shares
was $4.80 per share and we recorded a related recourse note receivable from such
stockholder of $1.9 million. In addition, we issued 52,000 shares of restricted
common stock to Andy R. Simms, our Vice President, Sales for the Americas. The
purchase price of such shares was $10.00 per share and we recorded a related
recourse note receivable from such stockholder of $520,000. We also issued
67,332 shares of restricted common stock to James J. Obot, our Senior Vice
President, Operations. The purchase price of such shares was $4.79 per share and
we recorded a related recourse note receivable from such stockholder of
$322,520. Each of the notes accrues interest at a rate of 6% per year and is due
in August 2009. Portions of those shares are subject to a right of repurchase
that lapses over a 36-to-48 month period.
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During August 2000, America Online, Inc. agreed to purchase from us shares
of our common stock, having an aggregate value of $5 million, in a private
placement that will occur concurrently with the closing of this offering. Based
on an assumed purchase price of $11.00 per share, which represents the mid-point
of our estimated initial public offering price range, less the estimated
underwriting discount which America Online will not pay, America Online will
purchase 488,759 shares from us.
MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
available funds for investments, which are comprised of commercial paper,
government securities and corporate debt securities at June 30, 2000. We
believe, however, that we are currently not subject to material interest rate
risk.
COMMITMENTS, CAPITAL EXPENDITURES AND FUTURE FINANCING REQUIREMENTS
As of June 30, 2000, our future minimum lease payments under noncancelable
operating leases through 2005 were $6.0 million. For one of these leases, we
provided an $800,000 letter of credit to secure our obligations that expires in
2007.
During July 2000, we entered into an office lease that expires in 2011 for
space that we expect to occupy in 2001. Our future minimum payments related to
this lease are $7.6 million in each of 2001 to 2004, and $8.0 million in 2005.
We expect to sublease approximately one-third of this space during 2001 through
2003. In connection with this lease, we provided a $7.4 million irrevocable
letter of credit to the landlord, and we are obligated to provide an additional
$3.7 million irrevocable letter of credit to the landlord in early 2001. These
letters of credit are or will be collateralized by an $11.1 million restricted
investment deposit that will be reflected in long-term assets. We also granted a
warrant to the landlord to purchase up to 95,901 shares of our common stock at a
purchase price of $8.91 per share.
We entered into a three-year agreement in 1999 with Convergys Corporation
that provides us with telesales, customer care, billing and reporting and
technical support services. We have minimum annual payments under that agreement
of $1.7 million in 2000 and $1.8 million for each of 2001 and 2002, excluding
additional subscriber-based charges of up to $0.50 per subscriber per month.
In July 1999, we entered into an agreement to purchase 100,000 wireless
modems through April 30, 2000. Through June 30, 2000, we had purchased 29,600
modems for approximately $6.8 million. The remaining purchase commitment under
that agreement, as of June 30, 2000, was approximately $16.2 million. Although
our agreement with Novatel has expired, they continue to ship and provision
modems in accordance with the agreement. We have experienced delays in receiving
modems from Novatel, but those delays have not affected our results of
operations so far. We have discussed and are continuing to discuss modifications
to the agreement regarding delivery timetables which have not been met. Although
we have not yet received a significant number of the modems that we agreed to
purchase, we do not expect the timing of those deliveries, and the effect of
that timing on our inventories, to have a material effect on our results of
operations. We also do not expect the potential obsolescence of those modems, if
it were to occur, to have a material effect on our results of operations.
We formed a joint venture with News Corporation in April 2000 to pursue
international opportunities for our business outside of the United States. We
expect the joint venture to develop its business in Europe over the next 12
months, and possibly Asia over the next 24 months, although we are not yet
certain in which countries the venture will first roll-out its wireless
services. We have agreed to contribute $5 million in cash to the venture and
expect to contribute additional funding, and provide additional technical and
related support, to the venture over time. We have not yet quantified any future
costs that we may incur in connection with the joint venture, although the joint
venture is intended to be self-financing after a period of time.
In accordance with our joint venture agreement and as a condition to the
related equity investment in us by News Corporation, we committed to spend $30.0
million over the next five years for advertising services with News
Corporation's affiliates in the United States.
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The total commitments that we have described above are set forth in the
table below (amounts in millions):
<TABLE>
<CAPTION>
2002-
2000 2001 2011
----- ----- -----
<S> <C> <C> <C>
Noncancelable operating leases at June 30, 2000............. $ 1.1 $ 1.2 $ 5.7
Noncancelable operating leases entered into subsequent to
June 30, 2000............................................. 7.6 68.2
Telesales, customer care, billing and reporting and
technical support services................................ 1.7 1.8 1.8
Modem purchase agreement.................................... 16.2
International joint venture................................. 5.0
Advertising commitment...................................... 6.0 6.0 18.0
----- ----- -----
Total commitments........................................... $30.0 $16.6 $93.7
===== ===== =====
</TABLE>
We expect that the source of funds to meet these commitments will come from
cash on hand, from working capital, and from cash flows from future operations,
together with additional funds raised through public or private financings,
including this offering.
Our future capital requirements will depend on a variety of factors,
including market acceptance of our wireless service, the resources we devote to
develop, market, sell and support our current and future service offerings,
whether handheld mobile devices on which our wireless service operates become
available through other sources or whether we need to develop and market them
ourselves and a myriad of other factors. We anticipate an increase in our
capital expenditures to support our expected growth in operations and our
related infrastructure. We believe that our cash, cash equivalents and the net
proceeds from this offering will provide sufficient capital to fund our
operations for at least the next 12 months if our assumptions about our revenues
and expenses are generally accurate. Since we have a limited operating history,
however, we cannot be certain that those assumptions will prove to be accurate.
We expect to devote substantial capital resources over the next 12 to 24 months:
- for our marketing and branding efforts;
- for customer support;
- to hire and expand our engineering, sales and marketing and finance and
accounting organizations;
- to further develop our wireless service offerings;
- to expand our wireless services to new handheld mobile devices,
platforms, networks and markets;
- to expand our operations internationally; and
- for general corporate purposes.
Even if we successfully complete this offering, we anticipate requiring
additional funds within the next 12 to 24 months to continue the development and
operation of our business. We do not expect to be profitable in the next 12
months, so we will likely need to raise additional funds in the future through
public or private financings or other similar arrangements. Additional financing
may not be available on acceptable terms, if at all, and the inability to obtain
that financing could adversely affect the continued operation of our business.
We will not have sufficient capital to fund our operations in a manner
consistent with our current intentions and plans without the net proceeds from
this offering. Without the proceeds from this offering or future financings, we
would likely initiate material changes to our business plan to conserve cash
resources, including reduction of advertising and marketing expenditures. If
additional funds are raised through the issuance of equity securities or
securities convertible into equity, dilution to existing stockholders may
result. If insufficient funds are available, we may not be able to introduce new
services, expand our marketing efforts or compete effectively.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 established new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS No. 133 requires that all derivatives
be recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income (loss), depending on the type of
hedging relationship that exists. In July 1999, the FASB issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective
of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company
does not currently hold derivative instruments or engage in hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, or SAB
101, "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. We believe that we have complied with the guidance of SAB
101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, or FIN 44, "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of Opinion No. 25 for the definition of employee for purposes of
applying Opinion No. 25, the criteria for determining whether a plan qualifies
as a noncompensatory plan, the accounting consequences of various modifications
to the terms of a previously fixed stock option or award and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. The adoption of certain
provisions of FIN 44 prior to March 31, 2000 did not have a material impact on
the financial statements. We do not expect that the adoption of the remaining
provisions will have a material effect on our financial position or results of
operations.
In various areas, including revenue recognition and other Internet-related
issues, accounting standards and practices continue to evolve. The SEC is
preparing to issue interpretive guidance relating to SAB 101, and the FASB's
Emerging Issues Task Force continues to address revenue and other
Internet-related accounting issues. We believe that we are in compliance with
all of the rules and related guidance as they currently exist. However, any
changes to generally accepted accounting principles in these areas could impact
our accounting for our operations.
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BUSINESS
We provide our subscribers with a comprehensive wireless service for their
handheld mobile devices.
Our service offers our subscribers:
- access to a broad range of Internet content and data and the ability to
manage through our wireless portal up to six of their existing e-mail
accounts and securely conduct e-commerce transactions;
- Internet data and content that has been modified for viewing and use on
handheld mobile devices and the ability to browse many popular web sites,
whether or not their content has been so modified;
- an easy-to-use wireless Internet portal which, as the automatic homepage
for all of our subscribers, serves as our subscribers' gateway to the
Internet;
- nationwide access covering 118 metropolitan statistical areas across the
United States, encompassing over 160 million people, for a fixed monthly
subscriber fee; and
- full-time customer support.
To access our wireless service, we sell our subscribers a wireless modem
that they attach to their handheld mobile device. We provide the Internet
access, arrange the wireless carriage and deliver optimized content through our
wireless portal; our subscribers do not need to make independent arrangements
with any Internet service provider, wireless carrier, content provider or other
third party to receive our wireless service. Our wireless portal is compatible
with both the Palm operating system and the Microsoft Pocket PC operating
system. We currently provide our wireless service for use on the Palm V and Palm
Vx handheld mobile devices and recently demonstrated our service on the
Handspring Visor at the 2000 PC Expo, with service expected to be available on
that device in the fall of this year. In addition, we recently signed an
agreement with Hewlett Packard Company to make our wireless service available by
the fall of this year on Hewlett Packard's Jornada 540 Series of handheld mobile
devices which uses the Microsoft Pocket PC operating system. We intend to make
our wireless service available on other handheld mobile devices that run the
Palm operating system and the Microsoft Pocket PC operating system, as well as
other operating systems or platforms that come to market in the future.
To provide our comprehensive wireless service, we seamlessly integrate
access, carriage, content and other components and offer them as a single
integrated solution to our subscribers. For some of these functions, we rely on
third party vendors. For instance, we purchase modems that we resell to our
subscribers from an independent modem manufacturer. We purchase airtime from
numerous wireless network carriers. We use a third party billing and customer
support company to bill our subscribers and to provide a portion of our customer
support. There are many other services and products that are bundled within our
service offering that are transparent to our subscribers, but which are critical
to our ability to provide a positive user experience.
THE MARKET OPPORTUNITY
Internet usage has become an integral part of daily life for many people,
for both personal and professional purposes. Today, the principal method for
accessing the Internet, sending e-mails and managing personal data remains the
desktop computer. With individuals becoming increasingly mobile, we believe that
a wireless service offering users access to the Internet or a corporate intranet
at any time, regardless of location, satisfies a growing need for many people.
We believe that a simple-to-use, integrated service that offers a comprehensive
Internet experience on a mobile basis is the key to making the wireless
experience useful, rewarding and productive.
INTERNET USAGE HAS BECOME AN INCREASINGLY IMPORTANT PART OF EVERYDAY LIFE.
Internet and e-mail usage has grown significantly. In recent years, the
Internet has experienced a worldwide rapid increase in the number of individual
users. Technology and communications research firm
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IDC estimates there were approximately 240 million Internet users worldwide at
the end of 1999, and projects that number to increase to more than 602 million
users by the end of 2003. In addition, the Internet and corporate intranets have
emerged as important channels for exchanging data and information and for daily
communication, particularly through e-mail. According to IDC, there were
approximately 315 million e-mail boxes worldwide as of July 1999, with this
number expected to grow to over 750 million e-mail boxes by the end of 2005. As
an indication of the growing importance of e-mail and the increasing reliance
many people place on e-mails in their personal and professional lives, IDC
estimated that 1.4 trillion e-mails were sent in 1999 and forecasts this number
will grow to 4.8 trillion in 2003. With such significant growth in the number of
e-mail messages being sent, we believe that demand for real-time e-mail access
anywhere and at anytime will increase. Although we have formed an international
joint venture with News Corporation to pursue international opportunities
outside of the United States, our joint venture has not yet commenced commercial
operation. As a result, while we have presented statistics in this and in other
sections of our prospectus which are generally global in nature, they may not
necessarily be indicative of trends within the United States, which is the only
region in which we currently operate.
Internet content continues to increase and e-commerce has become
increasingly common. Publishing and distributing content and information on the
Internet is generally considered less costly than traditional publishing and
distribution methods. As a result, the growth of Internet-based content and
information, including online magazines, news feeds and computer games, as well
as product, educational, entertainment and political information, has been
extraordinary over the past several years. The Internet has also created new
opportunities for many companies to advertise and promote their products and
services in a more targeted and interactive manner than had previously been
possible. With the emergence of the Internet as a global, interactive medium,
many individuals and companies that had traditionally conducted commercial
transactions in person, through the mail or over the telephone, have
increasingly looked to conduct their business electronically over the Internet,
a type of commercial practice which is commonly referred to as e-commerce.
E-commerce includes many types of commercial transactions that are conducted
over the Internet, including trading securities, buying goods and services and
paying bills. We expect that e-commerce transactions will continue to
proliferate as more individuals gain access to the Internet, as the cost of
Internet access decreases and as security concerns associated with transacting
business over the Internet are mitigated. According to IDC, Internet users
worldwide were expected to purchase more than $130 billion in goods and services
electronically in 1999, with that number increasing to $1.6 trillion in 2003.
WORLDWIDE DEMAND FOR MOBILE CONNECTIVITY CONTINUES TO GROW RAPIDLY.
Increasing usage of wireless communications. Individuals are increasingly
using wireless communications devices to provide them with convenient and
constant access to information whenever they are away from their home or office.
IDC estimates that in 1998 there were 303 million worldwide cellular and
personal communications systems subscribers, and IDC expects that number to
increase to approximately 1.1 billion in 2003. According to The Yankee Group, a
market research firm, the number of mobile users is expected to exceed 1 billion
by 2003 with approximately 60% capable of wireless Internet access.
Increasing usage of handheld mobile devices and demand for wireless
data. There has been, and we expect there will continue to be, a rapid adoption
by many individuals of handheld mobile devices, such as those produced by Palm,
Handspring and Hewlett-Packard, to remotely access and manage personal and
business information. According to IDC, worldwide sales of personal handheld
mobile devices are expected to increase from approximately 8.3 million units per
year in 1999 to approximately 35.5 million units per year in 2003. We believe
that this continuing growth will be fueled by, among other things, the
increasing dependence of many people on information stored or accessible through
their handheld mobile devices, their desire to conveniently and remotely access
personal and business information wherever they may be located, and by
continuing technological innovations, including improved wireless connectivity
and increased storage and performance characteristics.
In areas in which wireless services are widely available, individuals have
shown significant interest in receiving those services. In Japan, for instance,
NTT DoCoMo, the wireless affiliate of Nippon Telegraph
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<PAGE> 42
and Telephone, Japan's largest telecommunications company, offers a wireless
data service through its mobile telephone. NTT DoCoMo reported that it had more
than 9.4 million users of its wireless service as of July 23, 2000, having only
launched the service in February 1999. The wireless data service provided by NTT
DoCoMo is not comparable in many respects to our wireless service, including the
fact that NTT DoCoMo has designed its service for use with mobile telephones
rather than handheld mobile devices. While we believe that the success exhibited
by NTT DoCoMo indicates a growing use and acceptance of wireless data services,
it is not necessarily indicative of the likely acceptance of our wireless
service in the United States.
WE ANTICIPATE THE CONTINUING CONVERGENCE OF WIRELESS COMMUNICATIONS
SERVICES AND THE INTERNET.
Benefits of mobile connectivity. Wireless services will enable Internet
access, e-mail messaging, e-commerce transactions and information updates 24
hours a day, seven days a week without regard to the location of the mobile
user. It is also expected that service providers will eventually be able to
provide users of handheld mobile devices with location-specific information,
such as mapping, directions, movie and theater listings, restaurants, weather,
shopping and personal banking services. We believe that this ability to
customize information and deliver it when and where it is needed will provide
wireless data users with a highly-valued user experience.
Need for a service that helps navigate wireless content. When the Internet
was just starting, content was typically made available to users through
decentralized and independent providers, making it difficult for users to easily
locate information by context, subject matter or other easily searchable
characteristics. To address these problems, a number of search tools were
developed. Internet directories and search engines, which organize listings of
web sites into predetermined subject areas and offer users the ability to search
Internet sites based upon the user's query, have proliferated in an attempt to
make the Internet experience more valuable and productive.
Similar navigational tools are needed to make the wireless data experience
one which users will find useful, rewarding and productive. We believe that
wireless Internet users will seek content directories and search methods that
are adapted specifically for use on handheld mobile devices, yet are similar to
the ones that they have grown familiar with from their personal computer
Internet experience.
Need for a wireless service that offers access to a broad range of content
for use on handheld mobile devices. The Internet has become an increasingly
important part of daily life because of the broad range of content and data
available to end-users. To be successful, we believe that a wireless service
must provide the mobile user with access to nearly the same broad range of
Internet data and content that is available on the personal computer.
Most of the content and data available on the Internet today was created
for use and viewing on large computer monitors and is not easily or effectively
used or viewed on the relatively small display screens of most handheld mobile
devices. Several companies and technologies have recently emerged that enable
content providers to modify their Internet content and data for enhanced use and
viewing on handheld mobile devices; this process has recently become known as
"optimizing" Internet content and data for use on handheld mobile devices. While
we expect that the number of companies optimizing their content and data for
wireless services will continue to grow, the overwhelming majority of web sites
have not yet optimized their content and data for viewing or use on handheld
mobile devices. We believe, therefore, that people seeking a wireless Internet
experience will migrate towards a wireless service, which allows them to
navigate optimized content and data from popular web sites and to visit many web
sites whose content has not been optimized.
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OBSTACLES TO OVERCOME IN THE WIRELESS DATA MARKET
We believe that the market for wireless services is significant, with
tremendous potential for continuing growth. There are several factors, however,
that we believe have adversely affected the evolution of this market so far,
including:
- limited choice and availability of Internet content and data optimized
for use and viewing on handheld mobile devices;
- complex user interfaces and system configurations;
- high and unpredictable costs associated with using wireless data
networks, including roaming charges that are typically assessed when
users are outside of their home area;
- limited coverage areas and disparate wireless networks that do not always
work well together, leading to disconnections and other service problems,
including security and privacy concerns; and
- the number of wireless service providers that offer various limited types
of service -- for example, certain services offer just e-mail messaging,
other services provide just Internet access without the benefit of
optimizing the content while others provide a service without the benefit
of a portal designed specifically for use with a handheld mobile device
that enhances a mobile user's ability to navigate the Internet
wirelessly.
THE OMNISKY SOLUTION
We provide a comprehensive wireless service that enables our subscribers to
access and navigate the Internet, send and receive e-mail messages and securely
conduct e-commerce transactions on handheld mobile devices. We have developed
the user interface for our wireless service and have integrated into our service
Web clipping software, which helps "optimize" the content we deliver to our
subscribers, and software which synchronizes information in a handheld device to
a desktop computer. We continue to develop, in some cases with the assistance of
others, the technologies and support systems that we believe are necessary to
offer a service that is easy-to-use, cost-effective and reliable. To provide our
comprehensive wireless service, we integrate components from many different
vendors, including some who have made investments in us. For instance, we host
our network operations with, and license software from, Aether which made an
investment in us. We purchase airtime from numerous wireless network carriers,
including AT&T Wireless, which also has made an investment in us. We believe the
contractual relationships we have with our affiliated vendors, like Aether and
AT&T Wireless, are on arms' length terms. There are many other services and
products that are bundled within our service offering that are transparent to
our subscribers, but which are critical to our ability to provide a positive
user experience.
We believe that we offer our subscribers the following benefits:
ACCESS TO OPTIMIZED AND OTHER INTERNET CONTENT, E-MAIL MESSAGING AND
E-COMMERCE. Our subscribers have the ability over their handheld mobile devices
to access a broad range of Internet content and data, access and manage up to
six of their existing e-mail accounts through our wireless portal and securely
conduct e-commerce transactions. Our subscribers have access to Internet data
and content in a format that is modified for viewing and performance on the
small display screens of handheld mobile devices. We receive that content from
almost 1,000 links to popular data sources and content providers, including
CNBC, eBay, ESPN, E*Trade, Ticketmaster, Fox Sports and Yahoo!. In addition to
the Internet content that we provide, we also offer our subscribers the ability
to browse the web and visit many popular web sites, whether or not the content
of those sites has been optimized. When a subscriber views non-optimized content
through our wireless service, we enhance the non-optimized content by
automatically screening out portions which may be unreadable or poorly
formatted, on the relatively small display screen of a handheld mobile device.
As a result of the Strategic Marketing and Content Agreement we entered into
with America Online, we also expect to provide our subscribers with access to
America Online interactive services, including AOL e-mail and instant messaging,
Web content, Internet content and e-commerce services.
EASY-TO-USE WIRELESS PORTAL. We have designed an easy-to-use wireless
Internet portal for use on handheld mobile devices and their relatively small
display screens. Our wireless portal, which serves as the
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automatic home page for all of our subscribers, is designed to emulate the web
surfing experience found on the desktop computer, providing our subscribers with
an environment with which they are familiar and comfortable. Our subscribers
have access to the Internet and their e-mail messages through point-and-click
icons and descriptive graphics within our wireless portal, which acts as the
gateway to the Internet for our subscribers. Our wireless portal can only be
accessed, unlike more traditional Internet portals, through our service, and
subscribers do not currently have the ability to use another portal as their
home page. Our easy-to-use Internet directory enables our users to search
through a wide variety of content and data within 11 principal interest-area
categories, including finance, travel, entertainment and sports. We use a
tree-based navigation system which allows our subscribers simply to tap on an
icon or graphic to obtain immediate access to optimized content. We also enable
users to search the Internet through text-based searching. To further enhance
our subscribers' experience, we enable them to customize their use of our portal
to access their favorite content more quickly and easily.
NATIONWIDE ACCESS AT A FLAT MONTHLY RATE. We provide our subscribers with a
nationwide wireless service available in 118 metropolitan statistical areas
across the United States, 24 hours a day, seven days a week with unlimited
usage, for a fixed monthly subscriber fee. Our service area covers over 160
million people. We do not impose roaming charges in the United States on our
subscribers, which are charges that many cellular telephone companies have
typically imposed on their users if they travel outside of their home region. We
are able to offer a flat rate throughout the United States through our
arrangements with leading national wireless network carriers, including AT&T
Wireless Services and Verizon Wireless. We believe that our flat rate pricing
structure offers our subscribers a cost-effective pricing plan that is similar
to the simple, one-rate pricing plan that they are likely to be familiar with
from their land-line Internet access service and wireless telephone service
plans.
HIGH QUALITY CUSTOMER SERVICE. We believe that customer support is critical
to attracting and retaining our subscribers, especially in a business and
industry that is relatively new. Our customer service representatives are
available either through a toll free telephone number or by e-mail, which means
that our subscribers can also receive customer support through their handheld
mobile devices wherever they may be. We also post answers to frequently asked
questions and related information on our web site. We have outsourced portions
of our customer care to a leading customer service and billing company. We
believe that this enables us to manage our growth effectively, grow our business
quickly to meet increased demand and ensure that we do not sacrifice customer
service quality.
COMPATIBILITY WITH VARIOUS HANDHELD MOBILE DEVICES, WIRELESS NETWORKS AND
OPERATING SYSTEMS. While we currently provide service only for the Palm V and
Palm Vx handheld mobile devices, we are also working with other handheld mobile
device manufacturers to make our wireless service available for their devices.
We expect to offer our wireless service on the Handspring Visor and the
Hewlett-Packard Jornada in the fall of this year. We intend to offer a wireless
service that is compatible with many different types of handheld mobile devices,
various wireless network systems and operating systems. We believe that this
approach will increase the market acceptance and penetration of our wireless
service. Some of these handheld mobile device manufacturers include Handspring,
which licenses the Palm operating system, and Hewlett-Packard, which licenses
the Microsoft Pocket PC operating system. We also believe we have designed our
wireless service to be easily adaptable to evolving wireless networks. We
currently support the wireless network technology known as cellular digital
packet data, or CDPD, which is used by AT&T Wireless Services and Verizon
Wireless, the two largest wireless carriers in the United States. In the future,
we intend to support other wireless network technologies, such as code division
multiple access, or CDMA, global system for mobile communications, or GSM,
general packet radio service, or GPRS and enhanced data rates for global
evolution, or EDGE. Our wireless service is also compatible with the operating
systems on which most content is located and on which most computer applications
run, including Microsoft Windows NT, UNIX and Linux.
SECURE E-COMMERCE PLATFORM. We designed our wireless service to provide a
secure environment for e-commerce. The network operations center through which
we manage and operate our wireless service provides a high-security physical
link between the information sent and received by our subscribers, the wireless
carrier network over which our information is transmitted and the information
feeds and systems of our content providers.
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OUR STRATEGY
Our mission is to become the leading global provider of wireless service to
users of handheld mobile devices. To achieve our objective, we intend to:
ESTABLISH AND MARKET THE OMNISKY BRAND. We believe that establishing brand
awareness is critical to attracting and retaining subscribers, content
providers, e-commerce companies and advertisers to our wireless service.
Maintaining and enhancing our brand name, both domestically and internationally,
will be increasingly important as greater numbers of consumers look to wireless
data as a key source of information and commercial activity. We believe our
television commercials, print ads, online advertising and direct mailings convey
an image that our wireless service is compelling, dynamic and fun. We believe
that our branding strategy will enhance the general awareness of our wireless
service, help distinguish us from our competitors and ultimately increase our
subscriber base.
CONTINUE TO ENHANCE OUR WIRELESS SERVICE OFFERINGS. We intend to continue
to enhance the features and functionality of our wireless service. Since we
began our beta test in December 1999, we have continually sought to enhance our
wireless portal, increase the customization options available to our
subscribers, add more optimized data and content to our wireless service and
continue to simplify the software installation and provisioning process. Over
time, we also plan to extend our wireless service to allow our subscribers to
access their corporate intranets and remotely synchronize information on their
handheld mobile devices with their desktop computers and web-based applications.
We will also continue to seek to incorporate new technologies and e-commerce
opportunities as they become available.
USE OUR PORTAL TO GENERATE ADDITIONAL REVENUES. While we initially expect
to generate the majority of our revenues from our fixed monthly subscription
fees, we believe that significant opportunities exist for us to derive
additional revenues from advertising in our portal and from fees generated by
e-commerce transactions that are conducted through our wireless service. By
placing their advertisements in certain interest-specific channels within our
portal, advertisers may target their messages to specific, self-selected
audiences. We also intend to leverage our subscriber base by selling advertising
positions in our wireless service to various content providers. We have not yet
determined the advertising strategy that we intend to adopt or whether
subscribers will be able to elect not to view advertising through our wireless
service. With respect to e-commerce transactions that are conducted through our
wireless service, we intend to collect a percentage of the revenues generated
from those transactions. Many of our advertisers have already agreed to pay for
preferred placement within our portal and to share revenue generated from online
transactions.
EXPAND OUR WIRELESS SERVICE INTERNATIONALLY. We generally expect to
accomplish our international objectives through joint ventures, partnerships and
other relationships with companies that already have an international presence.
Toward that end, we recently entered into a joint venture with News Corporation,
one of the world's leading media companies, to expand our wireless service
internationally. We expect our joint venture to enable us to benefit from the
extensive international reach of News Corporation and its significant content
and distribution channels. We believe that our joint venture will help
accelerate the international rollout of our wireless service.
Although our subscribers are not currently able to do so, we intend over
time to allow our subscribers to use our wireless service in the United States
and internationally in a seamless fashion, much in the same manner that users of
wireless telephones are able to roam within the United States from one wireless
carrier's network to another carrier's network without disrupting their service.
In each international market that we enter, we also intend to adapt our wireless
service to meet the local needs of our subscribers. This will require that we
provide local language customer support, local content and region-specific
marketing and e-commerce opportunities that are of interest to the local
communities in which we operate.
FURTHER DEVELOP OUR SALES AND DISTRIBUTION CHANNELS. We currently sell our
wireless services through our web site, a toll-free telephone service center and
selected retailers. We intend to extend our sales reach by pursuing agreements
with additional retail outlets, including stores operated by wireless
telecommunications carriers and selected computer stores. As we begin to sell
our wireless services through additional
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retail outlets, we intend to provide training and ongoing support to sales
representatives in these stores so that they are familiar with the features and
functionality of our wireless service.
PURSUE SELECTED ACQUISITIONS. We intend to supplement our internal growth
through selected acquisitions of businesses or technologies that will enable us
to increase our subscriber base and enhance our wireless service offerings.
Acquisition candidates may include information technology companies with
specific engineering knowledge, companies that will enable us to enter new
markets or companies that provide services that we do not currently offer. We do
not currently have any acquisitions pending.
OUR WIRELESS SERVICE
We offer a wireless service that enables our subscribers to access and
navigate the Internet, send and receive e-mail messages and securely conduct
e-commerce transactions over handheld mobile devices. We currently offer our
subscribers the following services:
ENHANCED WIRELESS INTERNET ACCESS THROUGH OUR PORTAL. Our subscribers have
the ability to access a substantial amount of the information and applications
available on the Internet, including selected e-commerce sites. Our subscribers
can:
- access and search Internet content from almost 1,000 links to popular
data sources and content providers, which has been optimized for use and
viewing on handheld mobile devices;
- access web sites whose content has not been optimized for use and viewing
on handheld mobile devices;
- customize their use of our wireless portal to access their favorite
content more quickly and easily; and
- purchase products and services and engage in other e-commerce
transactions in a secure manner.
We have arranged information in our portal under the following subject
matters for the convenience of our subscribers:
<TABLE>
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
FINANCE TRAVEL SHOPPING REFERENCE
Stocks & Trading Flights Books Directories
Financial News Hotels & Car Rentals Music & Video Advice
Directions & Traffic Electronics Reviews
Weather Computers Travel Reference
NEWS Reference Toys
World News Gifts
U.S. News Auctions COMMUNICATIONS
Financial News SPORTS Travel Instant Messaging
Technology News Sports News Assistance Greeting Cards
Sports News Outdoor & Fitness Facsimile
Entertainment News Mobile Files
ENTERTAINMENT
PORTALS Dining
LOCAL Branded Portals Movies
Dining Events
Movies News
Events LIVING Fun
Directions & Traffic Advice
Weather Arts & Leisure
Shopping Culinary
Health
Parenting
Special Interest
----------------------------------------------------------------------------------------------------------
</TABLE>
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OPTIMIZED WIRELESS CONTENT. Our content relationships generally fall into
two broad categories: relationships with companies that provide us with their
own proprietary content and relationships with companies that aggregate content
from a multitude of sources.
Direct content relationships. We receive content that we believe is of
interest to our subscribers directly from a wide variety of companies. Our
agreements with these content providers generally contain some of the following
terms:
- one-time slotting fee which the content provider pays us for positioning
its content in a certain location in our portal;
- revenue sharing between us and the content provider that provides us with
a percentage of any revenue that the content partner generates from a
sale or other transaction that is originated through our wireless
service;
- payments to us for any new customers that one of our content providers
may generate, e.g. a paid subscription to a content provider's premium
services or an account opened with an online broker; and
- co-marketing arrangements and commitments to promote our wireless service
and that of the content provider.
The following is a representative list of our direct content providers and
reflects the breadth and depth of the optimized content, including financial,
shopping, travel, entertainment and news Web sites, that is currently available
using our wireless service:
<TABLE>
<S> <C> <C>
----------------------------------------------------------------------------------------
ABC News Fidelity Smaller.com
Alta Vista Shopping.com FitForAll.com SNAZ
American Airlines Flowers on Command Stock Smart
Ameritrade Fodors.com 10Best.com
Barnes & Noble.com Forbes.com The Industry Standard
BarPoint FOXNEWS.com The Motley Fool
BigCharts FOXSPORTS.com The Sporting News
BizTravel Frommers The Street.com
Bloomberg GO.com The Weather Channel
Britanica Google Theatre.com
BusinessThinkers Homes.com ticketmaster.com
Buy.com Hoover's Online TrailWorks
Camdens LAUNCH.com Travelocity
CBS MarketWatch MapBlast! TVguide.com
CitySearch MapQuest Ucook
CNBC Mercata United Airlines
CNET.com Merriam-Webster USA Today
Deja.com Moviefone Variety.com
DLJdirect MSNBC Vicinity
Domino Power MyDocs VVault
DrinkBoy mySimon Wall Street Journal
Ebay NY Times wfn.com
Economist.com ontheroad.com Windows CE Power
eFax PalmPower Women.com
ESPN.com RestaurantRow Yahoo!
Etak Salon.com Yodlee
E*TRADE Shadowpack ZDNet
Excite Silicon Investor
----------------------------------------------------------------------------------------
</TABLE>
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Content aggregators. We also receive access to popular data and content
from several different content aggregators. These content aggregators generally
relieve us of some of the significant time and effort it would take for us to
coordinate and collect content feeds from many different sources and, therefore,
make it more efficient for us to distribute content to our subscribers. For
example, Screaming Media provides us with content from more than 40 different
sources, including Business Wire, Edgar Online and PR Newswire. As new content
and services become available from content aggregators, they are automatically
made available to our subscribers.
E-MAIL. Our e-mail service lets our subscribers remotely manage their
e-mail accounts. With this service, our subscribers can:
- send, receive and remotely manage e-mail from up to six existing
accounts -- as an example, this allows our subscribers to access a
personal e-mail account used on a home computer and a business e-mail
account maintained at the office if the subscriber's employer makes
remote access to e-mail available;
- download an entire e-mail or simply preview an e-mail by reviewing the
sender's name, subject header and the first 500 characters of the e-mail
message for quick scanning -- this preview option allows our subscribers
to quickly review and prioritize their e-mails when "on the go," without
the need for downloading and reviewing the entire e-mail;
- reply to an e-mail or compose a new message either by using one of the
prepared messages included in our wireless service or by creating a new
message;
- receive an alert that new messages have arrived by an indicator light on
the wireless modem -- this allows our subscribers to avoid the constant
need to go online to see whether new e-mails have been received; and
- forward large e-mail attachments to fax machines or personal computers
with Internet access for easy reading and downloading.
While we support up to six e-mail accounts for our subscribers, our
subscribers may access additional e-mail accounts when navigating the Internet
that we do not directly support. In those cases, however, subscribers will not
be able to manage those e-mail accounts in the same manner as e-mail accounts
that we support. For instance, subscribers who wish to access an e-mail account
outside of the six that we support will not be able to preview e-mail headers,
receive e-mail alerts or forward attachments from an account we do not support.
In addition, the quality of e-mails received using these additional e-mail
accounts, including the formatting of text, will be subject to the same vagaries
in usability and functionality that a user might experience with other
non-optimized content.
PERSONAL DATA MANAGEMENT. Our subscribers can save information that they
have obtained from a search of the yellow or white pages directly into the
address book of their handheld mobile device and in the future will be able to
obtain directions to an address by clicking on an icon on the screen of their
handheld mobile device.
FUTURE SERVICE OFFERINGS. Over time, we plan to extend our wireless service
to include additional functions and features that we believe will be
particularly useful to our subscribers. These functions are expected to include:
Corporate intranets. We intend to enable our subscribers to access their
corporate intranets. This will allow our subscribers to access any information
that companies or organizations may want to offer their employees or associates
remotely, such as sales force automation, calendars and contact lists;
Enhanced abilities to customize our wireless portal. We intend to further
enhance the ability of our subscribers to customize and use our wireless portal
in a manner that best suits their personal needs;
Data synchronization. We intend to enable our subscribers to wirelessly
synchronize data that they may have downloaded or obtained on their handheld
mobile devices with their desktop computers,
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including such features as calendar synchronization. We believe that this
feature will allow for a more seamless integration of the desktop computer and
the handheld mobile device; and
Personal data management. We intend to offer our subscribers the ability to
use Internet-enabled versions of the following applications on their handheld
mobile devices: Palm Address Book, DateBook, To Do List and Memo Pad. For
example, we intend to allow our subscribers to retrieve data from the Internet,
such as a travel itinerary, and download it into their calendar on their
handheld mobile device by clicking on an icon.
AMERICA ONLINE OFFERINGS. We have entered into a three-year Strategic
Marketing and Content Agreement with America Online, which may be renewed by
America Online for an additional two years beyond the initial term. Our
agreement with America Online provides for the delivery of America Online
interactive services, including AOL e-mail and instant messaging, Web content,
Internet content and e-commerce services through our wireless service and the
development of a customized wireless service for America Online users. We expect
to launch our service with America Online in March 2001. We have also agreed to
purchase $3 million in online advertising from America Online during the term of
the agreement. In addition, concurrent with this offering, America Online has
agreed to purchase shares of our common stock, having an aggregate value of $5
million, in a private placement that will occur concurrently with the closing of
this offering.
CUSTOMERS
We began preliminary, or beta, testing of our wireless service in December
1999 and stopped accepting new beta orders on March 31, 2000. During our beta
test, our wireless service was selected as the best software/service for
wireless data in 2000 by Mobile Insights, Inc., a leading information source for
the mobile computing and data communications market. We formally launched our
wireless service nationally in May 2000. On August 26, 2000, we had 21,300
subscribers.
MARKETING AND SALES
We market and advertise our service to increase public awareness of the
availability of our wireless service, to establish brand recognition and to
generate sales opportunities.
MARKETING. Concurrent with the formal launch of our wireless service, we
initiated television, print, Internet and direct mail advertising campaigns. We
will continue seeking to expand our subscriber base, enhance product awareness
and build our OmniSky brand through mass media advertising, direct marketing and
online advertising. We intend to use a portion of the net proceeds from this
offering to advance our marketing programs.
We are investing in programs and practices that we believe will help to
minimize subscriber turnover, or churn, and establish our reputation for
superior customer service. These programs and practices include:
- the development of customer databases to help us track the needs of our
subscribers;
- ongoing communications with our subscribers through newsletters and other
means; and
- reward programs for sales generated by customer referrals.
SALES. We sell our wireless services through our web site, a toll-free
telephone service center and selected retailers. We intend to extend our sales
reach by pursuing agreements with additional retail outlets, including stores
operated by wireless telecommunications carriers and selected computer stores.
We intend to provide outlets with ongoing training, merchandising and marketing
support designed to drive traffic and sales to these outlets. Through our web
site, new and potential subscribers can access sales, support and technical
materials about our wireless service.
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SIGNIFICANT SERVICE AND SUPPORT RELATIONSHIPS
We believe that strengthening the following significant relationships with
wireless network providers and software developers is one of the keys to our
ability to provide our subscribers with a comprehensive wireless Internet
experience.
WIRELESS CARRIERS. AT&T Wireless Services is the primary wireless network
communications carrier for our service in the United States and also provides
support to us in the form of joint marketing arrangements. To provide nationwide
access for our wireless service across the country and also for redundancy
purposes, we have relationships with other wireless carriers, including Verizon
Wireless and SBC Communications. These carriers provide our subscribers with
wireless access across their networks and enable us to provide our subscribers
with wireless service in areas not covered by AT&T Wireless' network.
Pursuant to a reseller agreement, AT&T Wireless Services National Accounts,
Inc. agreed to provide cellular digital packet data service to us for
distribution of our wireless service to our customers. AT&T Wireless currently
charges us based on the aggregate usage per month of our subscribers. One rate
is charged to us while our subscribers are in their home markets and a higher
rate is charged to us as our subscribers travel outside of their home markets
and incur roaming fees. The agreement remains in effect until November 2000
unless earlier terminated due to default or governmental regulation and
automatically renews for successive one year terms unless either party
terminates the agreement. AT&T Wireless Services National Accounts, Inc. also
agreed to make available to us up to $10.0 million in marketing funds to finance
marketing activities approved in advance by AT&T, provided that we contribute an
equal amount of funds for similar marketing activities. As of June 30, 2000,
AT&T Wireless Services National Accounts, Inc. has reimbursed us for $10 million
of marketing expenses which we have fully utilized, and we have no further
credits available.
During the second half of 2000, we also intend to begin selling our service
through domestic AT&T Wireless and Verizon Wireless retail stores and are
currently engaged in discussions regarding both relationships. As part of our
relationship with AT&T Wireless, we were provided with $10 million of
co-marketing credits that we used to offset marketing expenses.
SOFTWARE PROVIDERS. We use software from many sources, including customized
and non-customized software applications. Two of the more important software
providers for our wireless service are the following:
Palm. Palm, Inc. manufactures the handheld mobile devices commonly referred
to as Palm devices. We currently provide wireless service for the Palm V and
Palm Vx devices. In August 1999, we issued 10 million shares of our Series A
preferred stock to 3Com in consideration for a $7.0 million investment in us and
a five-year, non-exclusive license, which expires in 2005, to use Palm's
operating system and web clipping technology that assists in modifying content
that has not been optimized. We valued the license we received from Palm, for
financial reporting purposes, at $500,000. Palm was a subsidiary of 3Com at the
time of 3Com's investment. The license automatically renews for successive one
year terms after the initial term unless either party provides notice at least
six months prior to the scheduled expiration date that it does not want to renew
the agreement. The license may also be terminated for material breaches and
other customary defaults. Other than non-material royalties and maintenance and
support fees, we are not required to pay any additional fees to Palm for our
license.
Aether Systems. Aether develops software and services for corporations
seeking to make wireless data available to mobile workers and consumers. In
August 1999, we issued 7 million shares of our Series A preferred stock and
warrants to purchase an additional 3 million shares of our preferred stock to
Aether in consideration for a $2.5 million investment in us and a perpetual
non-exclusive license to use Aether's wireless gateway middleware that supports
our content access and transactions. We valued the license we received from
Aether, for financial reporting purposes, at $5.25 million. Although the license
is perpetual, it may be terminated if a material breach occurs which is not
cured within 30 days after receipt of notice.
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Aether Technologies International, L.L.C. has licensed to us its Aether
Intelligent Messaging software and documentation. We are not required to pay any
additional fees to Aether for our license.
Together with Aether, we have jointly developed and continue to enhance a
technology that allows web sites that are not optimized for use and viewing on
handheld mobile devices to be converted and viewed on the limited screen size of
handheld mobile devices.
We have also entered into a non-exclusive reseller arrangement with Aether
that allows Aether to bundle our wireless services, for a fixed fee per
subscriber, to Aether's customers within the United States for a period of five
years. Our agreement with Aether provides that Aether will be solely responsible
for all customer support and service, as well as for airtime charges. Our
agreement with Aether does not contain provisions regarding termination of that
relationship, but rather provides that Aether will resell our services on the
same terms and conditions that we offer to other resellers. We do not currently
have any reseller arrangements with any other companies.
BUSINESS OPERATIONS
CUSTOMER SERVICE. We believe that high quality customer service and support
are critical to attracting and retaining our subscribers. We have engaged a
customer service company to provide customer support for our subscribers. This
company provides us with over 70 dedicated customer service representatives
providing customer and technical support every day of the week. We spend a
significant amount of time training this customer service team to respond
quickly and efficiently to inquiries and repair requests. In addition to seeking
help through our toll-free call center, subscribers can e-mail questions
directly to our technical support staff or seek solutions through information
and tutorials available on our web site.
PRODUCT DELIVERY AND SERVICE ACTIVATION. We currently take orders either
through our call center, our web site or selected retailers. Once received, a
new subscriber's order is forwarded to our wireless fulfillment partner. Our
fulfillment partner assigns an Internet protocol address to our subscriber's
handheld mobile device from one of our wireless network carriers, based on the
location of our subscriber. That Internet protocol address provides each of our
subscribers with an Internet identification which enables information, including
content and e-mails, to be directed through the Internet to that subscriber. Our
fulfillment partner then activates the address with the wireless network carrier
and ships the modem directly to our subscriber. Once our new subscriber receives
the modem and downloads the necessary software from a CD-ROM that we provide
onto their handheld mobile device, our wireless service is ready for use.
BILLING. We have outsourced our billing operations to a third party. We
believe that this arrangement will allow us to rapidly grow our business without
dedicating significant internal resources to the creation and maintenance of
complicated billing systems. We bill our subscribers monthly, in advance of
service, and charge our fees to our subscribers' credit cards. We also bill our
subscribers for the purchase of their modems in the same way. We believe that
advance billing for our wireless service reduces churn, lowers bad debt expense
and increases cash flow.
SYSTEMS AND TECHNOLOGY
NETWORK OPERATIONS CENTER. Aether, which is located in Owings Mills,
Maryland, currently hosts our network operations center, although we own all of
the monitoring equipment and communications equipment that we co-locate in
Aether's center. From the Aether network operations center, we maintain high
speed data transmission lines, known as T-1 connections, to the Internet, our
content providers, third party vendors and the wireless network carriers that we
use. The operations center is equipped with Cisco and Hewlett-Packard networking
equipment, Sun Sparc UNIX servers and high-end clustered Microsoft Windows NT
servers. The center is staffed and monitored 24 hours a day, seven days a week
and is equipped with backup power supplies, including diesel-powered generators
that are tested and serviced regularly.
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To help ensure that we provide our subscribers with high availability of
service, we have a back-up operations center in Palo Alto, California. At our
back-up center, we are able to monitor, in real-time, as if we were physically
located at Aether's network center, the entire network system, including our
connections to the Internet, our content providers, third party vendors and our
wireless network carriers. As our subscriber base grows, we intend to acquire
additional data center capacity to ensure continued high quality service.
WIRELESS NETWORKS. Through our arrangements with wireless network carriers,
we are able to provide our subscribers with wireless service throughout the
United States. We purchase wireless network capacity for our service through a
number of wireless carriers, including AT&T Wireless Services and Verizon
Wireless.
WIRELESS MODEM MANUFACTURER. We have an agreement with Novatel Corporation
to provide a wireless modem for our service. Novatel's Minstrel wireless modem
was specifically designed for use with the Palm V and Palm Vx handheld mobile
devices and our wireless service. Under our agreement with Novatel, we have a
right to acquire 100,000 wireless modems built by Novatel for such Palm devices,
of which 30,647 wireless modems had been delivered through July 31, 2000.
Although our agreement with Novatel has expired by its terms, Novatel continues
to ship and provision wireless modems in accordance with the agreement and has
informed us that it intends to honor its contractual commitments to provide us
with the 100,000 modems that we ordered. We have discussed and are continuing to
discuss with Novatel modifications to, and extension of, the agreement, although
no definitive agreements have been reached regarding those matters. We are also
in discussions with Novatel to build wireless modems for other handheld mobile
devices.
We have signed an agreement with Tellus Technology Incorporated to provide
a CDPD wireless modem for use with our wireless service. Under our agreement
with Tellus, we have a right to acquire 25,000 wireless modems. However, we have
not yet tested a prototype of the wireless modem, and we have the right to
terminate the agreement should the prototype not satisfy our product tests.
OUR PROPRIETARY E-COMMERCE SYSTEM. By combining third-party and internally
developed software, we have developed a proprietary e-commerce system for
providing information to, and taking Internet-based orders from, our subscribers
in a secure manner. Our system runs on scalable, redundant servers that we own
and have located in a third-party co-location facility.
INTELLECTUAL PROPERTY. We use intellectual property from many sources,
including software vendors, wireless network carriers and others with whom we
work in providing our wireless service. Much of the intellectual property that
we use in the day-to-day operation of our business, however, consists of trade
secrets and know-how that our management and employees have developed over the
years. We believe that our knowledge base of the Internet, wireless and handheld
mobile device industries is one of our principal competitive advantages.
We have also developed the following proprietary technology that we believe
enhances the nature of the wireless service that we provide to our subscribers:
- OUR WIRELESS INTERNET PORTAL
Navigation tools. Our wireless Internet portal uses a tree-based
navigational system, which resides on each subscriber's handheld mobile
device. With our navigational system, our subscribers simply tap on one of
our easily understood icons, or descriptive graphics, to immediately
access Internet content, e-mail messages or visit virtually any web site.
Content updates. We maintain our content categories and information
listings in our data center, which allows for constant and centralized
updating of information for our subscribers. Our subscribers can update
the content on their handheld mobile devices when they synchronize their
devices with their desktop computer. Our system enables our subscribers to
maintain constant access to the latest list of content channels without
having to incur long download times.
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- SERVER ENHANCEMENTS
Optimizing data. Handheld mobile devices that use the Palm operating
system employ a special software that is called a "web clipping" system.
With the web clipping system, Internet content is compressed at a server
for display on a handheld mobile device. We have enhanced this system with
a third-party data-optimization package that enables us to reduce the
system's bandwidth usage and, by doing that, make response times faster on
our subscribers' handheld mobile devices.
Bookmarking content. We have developed a technology, which allows any
Internet content retrieved from our data centers to be dynamically
bookmarked for easy access at a later time. This allows our subscribers to
customize our portal for their individual use so that they can more
quickly and easily access Internet content that is most important to them.
E-mail gateway. We have also developed a highly efficient e-mail
gateway for use on our subscribers' handheld mobile devices. Our e-mail
gateway allows our subscribers to retrieve an entire e-mail or simply
preview the critical elements of their e-mail, such as the sender's name,
a subject header and the first 500 characters of the e-mail message,
without the long download times commonly associated with large messages.
Our gateway also allows our subscribers to forward attachments to a fax
machine or to another e-mail account.
INTERNATIONAL JOINT VENTURE
We formed a joint venture with News Corporation in April 2000 to pursue
international opportunities for our business outside of the United States. We
and News Corporation each have a 50% ownership interest in the joint venture and
equal representation on its board of directors. Under the terms of the joint
venture agreement, the initial funding of the joint venture will consist of cash
contributions of $5 million from each of News Corporation and us. In addition,
we have agreed to provide the joint venture with use of our technology and
know-how without charge to allow the joint venture to develop its business, and
News Corporation has agreed to provide the joint venture with content at
preferred rates. We are entitled to appoint the chief executive officer, while
News Corporation is entitled to appoint the chief financial officer of the joint
venture. Neither party to the joint venture is obligated to provide any further
funding to the joint venture nor is either party permitted to dispose of its
interest in the joint venture without the consent of the other party. The terms
of the joint venture do not impose any exclusivity obligations on either us or
News Corporation, so that if we or News Corporation determine in good faith that
it would be inappropriate to conduct business in any particular market through
the joint venture, then either party is permitted to conduct business in that
market independent of the joint venture. We committed to spend $30 million over
the next five years for advertising with News Corporation's affiliates in the
United States.
COMPETITION
The market for wireless Internet and data services is becoming increasingly
competitive. The adoption of open industry standards in the wireless data
communications market may make it easier for new market entrants and existing
competitors to introduce services that compete against ours. We developed our
wireless service using mostly standard industry development tools. Many of our
agreements with wireless network carriers, handheld mobile device manufacturers
and content providers are non-exclusive. Our competitors, therefore, may use
many of the same products and services in competition with us. Given time and
capital, competitors could provide services which are similar in nature to our
wireless service.
We currently compete primarily on the basis of the functionality, breadth,
quality and price of our wireless service and expect to continue to do so in the
future. We believe that we compete favorably compared to our current competitors
with respect to these factors. Many of our existing and potential competitors
have substantially greater financial, technical, marketing and distribution
resources than we do. Many of these companies may also have greater name
recognition and more established relationships with our target subscribers.
Furthermore, these competitors may be able to adopt more aggressive pricing
policies and offer customers more attractive terms than we can.
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Some of our current competitors include companies with whom we work today
in providing our wireless service, including Palm through its Palm.net wireless
service, AT&T Wireless Services and Verizon Wireless. At some point in the
future, other companies with whom we work could decide to provide a wireless
service similar, and in competition with, ours.
Some of our other current competitors include:
- wireless Internet service providers, such as GoAmerica;
- handheld mobile device manufacturers, such as Research in Motion; and
- wireless network carriers like Sprint PCS.
Some of our future competitors could include:
- mobile portals like NTT DoCoMo's iMode;
- wireless application service providers like 724 Solutions, Dynamic Mobile
Data, Saraide (recently acquired by InfoSpace), and Wireless Knowledge, a
joint venture of Microsoft and Qualcomm;
- mobile data management and communications software providers like
AvantGo! and Phone.com;
- traditional Internet service providers like America Online (which has
signed an agreement to merge with Time Warner Inc.), EarthLink and
Prodigy; and
- web portals such as Yahoo!, Excite and Lycos.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. The
wireless network carriers we contract with to provide airtime are subject to
regulation by the Federal Communications Commission, or FCC. In addition,
Internet services currently are exempt from access charge payments. Any
limitation on, or termination of, that exemption could significantly increase
the costs associated with our purchase of wireless airtime. In addition, to the
extent that the FCC introduces new regulations that affect any of our wireless
carriers in any way, or if new interpretations of existing FCC regulations occur
through administrative or court proceedings that affect any of our wireless
carriers, we could also be derivatively affected by those changes. We could also
be adversely affected by developments in regulations that govern or may in the
future govern the Internet, the allocation of radio frequencies or the placement
of cellular towers that transmit our wireless service. Changes in these
regulations could also create uncertainty in the marketplace that could reduce
demand for our wireless services or increase the cost of doing business.
We currently do not collect sales or other taxes with respect to the sale
of services or products in states and countries where we believe we are not
required to do so. We do collect sales and other taxes in the states in which we
have offices and are required by law to do so. We continually monitor the laws
and regulations of the jurisdictions in which we conduct business to assess
whether we are required to collect sales or other taxes. It is not, however,
always clear as to how certain statutes and regulations apply to Internet-based
services, and we cannot be certain that interpretations of existing statutes and
regulations may not change in the future or that we and our advisors have
correctly interpreted these statutes and regulations. One or more jurisdictions
have sought to impose sales or other tax obligations on companies that engage in
online commerce within their jurisdictions. A successful assertion by one or
more jurisdictions that we should collect sales or other taxes on our products
and services, or remit payment of sales or other taxes for prior periods, could
have a material adverse effect on our business, financial condition or results
of operations. Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could also have an adverse effect on our business.
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FACILITIES
Our principal offices are currently located at 1001 Elwell Court in Palo
Alto, California in a 16,000 square foot facility under a lease expiring in
March 2007. We also have office space located at 299 California Street in Palo
Alto, California, where we maintain our network monitoring center. This facility
has 7,000 square feet under a lease that expires in June 2002.
On July 27, 2000, we signed a lease for 102,000 square feet of office space
at One Market Street, San Francisco, California. The lease commences in January
2001 and expires in March 2011. We initially intend to occupy approximately
68,700 square feet in order to relocate our principal executive offices to that
space once it becomes available and intend to sublet approximately 33,200 square
feet. We have not yet determined whether we will continue to occupy our other
offices or seek to sublet that space to other companies.
EMPLOYEES
As of August 30, 2000, we had a total of 151 employees in the following
groups:
<TABLE>
<S> <C>
Engineering, development and operations..................... 50
Sales and marketing......................................... 71
General and administrative.................................. 30
---
151
===
</TABLE>
None of our employees is covered by a collective bargaining agreement. We
believe that our relations with our employees are good.
LEGAL PROCEEDINGS
On July 6, 2000, a complaint was filed in the United States District Court
for the Northern District of California captioned "Julia Butterfly Hill v. AT&T
Corporation, a New York corporation; AT&T Wireless Services, Inc., a Delaware
corporation; OmniSky Corporation, a Delaware corporation; TWBA Chiat/Day, a
Delaware corporation; and Does I-XX, inclusive." The complaint alleges, among
other things, false endorsement and false designation of origin; false and
misleading advertising and misappropriation of likeness and image. We intend
vigorously to defend ourselves and believe that the claims alleged are without
merit. We do not believe that the resolution of this matter will have a material
effect on our financial condition or results of operations.
We have been contacted by the Federal Trade Commission regarding some of
our print and Web advertisements. The inquiry concerns whether the information
we provided in the advertisements about the terms of our modem rebate program,
the ability of our subscribers to access the Internet and content, the coverage
areas for our service and the security of transactions conducted through our
service was sufficient. We believe that the advertisements were sufficient in
all respects and we are cooperating fully with the inquiry. We do not expect the
results of the inquiry to have a material effect on our business.
Except as described in the previous paragraphs, we are not currently
subject to any material legal proceedings. We may from time to time, however,
become a party to various legal proceedings arising in the ordinary course of
our business. We also may be indirectly affected, as we discussed above under
the subsection entitled "Government regulation" by administrative or court
proceedings or actions in which we are not involved but which have general
applicability to the Internet or wireless industries.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information regarding our executive officers,
directors and other key employees as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Patrick S. McVeigh....................... 48 Chairman, Chief Executive Officer and Director
Barak A. Berkowitz....................... 47 President
Lawrence S. Winkler...................... 33 Senior Vice President and Chief Financial Officer
Michael D. Dolbec........................ 41 Senior Vice President, Business Development
James J. Obot............................ 45 Senior Vice President, Operations
Neville J. Street........................ 39 Senior Vice President, International
Elan Amir................................ 32 Chief Technology Officer
David K. Rensin.......................... 28 Chief Product Officer
Raymond Cleeman.......................... 35 Vice President, Treasurer
Ronald A. Gould.......................... 41 Vice President, Systems and Technology
Douglas Haslam........................... 49 Vice President, Human Resources
Michael J. Malesardi..................... 40 Vice President, Controller
Andy R. Simms............................ 40 Vice President, Sales for the Americas
Scott M. Wornow.......................... 38 Vice President, General Counsel and Secretary
Stephen M. Diamond(1)(2)................. 43 Director
Alex Mandl(1)(3)......................... 56 Director Nominee
Lachlan K. Murdoch....................... 28 Director
David S. Oros............................ 40 Director
Janice M. Roberts(1)(2).................. 44 Director
Timothy Weller(1)(3)..................... 35 Director Nominee
Thomas E. Wheeler(1)(2).................. 53 Director
</TABLE>
---------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Messrs. Mandl and Weller have agreed to join our board effective upon
completion of this offering.
Patrick S. McVeigh is a co-founder, our Chairman of the Board of Directors
and our Chief Executive Officer. From January 1996 to June 1999, Mr. McVeigh
served as Vice President of Worldwide Sales and Business Development at Palm
Computing, Inc., a manufacturer of handheld mobile devices and at that time a
wholly-owned subsidiary of 3Com Corporation, a provider of broad-based
networking systems and services. Prior to this, Mr. McVeigh was Vice President
of Sales and Marketing for Knowledge Adventure, an educational software company,
from October 1993 to January 1996. From August 1982 to October 1993, Mr. McVeigh
held a variety of sales and marketing management positions at Apple Computer
Inc., a manufacturer of personal computers. Most recently, he was responsible
for the development and launch of Apple's consumer personal computer business,
the Performa. Mr. McVeigh holds a Bachelor of Arts in psychology and philosophy
from Clark University.
Barak A. Berkowitz is a co-founder and our President. From June 1998 to
April 1999, Mr. Berkowitz served as Senior Vice President and General Manager at
the Go Network, an Internet portal and a joint venture of Infoseek Corporation
and The Walt Disney Company. Prior to this, Mr. Berkowitz was Vice President of
Marketing at Infoseek Corporation, an Internet portal, from October 1997 to June
1998. From September 1994 to October 1996, Mr. Berkowitz was Vice President and
General Manager of the American region at Logitech International S.A., a
manufacturer of computer interface devices, with responsibility for production
and marketing. From August 1990 to July 1994, Mr. Berkowitz was a marketing
consultant to several high-tech companies. From June 1985 to August 1990, Mr.
Berkowitz held
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a variety of positions at Apple Computer, Inc., managing consumer marketing
projects during the majority of his time there.
Lawrence S. Winkler has served as our Senior Vice President and Chief
Financial Officer since joining OmniSky in April 2000. From December 1997 to
April 2000, Mr. Winkler served as Senior Vice President and Treasurer at PSINet
Inc., a provider of Internet access services and related products. Prior to
this, Mr. Winkler served as Director, Finance and Investor Relations at The
Mills Corp., a real estate investment trust, from December 1996 to December
1997. Prior to December 1996, Mr. Winkler served in senior financial management
roles at Black and Decker and CRI, Inc. and was a consultant for Arthur Andersen
& Co. Mr. Winkler holds a Bachelor of Science in economics, accounting and
finance from the University of Maryland and a Master of Business Administration
from Loyola College in Baltimore, Maryland.
Michael D. Dolbec is a co-founder and our Senior Vice President, Business
Development. From inception to April 2000, Mr. Dolbec served as our Chief
Financial Officer and Secretary. From February 1996 to August 1999, Mr. Dolbec
was Vice President of Business Development for 3Com Corporation, a provider of
broad-based networking systems and services. Prior to this, Mr. Dolbec was a
Vice President at Telematica, a strategy-consulting firm, from June 1995 to
February 1996. From March 1993 to June 1995, Mr. Dolbec was a Vice President and
Managing Director of IBM. Prior to March 1993, Mr. Dolbec held positions at
Greylock Management Corporation, a Boston-based venture capital firm and Kleiner
Perkins Caufield & Byers, a Menlo Park-based venture capital firm. Mr. Dolbec
holds a Bachelor of Science in biology and a Master of Science in computer
science from Stanford University and a Master of Business Administration from
the Wharton School of the University of Pennsylvania.
James J. Obot has served as our Senior Vice President, Operations since
joining OmniSky in November 1999. From March 1999 to October 1999, Mr. Obot was
Vice President and General Manager at Palm.net, a wireless Internet access
service which is a division of Palm, Inc., a manufacturer of handheld mobile
devices. Prior to this, Mr. Obot was the Vice President of Worldwide Operations
at Palm Computing, Inc., the predecessor to Palm, Inc., from May 1996 to March
1999. From January 1995 to September 1995, Mr. Obot was President of Navigation
Technologies, a producer of navigable map databases. From February 1981 to
October 1994, Mr. Obot served in various positions at Apple Computer, Inc., a
personal computer manufacturer, including most recently as Senior Director of
field operations. Mr. Obot holds a Bachelor of Science in finance from Santa
Clara University.
Neville J. Street has served as our Senior Vice President, International
since joining OmniSky in March 2000, and also serves as the Chief Executive
Officer of our international joint venture with News Corporation. From December
1996 to March 2000, Mr. Street served as Vice President, International at Palm
Computing, Inc. From April 1994 to December 1996, Mr. Street was Managing
Director, Europe and Senior Vice President at Perle Systems Inc., a manufacturer
of communications controllers and access products. Mr. Street holds a Bachelor
of Arts in business studies from Sheffield Hallem University and a Master of
Business Administration from Thames Valley University.
Elan Amir has served as our Chief Technology Officer since joining OmniSky
in July 2000. From October 1999 to July 2000, Mr. Amir was Vice President,
Technology at Puma Technology, Inc., a provider of mobile device management and
synchronization software. Prior to this, Mr. Amir was Vice President,
Engineering and Chief Technology Officer at ProxiNet, Inc., a provider of
content transformation and delivery architecture for handheld mobile devices,
from February 1999 to October 1999. From May 1998 to December 1998, Mr. Amir was
a founder of FastForward Networks, Inc., a provider of content management and
distribution platforms for Internet broadcasting. Mr. Amir holds a Bachelor of
Science, Master of Science and a Doctorate in computer science from the
University of California, Berkeley.
David K. Rensin has served as our Chief Product Officer since joining
OmniSky in August 2000. From March 2000 to August 2000, Mr. Rensin was Chief
Scientist at Aether Systems, Inc., a provider of wireless data services and
systems. Prior to this, Mr. Rensin was Chief Technology Officer and co-founder
of Riverbed Technologies, Inc., a provider of mobile computing software, from
January 1999 to March
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2000. From July 1995 to January 1999, Mr. Rensin was a manager at Noblestar
Systems Corporation, an Internet, wireless and mobile computing integrator. Mr.
Rensin was the recipient of the Mobile Innovator of 1999 award from Mobile
Computing Magazine. Mr. Rensin holds a Bachelor of Science in management science
and statistics from the University of Maryland, College Park.
Raymond Cleeman has served as a Vice President since joining OmniSky in
March 2000 and our Treasurer since June 2000. From May 1996 to February 2000,
Mr. Cleeman was a Vice President in the Corporate Finance Group at Donaldson,
Lufkin & Jenrette Securities Corporation, an investment bank. Prior to that, Mr.
Cleeman served as an Associate at RLR Partners, a private equity fund, from May
1994 to April 1996. Mr. Cleeman holds a Bachelor of Arts in economics from
Queens College of the City University of New York and a Juris Doctor from
Brooklyn Law School.
Ronald A. Gould has served as our Vice President, Systems and Technology
since March 2000. Mr. Gould was initially hired by us as a consultant in January
2000. Prior to OmniSky, Mr. Gould was Chief Executive Officer of Stand Sure
Systems, a consulting company, from August 1997 to February 2000. From December
1989 to July 1997, Mr. Gould was Director of Information Technology Management
at Apple Computer, Inc. Mr. Gould holds a Bachelor of Science in information
systems management and a Master of Business Administration from the University
of San Francisco.
Doug Haslam has served as our Vice President, Human Resources since joining
OmniSky in June 2000. From January 1997 to April 2000, Mr. Haslam was Director,
Human Resources for Palm Computing. From January 1996 to December 1996, Mr.
Haslam was Director, Human Resources for the DDS Division of Xerox Corporation,
a provider of global document solutions. Mr. Haslam was Director, Human
Resources for Kenetech Windpower Corporation, a manufacturer of wind turbines,
from September 1991 to September 1995. Mr. Haslam holds a Bachelor of Arts in
political science from Ohio University and a Masters in Public Administration
from the University of California, Los Angeles.
Michael J. Malesardi has served as our Vice President, Controller since
joining OmniSky in March 2000. From July 1997 to February 2000, Mr. Malesardi
served as Vice President and Controller and more recently as Senior Vice
President and Controller at PSINet Inc. From February 1992 to July 1997, Mr.
Malesardi served initially as Vice President and Controller and then as Director
of Financial Administration at Watson Wyatt Worldwide, a consulting firm. Mr.
Malesardi holds a Bachelor of Science in accounting and business administration
from Washington and Lee University and is a Certified Public Accountant.
Andy R. Simms is a co-founder and our Vice President, Sales for the
Americas. From February 1996 to June 1999, Mr. Simms was the Channel Sales
Director for the Americas at Palm Computing, Inc. Prior to Palm Computing, Mr.
Simms was Regional Sales Manager in the consumer division of Apple Computer,
Inc. from March 1994 to January 1996. Mr. Simms holds a Bachelor of Arts in
business administration from the University of Kentucky.
Scott M. Wornow has served as our Vice President, General Counsel and
Secretary since joining OmniSky in May 2000. From February 1998 through May
2000, Mr. Wornow was a partner in the New York office of the international law
firm of Paul, Hastings, Janofsky & Walker LLP. Mr. Wornow was an associate with
Paul, Hastings from October 1994 through February 1998. Mr. Wornow holds a
Bachelor of Arts in economics from the University of Virginia, a Bachelor of
Arts and Master of Arts in law from Cambridge University in England and a Juris
Doctor from the Harvard Law School.
Stephen M. Diamond has served as a member of our board of directors since
January 2000. Mr. Diamond has been a General Partner of The Sprout Group, the
venture capital affiliate of Donaldson, Lufkin & Jenrette, since May 1998. Prior
to that, Mr. Diamond was with Dataquest, an information technology market
research and consulting firm, where he was Group Vice President and Worldwide
Director of Telecommunications and Networking Research from January 1996 to
February 1998. Prior to Dataquest, Mr. Diamond was Vice President of Marketing
at Electronic Retailing Systems International, Inc. from December 1995 to
December 1996. Mr. Diamond serves on the board of directors of Avici Systems,
Inc. He holds a Bachelor of Arts in environmental science and political science
from Boston
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College, a Master of Science in environmental engineering from Tufts University
and a Master of Public Administration from Northeastern University.
Alex J. Mandl has agreed to serve as a member of our board of directors
upon the completion of this offering. Mr. Mandl has been the Chairman and Chief
Executive Officer of Teligent, Inc., a provider of local and long distance
telephony, high-speed data and Internet access services, since September 1996.
Prior to joining Teligent, Mr. Mandl served as President and Chief Operating
Officer of AT&T Corporation from 1993 to 1996. From 1991 to 1993, Mr. Mandl was
Chief Financial Officer of AT&T. Mr. Mandl also serves on the boards of the
Warner-Lambert Company, Dell Computer Corporation, Forstmann Little & Co. and
NextLevel Corporation. He holds a Bachelor of Science in economics from
Willamette University in Oregon and a Master of Business Administration from the
University of California, Berkeley.
Lachlan K. Murdoch has served as a member of our board of directors since
May 2000. Mr. Murdoch has served as Executive Director of News Corporation since
October 1996 and Senior Executive Vice President since February 1999. Mr.
Murdoch has also served as a Director of News Limited, News Corporation's
principal Australian subsidiary, since September 1995, Chairman and Chief
Executive Officer since July 1997, Managing Director from September 1996 until
June 1997 and Deputy Chief Executive Officer from December 1995 until September
1996. Mr. Murdoch has also served as Chairman of Queensland Press Limited since
October 1996 and a Director since October 1994. Mr. Murdoch has served as a
Director of Beijing PDN Xiren Information Technology Co. Ltd since June 1996 and
One.Tel Limited since April 1999. He holds a Bachelor of Arts in philosophy from
Princeton University.
David S. Oros has served as a member of our board of directors since August
1999. Mr. Oros founded Aether Systems, Inc., a provider of wireless data
services and systems, in 1996 and has been its Chairman, Chief Executive Officer
and President since that time. From 1994 to 1996, Mr. Oros was President of
NexGen Technologies, L.L.C., a wireless software development company that
contributed all of its assets to Aether Systems. Mr. Oros serves on the board of
directors of Aether Systems, Inc. Mr. Oros holds a Bachelor of Science in
mathematics from the University of Maryland.
Janice M. Roberts has served as a member of our board of directors since
August 1999. Ms. Roberts has been a general partner of The Mayfield Fund, a
venture capital fund, since June 2000. From February 1992 until June 2000, Ms.
Roberts was Senior Vice President of Business Development of 3Com Corporation.
She was also President of 3Com Ventures, a corporate investment fund, from
October 1997 to May 2000. Ms. Roberts serves on the board of directors of Aether
Systems, Inc. She holds an Honors degree in economics and business from the
University of Birmingham in the United Kingdom.
Timothy Weller has agreed to serve as a member of our board of directors
upon the completion of this offering. Mr. Weller has served as the Chief
Financial Officer of Akamai Technologies, Inc. since August 1999. From July 1993
until August 1999, Mr. Weller was an equity research analyst at Donaldson,
Lufkin & Jenrette, an investment banking firm. Mr. Weller holds a Doctorate in
electrical engineering from the University of Illinois.
Thomas E. Wheeler has served as a member of our board of directors since
January 2000. Since 1992, Mr. Wheeler has served as President and Chief
Executive Officer of the Cellular Telecommunications Industry Association. Since
1994, Mr. Wheeler has served as a member of the board of trustees of the John F.
Kennedy Center for the Performing Arts. Mr. Wheeler is a director on the board
of directors of Aether Systems, Inc. He holds a Bachelor of Science in business
administration from Ohio State University.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
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BOARD OF DIRECTORS
Upon completion of this offering, our board of directors will consist of
eight directors, divided into three classes serving staggered three-year terms,
as follows:
<TABLE>
<CAPTION>
CLASS EXPIRATION MEMBERS
----- ---------- -------
<S> <C> <C>
Class I.............................. 2001 Diamond, Oros and Wheeler
Class II............................. 2002 Mandl, Murdoch and Roberts
Class III............................ 2003 McVeigh and Weller
</TABLE>
As a result of our staggered board, only one class of directors will be
elected at each annual meeting of our stockholders, with the other classes
continuing for the remainder of their respective three-year terms.
Our bylaws provide that the authorized number of directors may be changed
only by resolution of the board of directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the total number of directors.
This classification of the board of directors may have the effect of
delaying or preventing a change in control. See "Description of Capital
Stock -- Delaware Anti-Takeover Law and Charter and Bylaw Provisions."
At the time we complete this offering, each of our directors will have been
selected pursuant to a voting agreement among us and the holders of our Series
A, Series B and Series C preferred stock and several holders of our common
stock. In connection with our preferred stock financings, we entered into a
voting agreement that allowed our significant stockholders to have
representatives appointed to our board of directors. In connection with our
Series A preferred stock financing, 3Com Ventures, Inc. appointed Janice M.
Roberts and Aether OpenSky Investments LLC appointed David S. Oros to our board
of directors. In connection with our Series B preferred stock financing,
entities affiliated with The Sprout Group appointed Stephen M. Diamond to our
board of directors. In connection with our Series C preferred stock financing,
Omni Holdings, Inc., an indirect wholly-owned subsidiary of News Corporation,
appointed Lachlan K. Murdoch to our board of directors. The voting agreement
governing these board appointments will terminate upon the closing of this
offering.
BOARD COMMITTEES
Our board of directors has an audit committee and a compensation committee.
Audit Committee. The audit committee was formed in June 2000 and currently
consists of Ms. Roberts, Mr. Diamond and Mr. Wheeler. We expect Mr. Weller to
join this committee once he joins our board. Among other things, the audit
committee:
- reviews and monitors our financial statements and accounting practices;
- makes recommendations to our board of directors regarding the selection
of independent auditors; and
- reviews the results and scope of the audit and other services provided by
our independent auditors.
Compensation Committee. The compensation committee was formed in January
2000 and currently consists of Ms. Roberts, Mr. Wheeler and Mr. Diamond. The
compensation committee reviews and makes recommendations to our board of
directors concerning salaries and incentive compensation for our officers and
employees. The compensation committee also administers our stock plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to January 2000, our board of directors did not maintain a standing
compensation committee, and the entire board participated in all decisions
regarding compensation of our executive officers. During
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that time, Patrick S. McVeigh, our Chief Executive Officer, participated as a
member of our board of directors in deliberations concerning executive officer
compensation. In January 2000, our board formed the compensation committee. None
of the members of the compensation committee is currently or has ever been at
any time since our formation, one of our officers or employees. No member of the
compensation committee, other than Mr. Wheeler, serves as a member of the board
of directors or compensation committee of any entity that has one or more
officers serving as a member of our board of directors or compensation
committee. Mr. Wheeler serves as a member of the board of directors and
compensation committee of Aether Systems, Inc. One of our directors, Mr. Oros,
is chairman, chief executive officer and president of Aether Systems, Inc.
DIRECTOR COMPENSATION
We do not currently compensate our directors in cash for their service as
members of the board of directors, although they are reimbursed for expenses in
connection with attendance at board of director and audit and compensation
committee meetings. Under our 1999 stock plan, directors are eligible to receive
stock option grants at the discretion of the board of directors or other
administrator of the plan. We did not grant any options to our directors in
1999.
EXECUTIVE COMPENSATION
The following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal year ended December 31, 1999 by our Chief
Executive Officer and each other executive officer whose total compensation
exceeded or would have exceeded $100,000 during 1999 had those officers provided
services to us for the entire fiscal year. These executives are referred to as
the named executive officers elsewhere in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------- ------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION UNDERLYING OPTIONS
--------------------------- -------- ----- ------------ ------------------
<S> <C> <C> <C> <C>
Patrick S. McVeigh............................... $120,192 -- -- --
Chief Executive Officer
James J. Obot.................................... 43,269 -- -- 876,806
Senior Vice President, Operations(1)
Michael D. Dolbec................................ 89,135 -- -- --
Senior Vice President, Business Development(2)
Andy R. Simms.................................... 80,769 -- -- --
Vice President, Sales for the Americas
</TABLE>
---------------
(1) Mr. Obot joined us in November 1999.
(2) Mr. Dolbec served as our Chief Financial Officer and Secretary from May 1999
until April 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
granted to each of the named executive officers in the fiscal year ended
December 31, 1999. The exercise price per share of each option was equal to the
fair market value of the common stock as determined by the board of directors on
the date of grant. The potential realizable value assumes that the price of the
applicable stock increases from $11.00 per share, the mid-point of our offering
price range, from the date of grant until the end of the ten-year option term at
the annual rates specified. There is no assurance provided to any executive
officer or any other holder of our securities that the actual stock price
appreciation over the ten-year term will be at the assumed 5% and 10% levels or
at any other defined level. These assumed rates of appreciation comply
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with the rules of the Securities and Exchange Commission and do not represent
our estimate of future stock price. Actual gains, if any, on stock option
exercises will be dependent on the future performance of our common stock.
From our inception on May 7, 1999 to December 31, 1999, we granted options
to purchase up to an aggregate of 2,380,528 shares to employees, directors and
consultants. Options were granted under our 1999 Stock Plan at exercise prices
at the fair market value of our common stock on the date of grant, as determined
in good faith by the board of directors. Options to employees and directors have
a term of ten years. Options to consultants have a one-year term. Optionees may
pay the exercise price by cash, certified check, or delivery of already-owned
shares of our common stock. Options to the named executive officers are
immediately exercisable upon grant; however, we may repurchase any unvested
shares at their cost if the optionee's service terminates. Options to employees
and directors generally vest over four years. Options to consultants vest
immediately upon grant.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN LAST PRICE EXPIRATION -----------------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ----------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Patrick S. McVeigh.................. -- -- -- -- -- --
James J. Obot....................... 876,806 36.8% $0.342 12/10/09 $15,221,800 $24,238,200
Michael D. Dolbec................... -- -- -- -- -- --
Andy R. Simms....................... -- -- -- -- -- --
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table describes for our named executive officers their option
exercises for the fiscal year ended December 31, 1999, and exercisable and
unexercisable options held by them as of December 31, 1999.
All options were granted under our 1999 stock plan. The shares vest over
four years.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(2)
ACQUIRED ON VALUE --------------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE(1) UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE
---- ----------- -------- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Patrick S. McVeigh............ -- -- -- -- -- --
James J. Obot................. -- -- -- 876,806 -- $9,345,000
Michael D. Dolbec............. -- -- -- -- -- --
Andy R. Simms................. -- -- -- -- -- --
</TABLE>
---------------
(1) Options granted under our stock option plan are generally exercisable
immediately but the shares acquired upon exercise are subject to lapsing
rights of repurchase at the exercise price. The heading "exercisable" refers
to shares as to which our right of repurchase has lapsed. The heading
"unexercisable" refers to shares that we still have the right to repurchase
upon termination of the optionee's employment.
(2) The "Value of Unexercised In-the-Money Options at December 31, 1999" is
based on a fair market value of $11.00, the mid-point of our offering price
range, less the per share exercise price, multiplied by the number of shares
issued upon exercise of the option.
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STOCK PLANS
1999 STOCK PLAN
Our board of directors adopted our 1999 stock plan in July 1999, and our
stockholders approved the plan in July 1999. Our 1999 stock plan provides for
the grant to employees of incentive stock options within the meaning of federal
income tax laws, and for the grant to employees, directors and consultants of
nonstatutory stock options and stock purchase rights. Unless terminated sooner,
the 1999 stock plan will terminate automatically in 2009.
The board of directors has determined that no future options will be
granted under our 1999 stock plan following the effective date of this offering.
However, our board of directors or a committee of our board of directors will
administer the options granted under the 1999 stock plan that are outstanding on
the effective date of this offering. As of August 30, 2000, a total of 9,754,464
shares of common stock were authorized for issuance under the 1999 stock plan.
As of August 30, 2000, options and warrants to purchase an aggregate of
9,604,035 shares of our common stock were outstanding under the 1999 stock plan,
and no shares have been issued pursuant to the exercise of options granted under
the 1999 stock plan. The options outstanding at the time of this offering will
remain subject to the terms of the agreements evidencing such options and the
terms of the 1999 stock plan.
The 1999 stock plan provides that in the event of our merger with or into
another corporation, the successor corporation may assume or substitute each
option or stock purchase right. If the outstanding options or stock purchase
rights are not assumed or substituted, each outstanding option and stock
purchase right will fully vest and become exercisable, even as to shares that
would not otherwise be vested or exercisable. Our board or its committee will
notify each optionee that the option or stock purchase right will be fully
exercisable for a period of fifteen days from the day of notice and the option
or right will terminate upon the expiration of this period.
2000 STOCK PLAN
The 2000 stock plan was adopted by our board of directors in July 2000 and
approved by our stockholders in August 2000. The 2000 stock plan will become
effective upon the closing of this offering. A total of 4,000,000 shares of
common stock will be reserved for issuance under the 2000 stock plan, plus
annual increases on January 1st of each year equal to the lesser of:
- 1,000,000 shares;
- 3% of the outstanding shares on such date; and
- a lesser amount determined by the board.
The 2000 stock plan will be divided into five separate programs:
- the discretionary option grant program under which eligible individuals
employed by us may be granted options to purchase shares of common stock
at an exercise price determined by the plan administrator;
- the stock issuance program under which eligible individuals may be issued
shares of common stock directly, through the purchase of these shares at
a price determined by the plan administrator or as a bonus tied to the
performance of services;
- the salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to use a portion of their base
salary to acquire special below market stock option grants;
- 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 100% of the fair market value of those shares on the grant date;
and
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- the director fee option grant program under which our non-employee board
members may be given the opportunity to use a portion of any retainer fee
otherwise payable to them in cash for the year to acquire special below
market stock option grants.
The 2000 stock plan will include the following features:
- The discretionary option grant and stock issuance programs will be
administered by our compensation committee. In the case of options
intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Internal Revenue Code, the compensation
committee will consist of two or more "outside directors" within the
meaning of Section 162(m). This committee will determine which eligible
individuals are to receive option grants or stock issuances, the time or
times when such option grants or stock issuances are to be made, the
number of shares subject to each such grant or issuance, the exercise or
purchase price for each such grant or issuance, the status of any granted
option as either an incentive stock option or a non-statutory 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. No optionee may be granted
options, stock appreciation rights and direct stock issuances for more
than 1,000,000 shares in a calendar year. In connection with his or her
service to us, an optionee may be granted an additional 2,500,000 shares
pursuant to options, stock appreciation rights or direct stock issuances.
Options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Code and all incentive stock options
must have an exercise price at least equal to the fair market value of
our common stock on the date of grant. The committee will also 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 activated for one or more calendar years. Neither the
compensation committee nor the board will exercise any administrative
discretion with respect to option grants made under the salary investment
option grant program or under the automatic option grant program or
director fee option grant program for the non-employee board members.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program 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
common stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
us equal to the fair market value of the vested shares of common stock
subject to the surrendered option less the exercise price payable for
those shares. We may make the payment in cash or in shares of common
stock.
- The exercise price for the options may be paid in cash or in shares of
our common stock valued at fair market value on the exercise date or in
any other manner determined by the compensation committee. The option may
also be exercised through a same-day sale program without any cash outlay
by the optionee. In addition, the compensation committee may allow a
participant to pay the option exercise price or direct issue price (and
any associated withholding taxes incurred in connection with the
acquisition of shares) with a full-recourse, interest-bearing promissory
note.
The 2000 stock plan will include change in control provisions that may
result in the accelerated vesting of outstanding option grants and stock
issuances:
- In the event that we are acquired by merger or asset sale or a
board-approved sale of more than 50% of our capital stock, each
outstanding option under the discretionary option grant program that is
not assumed or continued by the successor corporation will immediately
become exercisable for all the option shares, and all 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.
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- The compensation committee may grant options and issue shares which will
accelerate (i) upon an acquisition even if the options are assumed and
repurchase rights assigned, (ii) in connection with a hostile change in
control (effected through a successful tender offer for more than 50% of
our outstanding voting stock or by proxy contest for the election of
board members) or (iii) upon a termination of the individual's service
following a change in control or hostile take-over.
The board will be able to amend or modify the 2000 stock plan at any time,
subject to any required stockholder approval. The 2000 stock plan will terminate
no later than July 28, 2010.
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 employee stock purchase plan was adopted by our board of directors
in July 2000 and approved by our stockholders in August 2000. The 2000 employee
stock purchase plan will become effective upon the closing of this offering. A
total of 750,000 shares of common stock will be reserved for issuance under the
purchase plan, plus annual increases on January 1st of each year equal to the
lesser of:
- 350,000 shares;
- 1% of the outstanding shares on such date; or
- a lesser amount determined by the board.
The board of directors or a committee appointed by the board will
administer the purchase plan. The board or its committee will have full and
exclusive authority to interpret the terms of the purchase plan and determine
eligibility.
The purchase plan will contain consecutive, overlapping 24 month offering
periods. Each offering period will include four six-month purchase periods. The
offering periods will generally start on the first trading day on or after May 1
and November 1 of each year, except for the first such offering period which
will commence on the first trading day on or after the effective date of this
offering and will end on the first trading day on or after November 1, 2002.
Employees will be eligible to participate if we or any participating
subsidiary employs them for at least 20 hours per week and more than 5 months in
any calendar year. However, the following employees will not be able to purchase
stock under the purchase plan:
- any employee who immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our capital
stock; or
- any employee whose rights to purchase stock under all our employee stock
purchase plans accrues at a rate which exceeds $25,000 worth of stock for
each calendar year.
Participants will be able to purchase common stock through payroll
deductions of up to 15% of the participant's eligible compensation.
"Compensation" is defined to include a participant's base salary only. The
maximum number of shares a participant may purchase during a single purchase
period will be 5,000 shares.
Amounts deducted and accumulated by the participant will be used to
purchase shares of common stock at the end of each purchase period. The price of
stock purchased under the purchase plan will be 85% of the lower of the fair
market value of the common stock at the beginning of the offering period or at
the end of each purchase period.
The purchase plan will provide that, if we experience a change in control
each outstanding purchase right may be assumed or substituted for by the
successor corporation. If the successor corporation refuses to assume or
substitute for the purchase rights, the offering period then in progress will be
shortened and a new purchase date will be set, which will occur before the
proposed change in control.
The purchase plan will terminate no later than July 28, 2010. The board of
the directors has the authority to amend or terminate the purchase plan, except
that no such action may adversely affect any outstanding rights to purchase
stock.
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401(k) PLAN
We have a 401(k) plan covering our full-time employees located in the
United States who have been employed by us for at least six months. The 401(k)
plan is intended to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended. Contributions to the 401(k) plan by employees or by us, and
the investment earnings thereon, are not taxable to employees until withdrawn
from the 401(k) plan. Consequently, contributions by us, if any, will be
deductible by us when made. Employees may elect to defer 20% of their current
compensation up to the statutorily prescribed annual limit, which was $10,000 in
1999 and $10,500 in 2000, and to have the amount of such deferral contributed to
the 401(k) plan. The 401(k) plan permits, but does not require, additional
matching contributions to the 401(k) plan by us on behalf of all participants in
the 401(k) plan. To date, we have not made any contributions to the 401(k) plan.
EMPLOYMENT AGREEMENTS
We do not currently have employment agreements with any of our employees.
LIMITATIONS ON DIRECTORS' 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 any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This 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. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. 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 our bylaws would permit indemnification.
We intend to enter into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, will provide for indemnification of our
directors and executive officers for expenses, 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 or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative litigation, if successful, might otherwise benefit us and
our stockholders. A stockholder's investment in us may be adversely affected to
the extent we pay the costs of settlement or damage awards against our directors
or officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
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RELATED PARTY TRANSACTIONS
There has not been, nor is there currently proposed, any transaction or
series of similar transactions to which we were or are to be a party in which
the amount involved exceeds $60,000 and in which any director, executive officer
or holder of more than 5% of our common stock had or will have a direct or
indirect interest other than compensation arrangements, which are described
where required under "Management," and the transactions described below.
EQUITY INVESTMENT TRANSACTIONS
In August 1999, we sold 17,219,335 shares of Series A preferred stock for
$0.75 per share and issued a warrant to purchase 3,000,000 shares of Series A
preferred stock at an exercise price of $0.8333 per share, which warrant was
exercised in November 1999. The Series A preferred stock converts into
29,547,385 shares of common stock on a split-adjusted basis. In January 2000, we
sold an aggregate of 4,319,427 shares of Series B preferred stock for $4.63 per
share (which converts into 6,312,164 shares of common stock on a split-adjusted
basis). From April 2000 to June 2000, we sold an aggregate of 13,953,012 shares
of Series C preferred stock for $6.51 per share (which converts into 10,195,072
shares of common stock on a split-adjusted basis). Listed below are the
stockholders who beneficially own more than 5% of our securities who
participated in these financings.
<TABLE>
<CAPTION>
AGGREGATE VALUE
SHARES OF SHARES OF SHARES OF AGGREGATE AT INITIAL
SERIES A SERIES B SERIES C PURCHASE PUBLIC OFFERING
STOCKHOLDER PREFERRED PREFERRED PREFERRED PRICE PRICE(4)
----------- ---------- --------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Aether Opensky Investments LLC.... 10,000,000(1) 1,439,809 -- $14,416,316 $183,892,328
3Com Ventures, Inc................ 10,000,000 -- -- 7,500,000 160,747,726
Entities affiliated with The
Sprout Group(2)................. -- 2,850,970 24,592 13,360,085 46,026,350
Omni Holdings, Inc.(3)............ -- -- 9,210,337 59,959,294 74,027,036
</TABLE>
-------------------------
(1) Includes exercise of warrant to purchase 3,000,000 shares of Series A
preferred stock.
(2) The aggregated shares listed for entities affiliated with The Sprout Group
are owned as follows: DLJ Capital Corp. owns 8,143 shares of Series B
preferred stock, DLJ ESC II, L.P. owns 233,452 shares of Series B preferred
stock, Sprout Capital VIII, L.P. owns 2,440,792 shares of Series B preferred
stock, Sprout Venture Capital, L.P. owns 125,389 shares of Series B
preferred stock and certain individuals affiliated with the Sprout Group own
43,194 shares of Series B preferred stock.
(3) Omni Holdings, Inc. is an indirect wholly-owned subsidiary of News
Corporation.
(4) Based upon an initial public offering price of $11.00 per share, the
mid-point of the estimated price range for this offering. Shares owned by
these entities are subject to lock-up arrangements and other resale
restrictions which could affect the liquidity and the value of those shares.
The midpoint of our proposed initial public offering price does not
represent our estimate of our future stock prices. Actual gains, if any, on
the sale of our shares will be dependent on the future performance of our
common stock.
SALES OF EQUITY SECURITIES TO EXECUTIVE OFFICERS
On April 5, 2000, we sold an aggregate of 730,671 shares of common stock at
a price of $2.05 per share to Lawrence S. Winkler, our Senior Vice President and
Chief Financial Officer. We have the right to repurchase 438,403 of such shares
in the event Mr. Winkler's services to us terminate, which right lapses over
three years after the date of grant. Mr. Winkler paid for such shares with a
full recourse, ten-year $1,500,000 promissory note, secured by the purchased
shares. The note bears interest at a rate of 6% per annum. On May 12, 2000, we
also sold to Mr. Winkler 100,000 shares of our Series C preferred stock (which
converts into 73,067 shares of common stock on a split-adjusted basis) at a
price of $6.51 per share. Mr. Winkler paid for such shares with a full recourse,
ten-year $651,000 promissory note, secured by the purchased shares. The note
bears interest at a rate of 6.5% per annum. After repayment of loans
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<PAGE> 68
made to Mr. Winkler (excluding interest thereon), and based upon an initial
public offering price of $11.00 per share, the mid-point of the estimated price
range for this offering, Mr. Winkler's shares would have an aggregate value of
$4,539,120. Mr. Winkler is subject to lock-up arrangements and other resale
restrictions which could affect the liquidity and value of his shares. The
midpoint of our proposed initial public offering price does not represent our
estimate of our future stock prices. Actual gains, if any, on the sale of our
shares will be dependent on the future performance of our common stock.
On July 11, 2000, our board of directors agreed to issue 219,201 shares of
common stock at a purchase price of $4.79 per share to Patrick S. McVeigh, our
Chief Executive Officer; 146,134 shares of common stock at a purchase price of
$4.79 per share to Barak Berkowitz, our President; and 182,668 shares of common
stock at a purchase price of $4.79 per share to James J. Obot, our Senior Vice
President, Operations. On August 11, 2000, our board of directors agreed to
issue 52,000 shares of common stock at a purchase price of $10.00 per share to
Andy R. Simms, our Vice President, Sales for the Americas. 25% of such shares
vest on the first anniversary of the issuance date and the remainder vest
monthly thereafter over a three year period. These employees paid for such
shares with full recourse, ten-year promissory notes totaling $3.1 million
secured by the purchased shares. The notes bear interest at a rate of 6% per
annum.
On August 11, 2000, our board of directors agreed to issue 67,332 shares of
common stock at a purchase price of $4.79 per share to James J. Obot, our Senior
Vice President, Operations. 25% of these shares vest on the first anniversary of
the issuance date and the remainder vest monthly thereafter over a three year
period. Mr. Obot paid for such shares with a full recourse, ten-year promissory
note totaling $322,520 secured by the purchased shares. The note bears interest
at a rate of 6% per annum.
TRANSACTIONS WITH STOCKHOLDERS OR THEIR AFFILIATES
Aether. In connection with Aether's purchase of Series A preferred stock,
Aether Technologies, a subsidiary of Aether, licensed to us its Aether
Intelligent Messaging software and documentation. We are not required to pay any
additional fees to Aether for the license. In a separate agreement, we granted
Aether Technologies the right to resell our basic package of services for a
period of five years.
News Corporation. We formed a joint venture with News Corporation in April
2000 to pursue international opportunities for our business outside of the
United States. We and News Corporation each have a 50% ownership interest in the
joint venture and equal representation on its board of directors. Under the
terms of the joint venture agreement, the initial funding of the joint venture
will consist of cash contributions of $5 million from each of News Corporation
and us. In addition, we have agreed to provide the joint venture with use of our
technology and know-how without charge to allow the joint venture to develop its
business, and News Corporation has agreed to provide the joint venture with
content at preferred rates. Neither party to the joint venture is obligated to
provide any further funding to the joint venture nor is either party permitted
to dispose of its interest in the joint venture without the consent of the other
party. We committed to spend $30 million over the next five years for
advertising with News Corporation's affiliates in the United States.
Palm. In connection with 3Com's purchase of Series A preferred stock, Palm,
which was then a subsidiary of 3Com, licensed to us its operating system
software for handheld mobile devices. Other than non-material royalties and
maintenance and support fees, we are not required to pay any additional fees to
Palm for the license.
OTHER TRANSACTIONS
Holders of preferred stock are entitled to registration rights with respect
to the common stock issued or issuable upon conversion of the preferred stock.
We believe that all related party transactions described above were on
terms no less favorable than could have been obtained from unrelated third
parties.
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<PAGE> 69
PRINCIPAL STOCKHOLDERS
The table on the following page sets forth information regarding the
beneficial ownership of our common stock as of August 30, 2000, by the following
individuals or groups:
- each person or entity who we know beneficially owns more than 5% of our
outstanding stock;
- each of our named executive officers and other senior executive officers;
- each of our directors; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o OmniSky Corporation, 1001 Elwell Court, Palo Alto,
California 94303. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as otherwise indicated, to
our knowledge, the persons named in the table have sole voting and investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of common
stock subject to options or warrants held by that person that are currently
exercisable or will become exercisable within 60 days after August 30, 2000 are
deemed outstanding, but the shares are not deemed outstanding for purposes of
computing percentage ownership of any other person.
Applicable percentage ownership in the following table is based on
55,564,863 shares of common stock outstanding as of August 30, 2000, as adjusted
to reflect the conversion of all outstanding shares of preferred stock upon the
closing of this offering. The number of shares of common stock outstanding after
this offering includes shares of common stock being offered and the issuance of
488,759 shares of common stock to America Online concurrent with the closing of
this offering, but does not include the shares that are subject to the
underwriters' over-allotment option.
PRINCIPAL STOCKHOLDERS TABLE
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
NUMBER OF --------------------
SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
5% STOCKHOLDERS:
Aether OpenSky Investments LLC(1)......................... 16,717,485 30.1% 25.7%
3Com Ventures, Inc.(2).................................... 14,613,430 26.3% 22.4%
Entities affiliated with The Sprout Group(3).............. 4,166,245 7.5% 6.4%
Omni Holdings, Inc.(4).................................... 6,729,731 12.1% 10.3%
DIRECTORS AND EXECUTIVE OFFICERS:
Patrick S. McVeigh(5)..................................... 2,849,618 5.1% 4.4%
Barak A. Berkowitz(6)..................................... 1,899,746 3.4% 2.9%
Lawrence S. Winkler(7).................................... 803,738 1.4% 1.2%
Michael D. Dolbec(8)...................................... 1,315,209 2.4% 2.0%
James J. Obot(9).......................................... 250,000 * *
Andy R. Simms(10)......................................... 600,004 1.1% *
Neville J. Street(11)..................................... 0 * *
David S. Oros(12)......................................... 16,754,018 30.2% 25.7%
Janice M. Roberts(13)..................................... 14,649,963 26.4% 22.5%
Stephen M. Diamond(14).................................... 4,202,778 7.6% 6.5%
Thomas E. Wheeler(15)..................................... 46,062 * *
Lachlan K. Murdoch(16).................................... 6,729,731 12.1% 10.3%
---------- ---- ----
All directors and executive officers as a group (12
persons)(17)............................................ 50,100,867 90.2% 76.9%
========== ==== ====
</TABLE>
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<PAGE> 70
-------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Aether OpenSky Investments, L.L.C. is an entity managed by Aether Systems,
Inc. David S. Oros is the chairman, president and chief executive officer
of Aether Systems, Inc. and as such may be deemed to exercise voting and
investment power over the shares held by Aether Opensky Investments, L.L.C.
The address of Aether Opensky Investments, L.L.C. is 11460 Cronridge Drive,
Owings Mills, MD 21117.
(2) 3Com Ventures, Inc. is a wholly-owned subsidiary of 3Com Corporation. 3Com
Ventures has the right to appoint one director to our board of directors
and has designated Janice M. Roberts as that representative. The address of
3Com Ventures, Inc. is 5400 Bayfront Plaza, Santa Clara, CA 95052-8145.
(3) The aggregated shares listed for entities affiliated with The Sprout Group
are owned as follows: DLJ Capital Corp. owns 8,143 shares of Series B
preferred stock, DLJ ESC II, L.P. owns 233,452 shares of Series B preferred
stock, Sprout Capital VIII, L.P. owns 2,440,792 shares of Series B
preferred stock, Sprout Venture Capital, L.P. owns 125,389 shares of Series
B preferred stock and certain individuals affiliated with the Sprout Group
own 43,194 shares of Series B preferred stock. Stephen M. Diamond is a
general partner of The Sprout Group and as such may be deemed to exercise
voting and investment power over the shares held by these entities. The
address of The Sprout Group is 3000 Sand Hill Road #3-170, Menlo Park, CA
94025.
(4) Omni Holdings, Inc. is an indirect wholly-owned subsidiary of News
Corporation. Lachlan K. Murdoch is an executive director and senior vice
president of News Corporation and as such may be deemed to exercise voting
and investment power over the shares held by Omni Holdings, Inc. The
address of Omni Holdings, Inc. is 1211 Avenue of the Americas, New York, NY
10036.
(5) As of August 30, 2000, 2,137,213 shares held by Mr. McVeigh were unvested
and subject to a right of repurchase in our favor, which right lapses over
time. Mr. McVeigh also holds options for 300,000 shares, none of which will
vest within 60 days of August 30, 2000.
(6) As of August 30, 2000, 1,424,809 shares held by Mr. Berkowitz were unvested
and subject to a right of repurchase in our favor, which right lapses over
time. Mr. Berkowitz also holds options for 250,000 shares, none of which
will vest within 60 days of August 30, 2000.
(7) As of August 30, 2000, 389,691 shares held by Mr. Winkler were unvested and
subject to a right of repurchase in our favor, which right lapses over
time. Mr. Winkler also holds options for 200,000 shares, none of which will
vest within 60 days of August 30, 2000.
(8) As of August 30, 2000, 959,007 shares held by Mr. Dolbec were unvested and
subject to a right of repurchase in our favor, which right lapses over
time.
(9) Mr. Obot holds options for 876,806 shares, none of which will vest within
60 days of August 30, 2000. As of August 30, 2000, Mr. Obot also held
250,000 shares, all of which were unvested and subject to a right of
repurchase in our favor, which right lapses over time.
(10) As of August 30, 2000, 481,270 shares held by Mr. Simms were unvested and
subject to a right of repurchase in our favor, which right lapses over
time. Mr. Simms also holds options for 100,000 shares, none of which will
vest within 60 days of August 30, 2000.
(11) Mr. Street holds options for 584,537 shares, none of which will vest within
60 days of August 30, 2000.
(12) Includes 16,717,485 shares held by Aether OpenSky Investments LLC. Mr. Oros
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest therein. Mr. Oros holds options for 43,840 shares which
vest ratably over a one-year period, of which 36,533 shares will vest
within 60 days of August 30, 2000.
(13) Includes 14,613,430 shares held by 3Com Ventures, Inc. Ms. Roberts
disclaims beneficial ownership of these shares except to the extent of her
pecuniary interest therein. Ms. Roberts holds options for 43,840 shares
which vest ratably over a one-year period, of which 36,533 shares will vest
within 60 days of August 30, 2000.
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<PAGE> 71
(14) Includes 4,166,245 shares held by entities affiliated with The Sprout
Group. Mr. Diamond disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest therein. Mr. Diamond holds options for
43,840 shares which vest ratably over a one-year period, of which 36,533
shares will vest within 60 days of August 30, 2000.
(15) Mr. Wheeler holds options for 43,840 shares which vest ratably during a
one-year period, of which 29,227 shares will vest within 60 days of August
30, 2000. Mr. Wheeler also owns 16,835 shares of Series C preferred stock.
(16) Represents 6,729,731 shares held by Omni Holdings, Inc. Mr. Murdoch
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest therein.
(17) Includes 5,641,990 shares which are unvested as of August 30, 2000 and
subject to a right of repurchase in our favor, which right lapses over
time. Includes 138,826 shares subject to options which are exercisable
within 60 days of August 30, 2000.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will be authorized to issue
200,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of our
capital stock is based on the assumption that all outstanding shares of our
convertible preferred stock will convert into shares of our common stock
immediately prior to the closing of this offering. The following description of
our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our certificate of incorporation and bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of August 30, 2000, there were 55,564,863 shares of common stock
outstanding which were held of record by approximately 47 stockholders, as
adjusted for the conversion of all outstanding shares of convertible preferred
stock into an aggregate of 46,054,619 shares of common stock, which will occur
upon the closing of this offering.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding up, the holders
of 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. The holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable. The shares of common stock to
be issued upon the closing of this offering will be fully paid and
nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of us without further action
by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
WARRANT
On July 27, 2000, we issued a warrant to our landlord to purchase 95,901
shares of our common stock, subject to customary anti-dilution adjustments. The
right to purchase common stock under this warrant is subject to a vesting
limitation which is tied to our taking possession of office space under our
lease. As of the date of this prospectus, none of the purchase rights under the
warrant were vested.
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REGISTRATION RIGHTS
The holders of preferred stock, restricted stock and a warrant convertible
or exercisable, as the case may be, into 46,639,279 shares of common stock,
referred to as registrable securities, are entitled to rights with respect to
registration of such shares under the Securities Act of 1933. Beginning 180 days
after the date of this prospectus, holders of these registrable securities may
require that we register their shares for public resale. Furthermore, in the
event we elect to register any of our shares of common stock for purposes of
effecting any public offering, the holders of the registrable securities are
entitled to include their shares of common stock in the registration, but we may
reduce the number of shares proposed to be registered in view of market
conditions, including the right of the underwriters in any underwritten offering
to limit the number of shares to be included in the offering. These registration
rights are not applicable in connection with this offering. We will pay all
expenses, other than underwriting discounts and commissions, in connection with
any registration. These registration rights will terminate seven years following
the consummation of this offering, or, for each holder of registrable
securities, at the time the holder is entitled to sell all of its shares in any
90 day period under Rule 144 of the Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make the following more difficult:
- the acquisition of us by means of a tender offer;
- the acquisition of us by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging such proposals because negotiation of such proposals could result
in an improvement of their terms.
Upon the closing of our offering, our certificate of incorporation will
provide for the following:
Election and Removal of Directors. Our board of directors will be divided
into three classes. The directors in each class will serve for a three-year
term, one class being elected each year by our stockholders. This system of
electing and removing directors may tend to discourage a third party from making
a tender offer or otherwise attempting to obtain control of us because it
generally makes it more difficult for stockholders to replace a majority of the
directors.
Stockholder Meetings. Only the board of directors, the chairman of the
board and the chief executive officer will be able to call special meetings of
stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws will establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
Elimination of Stockholder Action By Written Consent. Stockholders will not
have the right to act by written consent without a meeting.
Undesignated Preferred Stock. Our board of directors will be able to issue
preferred stock with voting or other rights or preferences that could impede the
success of any attempt to change control of us. These and other provisions may
have the effect of deterring hostile takeovers or delaying changes in control or
management of us.
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<PAGE> 74
Amendment of Charter Provisions. The amendment of any of the above
provisions will require approval by holders of at least 66 2/3% of the
outstanding common stock.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services.
NASDAQ NATIONAL MARKET LISTING
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "OMNY".
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<PAGE> 75
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
there can be no assurance that a significant public market for our common stock
will develop or be sustained after this offering. Sales of substantial amounts
of our common stock, including shares issued upon exercise of outstanding
warrants or options, in the public market following this offering could
adversely affect the market price of our common stock and our ability to raise
equity capital in the future on terms favorable to us. As described below, no
shares currently outstanding will be available for sale immediately after this
offering because of contractual restrictions on resale and resale restrictions
under the federal securities laws.
After this offering, 65,153,622 shares of common stock will be outstanding
based upon shares outstanding as of August 30, 2000, assuming that the
underwriters do not exercise their over-allotment option and that no outstanding
options or warrants are exercised prior to completion of this offering. Of these
shares, the 9,100,000 shares sold in this offering will be freely tradable
without restriction under the Securities Act except for any shares purchased by
our affiliates as that term is defined in Rule 144 under the Securities Act.
The remaining 56,053,622 shares of common stock held by existing
stockholders are restricted securities as that term is defined in Rule 144 under
the Securities Act. Restricted securities may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144 or 701 under the Securities Act, which rules are summarized below. As a
result of the lock-up agreements described below and the provisions of Rule 144
and 144(k), the restricted shares will become eligible for sale in the public
market as follows:
- no shares will become eligible for sale on the date of this prospectus;
- no shares will become eligible for sale 90 days after the date of this
prospectus;
- 42,585,947 shares will become eligible for sale 180 days after the date
of this prospectus; and
- the remaining 13,467,675 shares will become eligible for sale from time
to time more than 180 days after the date of this prospectus.
Resale of 51,685,947 of the shares that will become eligible for sale in
the public market starting 180 days after the date of this prospectus will be
limited by volume and other resale restrictions under Rule 144.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year including the holding period of any prior owner
except an affiliate would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding which will
equal approximately 651,536 shares immediately after this offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
us at any time during the three months 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 except an affiliate, is entitled
to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
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RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchased shares from us under
a stock option plan or other written agreement can resell those shares 90 days
after the date of this prospectus in reliance on Rule 144, but without complying
with some of the restrictions, including the holding period, contained in Rule
144. As of August 1, 2000, no shares had been issued as a result of exercise of
stock options.
LOCK-UP AGREEMENTS
Our officers, directors and substantially all our stockholders have agreed
that they will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any of
the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of preferred stock,
restricted stock and a warrant convertible or exercisable, as the case may be,
into 46,639,279 shares of our common stock will be entitled to rights to
registration of their shares under the Securities Act. Registration of those
shares under the Securities Act would result in those shares becoming freely
tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration.
STOCK OPTIONS
Immediately after this offering we intend to file a registration statement
on Form S-8 under the Securities Act to register shares of common stock subject
to outstanding options or reserved for issuance under our 1999 stock plan, 2000
stock plan and 2000 employee stock purchase plan. Each year as the number of
shares reserved for issuance under our 2000 stock plan and 2000 employee stock
purchase plan increases, we will file an amendment to the registration statement
registering the additional shares. Shares registered under that registration
statement on Form S-8 will, upon the optionee's exercise and depending on
vesting provisions and Rule 144 volume limitations applicable to our affiliates,
be available for sale in the open market immediately after the 180 day lock-up
period expires.
74
<PAGE> 77
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Chase Securities
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Smith Barney,
Inc. and DLJdirect Inc., are acting as representatives, the following respective
number of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Chase Securities Inc. ......................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Salomon Smith Barney, Inc...................................
DLJdirect Inc...............................................
---------
Total..................................................... 9,100,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated. We have granted to the underwriters
a 30-day option to purchase on a pro rata basis up to 1,365,000 additional
shares at the initial public offering price less the underwriting discounts and
commissions. The option may be exercised only to cover any over-allotments of
common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to broker/dealers may be
changed by the representatives.
The following table summarizes the compensation and expenses we will pay.
The underwriting discounts and commissions will be determined based on our
negotiations with the underwriters at the time the initial public offering price
of our common stock is determined. We do not expect the underwriting discounts
and commissions per share of our common stock to exceed 7% of the initial public
offering price per share of our common stock.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us.................. $ $ $ $
Expenses payable by us.................... $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
Credit Suisse First Boston Corporation acted as the placement agent in
connection with a private placement of our Series C preferred stock in April
2000. Credit Suisse First Boston Corporation received a customary fee for its
services as placement agent. Several entities and individuals affiliated with
Donaldson, Lufkin & Jenrette Securities Corporation invested in our Series B
preferred stock in January 2000 and our Series C preferred stock in April 2000,
purchasing an aggregate of 2,850,970 shares of Series B preferred stock and
24,592 shares of Series C preferred stock on the same terms and conditions as
the other
75
<PAGE> 78
investors in the respective private placements, including price per share. Of
such shares of preferred stock purchased, individuals affiliated with Donaldson,
Lufkin & Jenrette Securities Corporation purchased an aggregate of 43,194 shares
of Series B preferred stock and 24,592 shares of Series C preferred stock. In
addition, two individuals affiliated with Salomon Smith Barney, Inc. invested in
our Series C preferred stock in April 2000, purchasing an aggregate of 15,360
shares of Series C preferred stock on the same terms and conditions as the other
investors in the private placements, including price per share. The shares of
Series B preferred stock and Series C preferred stock that were purchased by
individuals affiliated with Donaldson, Lufkin & Jenrette Securities Corporation
or Salomon Smith Barney, Inc. have been deemed by the National Association of
Securities Dealers, Inc. to be underwriting compensation and will be restricted
from sale, transfer, assignment or hypothecation for a period of one year from
the date of this offering, except as otherwise permitted by the National
Association of Securities Dealers, Inc. Conduct Rule 2710(c)(7)(A).
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933,
as amended, relating to, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, or publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 180 days after the date of this prospectus,
except for issuances pursuant to the exercise of employee stock options
outstanding on the date hereof and the issuance of options pursuant to our stock
option plans.
Our officers, directors and substantially all our stockholders have agreed
that they will not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, any shares of our common stock or securities
convertible into or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same effect, or enter into
any swap, hedge or other arrangement that transfers, in whole or in part, any of
the economic consequences of ownership of our common stock, whether any such
aforementioned transaction is to be settled by delivery of our common stock or
such other securities, in cash or otherwise, or publicly disclose the intention
to make any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
At our request, the underwriters have reserved for sale, at the initial
offering price, up to 900,000 shares of common stock for our employees,
customers, business partners and other parties, including friends and family of
our key employees. The number of shares available for sale to the general public
will be reduced to the extent that these persons purchase the reserved shares.
Any reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "OMNY".
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include the following:
- the information included in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
76
<PAGE> 79
- our prospects for future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions,
penalty bids and passive market making in accordance with Regulation M under the
Securities Exchange Act of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- 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. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option -- a naked short position -- that
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be a downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
- In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations,
make bids for or purchases of the common stock until the time, if any, at
which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of the
common stock or preventing or retarding a decline in the market price of the
common stock. As a result, the price of the common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
The representatives of the underwriters plan to make available on their Web
sites a prospectus in electronic format, and one or more of the other
underwriters participating in this offering may make available on their Web
sites a prospectus in electronic format. The representatives may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders. Internet distributions will be allocated by the underwriters
that will make Internet distributions on the same basis as other allocations.
DLJdirect Inc. is an online investment bank that will receive an allocation of
shares of common stock in its capacity as an underwriter.
77
<PAGE> 80
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario Securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgement obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
78
<PAGE> 81
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Shearman & Sterling, Menlo Park, California.
As of the date of this prospectus, investment partnerships composed of members
of and persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as well as some individual attorneys of that firm, beneficially own
an aggregate of 342,064 shares of our common stock.
EXPERTS
Our consolidated financial statements as of December 31, 1999 and for the
period from May 7, 1999 (inception) to December 31, 1999, included in this
prospectus are included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on their authority as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules to the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and exhibits and schedules filed as part
of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other documents are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or document
that has been filed. The prospectus identifies all material provisions of the
exhibits that we have filed. Each statement in this prospectus relating to a
contract or document filed as an exhibit is qualified in all respects by the
filed exhibit. Any document we file may be read and copied at the Commission's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the Commission at 1-800-SEC-0330 for further information
about the public reference rooms. Our filings with the Commission are also
available to the public from the Commission's web site at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the web site of the Commission referred to above.
79
<PAGE> 82
OMNISKY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Convertible Preferred Stock and
Stockholders' (Deficit) Equity............................ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of OmniSky Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of convertible preferred stock and
stockholders' (deficit) equity and of cash flows present fairly, in all material
respects, the financial position of OmniSky Corporation (a company in the
development stage) at December 31, 1999 and the results of their operations and
their cash flows for the period from May 7, 1999 (inception) to December 31,
1999 in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
June 12, 2000, except as to the
second paragraph of Note 1 which is as of August 1, 2000
F-2
<PAGE> 84
OMNISKY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, JUNE 30, JUNE 30, 2000
1999 2000 (SEE NOTE 10)
------------ ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,767 $ 63,235
Short-term investments and marketable securities.......... -- 16,975
Accounts receivable, net.................................. 471 1,427
Inventories............................................... 2,906 2,948
Prepaid expenses and other current assets................. 5,364 8,790
------- --------
Total current assets................................... 15,508 93,375
------- --------
Restricted cash............................................. -- 800
Investments................................................. -- 3,509
Property and equipment, net................................. 468 3,691
Intangibles, net............................................ 5,469 4,717
------- --------
Total assets........................................... $21,445 $106,092
======= ========
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,194 $ 12,759
Accrued and other current liabilities..................... 4,259 2,895
Due to and advances from stockholder...................... 5,097 5,390
Deferred revenue.......................................... 457 1,839
------- --------
Total current liabilities.............................. 12,007 22,883
------- --------
Convertible preferred stock:
Series A; $0.001 par value, 25,000,000 authorized shares;
issued and outstanding: 20,219,335 in 1999, 20,219,335
in 2000 (unaudited) and zero pro forma (unaudited)
(Liquidation value: $15,165)........................... 15,707 15,707 $ --
Series B; $0.001 par value, 5,000,000 authorized shares;
issued and outstanding: zero in 1999, 4,319,427 in 2000
(unaudited), and zero pro forma (unaudited)
(Liquidation value: $19,999 (unaudited)................ -- 19,973 --
Series C; $0.001 par value, 14,500,000 shares authorized;
issued and outstanding actual, zero in 1999, 13,953,012
in 2000 (unaudited) and zero pro forma (unaudited)
(Liquidation value: $90,834 (unaudited)................ -- 84,521 --
Receivable from stockholders.............................. -- (1,335)
------- -------- --------
Total convertible preferred stock...................... 15,707 118,866 --
------- -------- --------
Commitments and contingencies (Notes 4, 5 and 11)
Stockholders' (deficit) equity:
Common stock: $0.001 par value, 73,067,149 shares
authorized; issued and outstanding: 6,137,641 in 1999,
8,000,853 in 2000 (unaudited), and 54,055,472 pro forma
(unaudited)............................................ 6 8 54
Additional paid-in capital................................ 6,283 38,844 158,999
Receivable from stockholders.............................. (315) (4,500) (5,835)
Deferred stock compensation............................... (5,314) (23,216) (23,216)
Accumulated other comprehensive (loss) income............. -- (11) (11)
Accumulated deficit....................................... (6,929) (46,782) (46,782)
------- -------- --------
Total stockholders' (deficit) equity................... (6,269) (35,657) $ 83,209
------- -------- ========
Total liabilities, convertible preferred stock and
stockholders' (deficit) equity........................ $21,445 $106,092
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 85
OMNISKY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1999
(INCEPTION) TO SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1999 2000
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Services.................................................. $ -- $ 686
Equipment................................................. -- 183
Beta period............................................... -- 1,231
----------- -----------
-- 2,100
----------- -----------
Operating costs and expenses:
Cost of revenue:
Services............................................... -- 1,747
Equipment.............................................. -- 238
Beta period............................................ -- 4,331
----------- -----------
-- 6,316
Engineering, development and operations................... 2,352 4,125
Sales and marketing....................................... 1,978 15,146
General and administrative................................ 1,342 5,931
Amortization of deferred stock compensation(*)............ 660 10,340
Depreciation and amortization............................. 619 993
----------- -----------
Total operating expenses............................... 6,951 42,851
----------- -----------
Loss from operations........................................ (6,951) (40,751)
Interest income, net........................................ 22 898
----------- -----------
Net loss.................................................... $ (6,929) $ (39,853)
=========== ===========
Net loss per share -- basic and diluted..................... $ -- $ (30.48)
=========== ===========
Shares used in computing basic and diluted net loss per
share..................................................... -- 1,307,330
=========== ===========
Pro forma net loss per share -- basic and diluted
(unaudited)............................................... $ (0.43) $ (1.03)
=========== ===========
Shares used in computing pro forma net loss per
share -- basic and diluted (unaudited).................... 16,182,742 38,765,224
=========== ===========
(*) Amortization of deferred stock compensation:
Engineering, development and operations................ $ 236 $ 1,335
Sales and marketing.................................... 357 2,480
General and administrative............................. 67 6,525
----------- -----------
$ 660 $ 10,340
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 86
OMNISKY CORPORATION
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
(DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- ------------------ PAID-IN FROM DEFERRED STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
---------- -------- --------- ------ ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 7, 1999
(inception)....................... -- $ -- -- $-- $ -- $ -- $ --
---------- -------- --------- --- ------- ------- --------
Issuance of common stock at $0.0513
per share in July 1999............ 6,137,640 6 309 (315)
Issuance of Series A preferred stock
at $0.75 per share in August 1999,
less issuance costs of $21........ 17,219,335 12,893
Issuance of Series A warrants....... 314
Issuance of Series A preferred stock
at $0.8333 per share in November
1999 upon exercise of warrant..... 3,000,000 2,500
Deferred stock compensation......... 5,974 (5,974)
Amortization of stock-based
compensation...................... 660
Net loss............................
---------- -------- --------- --- ------- ------- --------
Balance at December 31, 1999........ 20,219,335 15,707 6,137,640 6 6,283 (315) (5,314)
---------- -------- --------- --- ------- ------- --------
Issuance of Series B preferred stock
at $4.63 per share in January
2000, less issuance costs of
$26............................... 4,319,427 19,973
Issuance of common stock options to
consultants at $0.5132 per share
in January 2000................... 136
Issuance of Series C preferred stock
at $6.51 per share in April
through June 2000, less issuance
costs of $6,312 (unaudited) and
less receivable from stockholders
of $1,335......................... 13,953,012 83,186
Deferred stock compensation......... 28,242 (28,242)
Issuance of common stock............ 1,863,213 2 4,183 (4,185)
Amortization of stock-based
compensation...................... 10,340
Comprehensive income:
Net loss..........................
Unrealized gain (loss) on
marketable securities...........
Foreign currency translation
adjustment......................
Total comprehensive loss........
---------- -------- --------- --- ------- ------- --------
Balance at June 30, 2000
(unaudited)....................... 38,491,774 $118,866 8,000,853 $ 8 $38,844 $(4,500) $(23,216)
========== ======== ========= === ======= ======= ========
<CAPTION>
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
INCOME (LOSS) DEFICIT (DEFICIT) EQUITY
------------- ----------- -----------------
<S> <C> <C> <C>
Balance at May 7, 1999
(inception)....................... $ -- $ -- $ --
----- -------- --------
Issuance of common stock at $0.0513
per share in July 1999............
Issuance of Series A preferred stock
at $0.75 per share in August 1999,
less issuance costs of $21........
Issuance of Series A warrants.......
Issuance of Series A preferred stock
at $0.8333 per share in November
1999 upon exercise of warrant.....
Deferred stock compensation.........
Amortization of stock-based
compensation...................... 660
Net loss............................ (6,929) (6,929)
----- -------- --------
Balance at December 31, 1999........ -- (6,929) (6,269)
----- -------- --------
Issuance of Series B preferred stock
at $4.63 per share in January
2000, less issuance costs of
$26...............................
Issuance of common stock options to
consultants at $0.5132 per share
in January 2000................... 136
Issuance of Series C preferred stock
at $6.51 per share in April
through June 2000, less issuance
costs of $6,312 (unaudited) and
less receivable from stockholders
of $1,335.........................
Deferred stock compensation.........
Issuance of common stock............
Amortization of stock-based
compensation...................... 10,340
Comprehensive income:
Net loss.......................... (39,853) (39,853)
Unrealized gain (loss) on
marketable securities........... (10) (10)
Foreign currency translation
adjustment...................... (1) (1)
Total comprehensive loss........ [(39,864)]
----- -------- --------
Balance at June 30, 2000
(unaudited)....................... $ (11) $(46,782) $(35,657)
===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 87
OMNISKY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1999
(INCEPTION) TO SIX MONTHS
DECEMBER 31, ENDED
1999 JUNE 30, 2000
-------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(6,929) $(39,853)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 619 993
Amortization of stock-based compensation................ 660 10,340
Provision for obsolete inventory and doubtful accounts
receivable............................................. -- 236
Issuance of common stock options to consultants in
exchange for services.................................. -- 136
Change in operating assets and liabilities:
Accounts receivable..................................... (471) (1,056)
Inventories............................................. (2,906) (178)
Prepaid expenses and other current assets............... (5,364) (3,426)
Accounts payable........................................ 2,194 10,565
Accrued and other current liabilities................... 4,259 (1,364)
Due to and advances from stockholder.................... 5,097 293
Deferred revenue........................................ 457 1,382
------- --------
Net cash used in operating activities................. (2,384) (21,932)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash deposit................................... -- (800)
Purchase of property and equipment........................ (492) (3,464)
Purchase of investments................................... -- (78,082)
Sale/maturity of investments.............................. -- 57,588
Net cash used in investing activities................. (492) (24,758)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of preferred stock, net of
issuance costs.......................................... 7,143 103,159
Proceeds from exercise of warrants for preferred stock.... 2,500 --
------- --------
Net cash provided by financing activities............. 9,643 103,159
------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... -- (1)
------- --------
Net increase in cash and cash equivalents................... 6,767 56,468
Cash and cash equivalents, beginning of period.............. -- 6,767
------- --------
Cash and cash equivalents, end of period.................... $ 6,767 $ 63,235
======= ========
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Issuance of preferred stock in connection with purchased
technology licenses....................................... $ 5,750 $ --
======= ========
Issuance of warrants in connection with purchased technology
license................................................... $ 314 $ --
======= ========
Issuance of preferred stock for notes....................... $ -- $ 1,335
======= ========
Issuance of common stock for notes.......................... $ 315 $ 4,185
======= ========
Deferred stock compensation related to common stock option
grants to employees....................................... $ 5,974 $ 28,242
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 88
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Formation of company and description of business
OmniSky Corporation (the "Company"), formerly AirWeb Corporation, was
incorporated on May 7, 1999 and initially did business under the name "OpenSky".
The Company provides a wireless service under the OmniSky brand that enables
subscribers to access and navigate the Internet, send and receive e-mail
messages and securely conduct e-commerce transactions over handheld mobile
devices. At December 31, 1999, the Company was in the development stage as the
Company was devoting substantially all of its efforts to developing its products
and services and raising capital. As of June 30, 2000 the Company is no longer
deemed a development stage company. The Company initiated its beta test in
December 1999, and launched its commercial service in May 2000. The Company has
a single operating segment and has no organizational structure dictated by
product or service lines, geography or customer type.
Stock splits
On April 4, 2000 the Company effected a 2 for 1 common stock split, and on
August 1, 2000 the Company effected a 0.7307 for 1 reverse stock split. The two
common stock splits resulted in the net issuance of 1.4613 shares for each one
share outstanding before April 4, 2000. The consolidated financial statements
and all references to common stock contained in these consolidated financial
statements and notes give retroactive effect to the stock splits.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements of OmniSky Corporation include the
accounts of a wholly-owned subsidiary, OmniSky Limited, which is domiciled in
the United Kingdom. All significant intercompany balances and transactions have
been eliminated.
Use of estimates
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those
estimates.
Interim consolidated financial statements (Unaudited)
The interim consolidated financial statements at June 30, 2000 and for the
six months ended June 30, 2000 are unaudited but, in the opinion of management,
have been prepared on the same basis as the annual consolidated financial
statements and include all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of its financial
position at such date and its operating results and cash flows for this period.
The financial data and other information disclosed in these notes to the
consolidated financial statements related to this period are unaudited. Results
for the interim period are not necessarily indicative of the results to be
expected for the entire year, or any future period. While the Company was
incorporated in May 1999, it had no operations for the period through June 30,
1999. Accordingly, no comparative interim financial statements are presented.
F-7
<PAGE> 89
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash and cash equivalents
The Company considers all highly liquid investments with original or
remaining maturities of three months or less at the date of purchase to be cash
equivalents. The Company's cash equivalents consist of money market funds,
short-term deposits and highly-liquid short-term commercial paper.
Certain risks and concentrations
The Company's financial instruments that are exposed to concentration of
credit risk consist primarily of cash, cash equivalents, short-term investments
and marketable securities, investments, restricted cash deposits and accounts
receivable. The Company's cash, cash equivalents and restricted cash are
deposited with major financial institutions in the United States and the United
Kingdom. At times, such deposits may be in excess of the amount of insurance
provided on such deposits. The Company's short-term investments and marketable
securities and investments are held in accounts with major investment banking
firms in the United States. To date, the Company has not experienced any losses
on its deposits of cash, cash equivalents, short-term investments and marketable
securities, investments and restricted cash.
Almost all of the Company's sales are made by credit card. No one customer
accounted for more than 10% of total trade accounts receivable in 1999 or 2000.
The Company is highly dependent on third-party providers for wireless
communication services and wireless modem devices that are used in providing
services to customers. In addition, the Company relies on a third party for
subscriber billing and customer support.
The Company operates in a highly competitive environment subject to rapid
technological change and emergence of new technology. Although management
believes its services are transferable to emerging technologies, rapid changes
in technology could have an adverse financial impact on the Company.
The Company's inventory is currently provided by one supplier.
Fair value of financial instruments
The fair value of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate their carrying value due to the
short maturity or market rate structure of those instruments.
Investments
The Company classifies all short-term investments and marketable securities
and investments as available-for-sale and reports them at fair value, with
unrealized gains and losses, net of tax, recorded in stockholders' equity.
Realized gains and losses and permanent declines in value, if any, on
available-for-sale securities are reported in other income or expensed as
incurred. At June 30, 2000, the Company's investments are comprised of
commercial paper, government securities and corporate debt securities.
Inventories
Inventories, principally wireless modem devices and accessories, are stated
at the lower of cost (first-in, first-out basis) or market. The inventory of the
Company is subject to rapid technological changes that could have an adverse
impact on its realization in future periods.
Property and equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
generally two to four years. Expenditures for maintenance and repairs are
charged to expense as incurred.
F-8
<PAGE> 90
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has adopted Statement of Position 98-1, which requires software
development costs associated with internal use software to be charged to
operations until certain capitalization criteria are met. Once capitalization
criteria are met, any such project costs are amortized over their estimated
useful lives. Amortization on the projects begins when the software is ready for
its intended use. During the period ended December 31, 1999 no such project
costs were capitalized. For the period ended June 30, 2000, $739,000 was
capitalized.
Intangibles
Intangible assets consist of acquired technology licenses. These assets are
being amortized using the straight-line method over their estimated useful life
of four years. The Company periodically assesses the value of recorded
intangible assets for possible impairment based primarily on the ability to
recover the balances from expected future cash flows on an undiscounted basis.
If the sum of the expected future cash flows on an undiscounted basis is less
than the carrying amount of the intangible asset, an impairment loss would be
recognized for the amount by which the carrying value of the intangible asset
exceeds its estimated fair value.
Accounting for long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. Impairments, if any, are
recognized in operating results in the period in which an impairment in value is
determined.
Revenue and deferred revenue
The Company derives revenues from the provision of wireless services for
handheld mobile devices and from the sale of related equipment and accessories.
During the Company's beta test period (December 1999 through April 2000),
subscribers were charged a flat rate that combined equipment and service over
the beta test period. Revenue and the related cost of revenue has been
recognized ratably over the beta test period from the date at which customers
are no longer entitled to a refund (30 days after the initial sale). We
recognized no revenue from the beta test in the period ended December 31, 1999.
Of the $1.2 million of beta revenue recognized in the six months ended June 30,
2000, $0.7 million was for services and $0.5 million was for equipment.
Wireless service revenue consists of a flat monthly rate for usage and is
recognized ratably over the service period beginning with the date at which
customers are no longer entitled to a refund (30 days after the initial sale).
Amounts billed or received in advance of revenue are recorded as deferred
revenue. Service revenue also includes advertising, sponsorship and slotting
fees, which are recorded ratably over the service period. Such amounts were
insignificant through June 30, 2000. Any discounts provided to customers are
recognized as a reduction of revenue at the time the related revenue is
recorded.
Equipment revenue is recognized upon shipment or the date at which
customers are no longer entitled to a refund (30 days after the initial sale),
whichever is later. Where customers pay in advance for equipment for which they
may be entitled to an incentive rebate in the future, the Company defers the
revenue and records a liability in accrued and other current liabilities. If the
customer terminates prior to being entitled to the rebate, the Company records
the revenue and reverses the liability. Otherwise, such amounts are remitted to
the customers.
F-9
<PAGE> 91
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cost of revenue
Cost of wireless service revenue consists principally of activation fees,
airtime, network costs and fees paid to content providers, and is recognized as
the costs are incurred.
Cost of equipment revenue consists of the cost of equipment sold, shipping,
and direct provisioning costs.
Cost of beta period revenue consists of the combined cost of wireless
service and equipment incurred during the beta period (December 1999 through
April 2000). Of the $4.3 million of cost of beta period revenue recognized in
the six months ended June 30, 2000, $1.9 million was for services and $2.4
million was for equipment.
Where the Company defers equipment revenue pending completion of the
customer refund period, both during and after the beta period, related costs of
equipment revenue are also deferred.
Engineering, development and operations
Engineering, development and operations costs are expensed as incurred.
Advertising and cooperative marketing costs
The Company expenses the production costs of advertising the first time the
advertising takes place. At June 30, 2000, prepaid advertising consists of
deposits and production costs for future advertising campaigns. Sales and
marketing expense is reflected net of amounts reimbursed under a cooperative
marketing arrangement with AT&T Wireless. Cooperative advertising funds received
in advance of the Company incurring the related marketing costs are recorded as
advance marketing costs in accrued and other current liabilities. Advertising
expense was $1,866,000 and $19,593,000 in the periods ended December 31, 1999
and June 30, 2000, respectively, before reimbursements recognized under the
cooperative marketing agreement of $933,000 and $9,067,000, respectively.
Cooperative advertising funds received totaled $5.0 million in each of the
periods ended December 31, 1999 and June 30, 2000. As of June 30, 2000, all
marketing funds received under this arrangement have been expended.
Stock-based compensation
The Company accounts for stock-based compensation issued to employees using
the intrinsic value method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and, accordingly, presents
disclosure of pro forma information required under Financial Accounting
Standards Board Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Stock and other equity instruments issued to non-employees are
accounted for in accordance with SFAS 123 and Emerging Issues Task Force Issue
No. 96-18 and valued using the Black-Scholes model.
Income taxes
The Company accounts for its income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on temporary differences between the financial reporting and tax basis of
assets and liabilities, measured at tax rates that will be 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 realized.
Foreign currency translations
The functional currency of the Company's foreign subsidiary is the local
currency. In consolidation, assets and liabilities are translated at year-end
currency exchange rates and revenue and expense items are
F-10
<PAGE> 92
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
translated at average currency exchange rates prevailing during the period.
Unrealized gains and losses from foreign currency translation are accumulated as
a component of other comprehensive income (loss) and presented as a separate
component of stockholders' equity (deficit). Realized gains and losses resulting
from foreign currency transactions are included in the consolidated statements
of operations.
Comprehensive income (loss)
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
comprehensive income (loss) and its components in financial statements.
Comprehensive income (loss), as defined, includes all changes in equity during a
period from non-owner sources. There was no difference between the Company's net
loss and its total comprehensive loss through December 31, 1999. The Company's
total comprehensive loss through June 30, 2000 is reported on the accompanying
consolidated statement of convertible preferred stock and stockholders' deficit.
Net loss per common share
Basic net loss per common share is computed by dividing the net loss for
the period by the weighted average number of common shares outstanding for the
period net of common shares subject to repurchase. Diluted net loss per common
share is computed by dividing the net loss for the period by the weighted
average number of common and common equivalent shares outstanding during the
period net of common shares subject to repurchase. Common equivalent shares,
composed of common shares issuable upon exercise of stock options and upon
conversion of preferred stock are included in the diluted net loss per share
computation to the extent such shares are dilutive.
A reconciliation of the numerator and denominator used in the calculation
of basic and diluted net loss per common share is as follows:
<TABLE>
<CAPTION>
PERIOD FROM SIX
MAY 7, 1999 MONTHS
(INCEPTION) ENDED
TO DECEMBER 31, JUNE 30,
1999 2000
--------------- ------------
(UNAUDITED)
<S> <C> <C>
Numerator:
Net loss............................................. $(6,929,000) $(39,853,000)
=========== ============
Denominator:
Weighted average common shares -- basic.............. 6,137,641 7,021,673
Weighted average shares subject to repurchase........ (6,137,641) (5,714,343)
----------- ------------
Denominator for basic and diluted calculation........ -- 1,307,330
=========== ============
Net loss -- basic and diluted.......................... $ -- $ (30.48)
=========== ============
</TABLE>
Diluted net loss does not include the effect of the following antidilutive
common equivalent shares:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Common stock options............................... 2,380,528 6,238,105
Convertible preferred stock........................ 29,547,385 46,054,619
---------- ----------
31,927,913 52,292,724
========== ==========
</TABLE>
F-11
<PAGE> 93
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recently issued accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 established new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS No. 133 requires that all derivatives
be recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income (loss), depending on the type of
hedging relationship that exists. In July 1999, the FASB issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective
of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company
does not currently hold derivative instruments or engage in hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the Company has complied with the guidance of SAB 101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January 12,
2000. The adoption of certain provisions of FIN 44 prior to March 31, 2000 did
not have a material impact on the financial statements. Management does not
expect that the adoption of the remaining provisions will have a material effect
on the financial position or results of operations of the Company.
In various areas, including revenue recognition and other Internet-related
issues, accounting standards and practices continue to evolve. The SEC is
preparing to issue interpretative guidance relating to SAB 101, and the FASB's
Emerging Issues Task Force continues to address revenue and other Internet-
related accounting issues. The management of the Company believes it is in
compliance with all of the rules and related guidance as they currently exist.
However, any changes to generally accepted accounting principles in these areas
could impact the Company's accounting for its operations.
NOTE 3 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable.............................. $471 $1,527
Less: Allowance for doubtful accounts............ (--) (100)
---- ------
$471 $1,427
==== ======
</TABLE>
F-12
<PAGE> 94
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
Prepaid expenses and other current assets:
Prepaid advertising.............................. $ -- $4,011
Advances on inventory purchases.................. 4,832 1,061
Deposits......................................... 2 695
Deferred cost of revenue......................... 457 1,839
Other............................................ 73 1,184
------ ------
$5,364 $8,790
====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment, net:
Computer equipment................................ $317 $1,701
Computer software................................. 61 1,871
Furniture, fixtures and equipment................. 114 295
Leasehold improvements............................ -- 90
---- ------
492 3,957
Less: accumulated depreciation and amortization... (24) (266)
---- ------
$468 $3,691
==== ======
</TABLE>
Depreciation and amortization expense related to property and equipment was
$24,000 and $242,000 for the periods from May 7, 1999 (inception) to December
31, 1999 and for the six months ended June 30, 2000, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Intangibles, net:
Purchased technology licenses..................... $6,064 $ 6,064
Less: accumulated amortization.................... (595) (1,347)
------ -------
$5,469 $ 4,717
====== =======
</TABLE>
Amortization expense related to intangibles was $595,000 and $752,000 for
the periods from May 7, 1999 (inception) to December 31, 1999 and for the six
months ended June 30, 2000, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Accrued and other current liabilities:
Advance under cooperative marketing arrangement... $4,067 $ --
Incentive plan liability.......................... -- 1,926
Accrued employee compensation..................... 158 548
Other............................................. 34 421
------ ------
$4,259 $2,895
====== ======
</TABLE>
F-13
<PAGE> 95
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS:
At December 31, 1999 and June 30, 2000, certain executive officers had
recourse notes payable to the Company of $315,000 and $5,835,000 for the
purchase of the Company's common and preferred stock. The notes accrue interest
at a rate of 6% to 6.5% per year and are due July 2003 through May 2004.
In August 1999, the Company issued 10,000,000 shares of Series A preferred
stock to 3Com in exchange for $7.0 million and a five-year, non-exclusive,
non-assignable, worldwide license to certain proprietary software of 3Com's Palm
Computing business, which has been valued at $500,000 based on the cash received
in connection with the Series A issuance. In December 1999, we purchased
inventory totalling $230,000 from 3Com; at December 31, 1999, this amount due to
3Com was included in accounts payable and was subsequently settled in cash in
January 2000. A representative of 3Com serves on the Company's board of
directors. At June 30, 2000, 3Com's ownership in the Company was approximately
27.0% of the Company's outstanding capital stock.
In connection with the August 1999 preferred stock financing, the Company
issued to Aether Systems Inc. ("Aether") 7,000,000 shares of Series A preferred
stock and warrants to purchase an additional 3,000,000 shares of Series A
preferred stock for $2.5 million. In exchange, the Company received from Aether
a perpetual, non-exclusive, non-assignable, worldwide license to certain
proprietary Aether software, which has been valued at $5.25 million based on the
cash received in conjunction with the Series A issuance and is being amortized
over its estimated useful life of four years. Aether exercised its warrants in
November 1999 and acquired the additional shares for cash. In connection with
the January 2000 preferred stock financing, Aether acquired an additional
1,439,809 shares of Series B preferred stock for $6.7 million. At June 30, 2000,
Aether's ownership in the Company was approximately 30.9% of the Company's
outstanding capital stock.
Aether's chief executive officer serves on the Company's board of
directors. Aether has provided engineering and network services to the Company
and the Company has recognized approximately $2.1 million and $1.5 million in
engineering and network costs to Aether in the periods ended December 31, 1999
and June 30, 2000, respectively. The Company also pays Aether $1.50 per month
per subscriber for the use of Aether's network operating center which totaled
zero and $0.1 million for the periods ended December 31, 1999 and June 30, 2000,
respectively.
Aether also agreed in November 1999 to purchase 25,000 modems from the
Company for $5.75 million. Under the agreement, Aether advanced the Company $4.6
million, of which the Company received approximately $3.5 million after applying
amounts due to Aether for services. In May 2000, the agreement with Aether was
revised to lower by 8,000 units the purchase commitment; accordingly, in July
2000, the Company repaid Aether $1.84 million for the modems it did not
purchase. As the modems sold to Aether are at the Company's cost per unit, and
given Aether's investment and business relationships with the Company, no
revenue is recognized upon sale of modems to Aether. In the periods ended
December 31, 1999 and June 30, 2000, respectively, 500 and 1,450 modems were
sold to Aether.
The net advances from and amounts due to Aether are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
Advances from Aether................................ $4,485 $2,300
Amounts due to Aether............................... 612 3,090
------ ------
$5,097 $5,390
====== ======
</TABLE>
The Company formed an international joint venture with News Corporation in
April 2000 to pursue business opportunities outside of the United States. Under
the joint venture agreement, each party will
F-14
<PAGE> 96
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contribute $5 million to initially fund the new joint venture. The joint venture
is 50% owned by News Corporation and 50% by the Company. The Company will record
its interest in the joint venture under the equity method of accounting. A
representative of News Corporation serves on the Company's board of directors.
In accordance with the joint venture agreement and a related equity
investment in the Company by News Corporation (9,210,337 shares of Series C
preferred stock at $6.51 per share totaling approximately $60 million), the
Company committed to spend $30 million over the next five years for advertising
with News Corporation's affiliates in the United States.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
During March 2000, the Company entered into an office lease that expires in
2007 for space it currently occupies. In conjunction with this lease, the
Company provided an $800,000 letter of credit to the landlord, which was
collateralized by an $800,000 restricted cash deposit at June 30, 2000 that is
reflected in long-term assets.
Future minimum lease payments under noncancelable operating leases at
December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
------------------------ ---------
<S> <C>
2000..................................................... $1,079
2001..................................................... 1,234
2002..................................................... 1,117
2003..................................................... 1,002
2004..................................................... 1,052
Thereafter............................................... 2,558
------
Total minimum lease payments.......................... $8,042
======
</TABLE>
Rental expense under noncancelable operating leases was $179,000 and
$576,000 for the periods ended December 31, 1999 and June 30, 2000,
respectively.
The Company entered into a three-year agreement in 1999 with a company that
will provide telesales, customer care, billing and reporting, and technical
support services for Company customers. Minimum annual payments under this
service agreement are $1.7 million for 2000, and $1.8 million for each of 2001
and 2002, excluding subscriber-based charges. Under this and other service
agreements, the Company expensed $529,000 during the period from May 7, 1999
(inception) to December 31, 1999 and $3.1 million in the six months ended June
30, 2000.
During 1999, the Company entered into a supply agreement with a company to
purchase 100,000 wireless modems through April 30, 2000. The purchase commitment
totals approximately $23.0 million. Through June 30, 2000, the Company has
purchased 29,600 modems for approximately $6.8 million. The remaining purchase
commitment under that agreement, as of June 30, 2000, was approximately $16.2
million. Amounts prepaid under this supply agreement totaled $4.8 million at
December 31, 1999 and $1.1 million at June 30, 2000 and are included in prepaid
expenses and other current assets in the Company's balance sheet. Although the
Company's agreement with Novatel has expired, Novatel continues to ship and
provision modems in accordance with the agreement. The Company and its supplier
have discussed and are continuing to discuss modifications to the agreement
regarding delivery timetables which have not been met.
During 1999, the Company entered into a software license agreement related
to certain wireless software computing systems. Under this agreement, the
Company is committed to maintenance and
F-15
<PAGE> 97
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
support fees through June 1, 2004 totaling $450,000. Under this agreement the
Company expensed $73,000 during the period from May 7, 1999 (inception) to
December 31, 1999 and $60,000 in the six months ended June 30, 2000.
The Company is not currently subject to any material legal proceedings. The
Company may from time to time, however, become a party to various legal
proceedings arising in the ordinary course of business. The Company may also be
indirectly affected by administrative or court proceedings or actions in which
the Company is not involved but which have general applicability to the Internet
or wireless industries.
See Note 11 for additional commitments.
NOTE 6 -- CONVERTIBLE PREFERRED STOCK:
Authorized shares
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 44,500,000 shares of preferred stock, issuable in series. The
rights, preferences and privileges of the preferred stockholders are as follows:
Dividends
The holders of Series A, Series B and Series C preferred stock are entitled
to receive noncumulative dividends at an annual rate of 8% per share when, as
and if declared by the Board of Directors. No dividends have been declared
through June 30, 2000.
Liquidation
The holders of the Series A, Series B and Series C preferred stock are
entitled to a distribution in preference to common shareholders of $0.75, $4.63
and $6.51 per share, respectively, plus any declared but unpaid dividends. A
consolidation or merger of the Company into another company or certain other
events, each such event being a change of control, as defined, shall be deemed
to be a liquidation, dissolution or winding up of the Company.
Conversion
The Series A and Series B preferred stock is convertible, at the option of
the holder, into common stock on a 1.4613:1 basis, subject to adjustment for
dilution. The Series C preferred stock is convertible at the option of the
holder into common stock on a 0.7307:1 basis, subject to adjustment for
dilution. Conversion is automatic upon the closing of a firm commitment
underwritten public offering of the Company's common stock at an aggregate
offering price of not less than $25,000,000 and at a price per share of not less
than $7.91. In addition, preferred stockholders have certain registration rights
and the right to participate in future issuances of the Company's stock. A total
of 46,054,619 shares of common stock have been reserved for issuance upon the
conversion of preferred stock at June 30, 2000.
Redemption
For a three year period beginning any time after April 24, 2005, upon the
written request of a majority of the holders of then outstanding Series B and
Series C preferred stock taken together as a single class, the Company is
required to redeem any outstanding shares of Series B and Series C preferred
stock as requested by such holders. At the option of the Company, this
redemption can be made in installments on an annual basis over a period not to
exceed three consecutive calendar years. The shares of Series B and Series C
preferred stock are required to be redeemed in cash in an amount equal to the
F-16
<PAGE> 98
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Series B and Series C original issue price as applicable, plus, in the case of
each share, an amount equal to any declared but unpaid dividends.
Voting
Each share of Series A, Series B and Series C preferred stock has voting
rights equal to the number of shares of Common Stock into which it is
convertible and votes together as one class with the Common Stock. The Company
must obtain approval from two-thirds of the outstanding shares of preferred
stock to alter the certificate of incorporation as related to preferred stock,
authorize or issue any other equity security senior to or on parity with that
preferred stock, redeem or purchase any shares of preferred stock other than by
redemption in accordance with the certificate of incorporation, increase or
decrease the number of authorized shares of preferred stock, authorize a
dividend for any class or series other than preferred stock, increase the size
of the Board of Directors, or acquire any other company or business.
Warrants for convertible preferred stock
In connection with the Series A preferred stock issuance in August 1999,
the Company issued warrants to purchase 3 million shares of Series A preferred
stock at $0.8333 per share. The fair value of these warrants has been estimated
using the Black-Scholes pricing model at the date of the grant using a term of
six months, a weighted-average risk free rate of 5.12%, an expected dividend
yield of zero percent and a volatility of 60%, resulting in a fair value of
$314,000. The fair value of these warrants is being amortized over the life of
the related purchased technology license. The Company recognized $31,000 and
$39,000 as amortization expense associated with these warrants for the periods
ended December 31, 1999 and June 30, 2000, respectively. The warrants were
exercised in November 1999, and no warrants were outstanding at December 31,
1999.
NOTE 7 -- COMMON STOCK:
Authorized shares
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 73,067,149 shares of common stock.
Right of repurchase
A portion of the shares sold to employees, directors or consultants are
subject to a right of repurchase by the Company subject to vesting, which is
generally over a three to four year period from the earlier of grant date or
employee hire date, as applicable, until vesting is complete. At December 31,
1999 all common shares outstanding were subject to repurchase as the initial
vesting for 6/48 of these shares did not lapse until January 2000; the remaining
shares vest 1/48 per month thereafter. At June 30, 2000, 5,894,400 shares were
subject to a right of repurchase.
Stock option plan
In 1999 the Company adopted the 1999 Stock Plan (the "Plan"). The Plan
provides for the granting of stock options to employees, directors and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees, non-employee directors and consultants. At June
30, 2000, the Company has reserved 9,754,464 shares of common stock for issuance
under the Plan.
F-17
<PAGE> 99
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options under the Plan may be granted for a period of up to ten years,
provided, however, that (i) the exercise price of an ISO and NSO shall not be
less than 100% and 85% of the estimated fair value of the shares on the date of
grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a
10% stockholder shall not be less than 110% of the estimated fair value of the
shares on the date of grant, respectively. To date, options granted generally
vest over four years.
The following table summarizes activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVAILABLE OPTIONS AVERAGE EXERCISE
FOR GRANT OUTSTANDING PRICE
---------------- ----------- ----------------
<S> <C> <C> <C>
Shares reserved at plan inception......... 8,475,789 -- --
Options granted......................... (2,380,528) 2,380,528 $0.34
---------- ---------
Balance at December 31, 1999.............. 6,095,261 2,380,528 $0.34
---------- ---------
Options granted (unaudited)............. (4,021,977) 4,021,977 $2.99
Options cancelled (unaudited)........... 164,400 (164,400) $0.89
Options reserved (unaudited)............ 1,278,675 -- --
---------- --------- -----
Balance at June 30, 2000.................. 3,516,359 6,238,105 $2.03
========== =========
</TABLE>
The options outstanding, and currently exercisable by exercise price at
December 31, 1999, are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING WEIGHTED
NUMBER NUMBER CONTRACTUAL LIFE AVERAGE EXERCISE
EXERCISE PRICE OUTSTANDING VESTED (YEARS) PRICE
--------------- ----------- ------ ---------------- ----------------
<S> <C> <C> <C> <C>
$0.342 2,380,528 -- 3.55 $0.342
</TABLE>
In connection with certain stock option grants and restricted common stock
issuances to employees during the periods ended December 31, 1999 and June 30,
2000, the Company recorded deferred stock compensation totaling $6.0 million and
$28.2 million, respectively, which is being amortized over the vesting periods
of the related options which is generally four years using the method set out in
FASB Interpretation No. 28 ("FIN 28"). Under the FIN 28 method, each vested
tranche of options is accounted for as a separate option grant awarded for
services. Accordingly, the compensation expense is recognized over the period
during which the services have been provided. This method results in higher
compensation expense in the earlier vesting periods of the related options.
Amortization of this stock-based compensation was $660,000 and $10,340,000 for
the periods ended December 31, 1999 and June 30, 2000, respectively. For stock
issuances and grants made through June 30, 2000, the Company expects to amortize
stock-based compensation expense of $7.0 million in the remainder of fiscal
2000, $9.3 million in 2001, $4.7 million in 2002, $2.0 million in 2003, and $0.2
million in 2004, assuming no cancellations.
Options granted include options issued to consultants in January 2000 to
acquire 51,148 shares of common stock at an exercise price of $0.513 in exchange
for the provision of services. The shares vested immediately upon issuance. The
fair value of these options has been estimated using the Black-Scholes pricing
model at the date of the grant using a weighted-average risk free rate of 5.69%,
an expected dividend yield of zero percent and a volatility of 60%, resulting in
a fair value of $136,000. Stock-based compensation related to stock options
granted to consultants is recognized as earned. The Company recorded stock-based
compensation of $136,000 in the six months ended June 30, 2000.
Pro forma stock-based compensation
The Company has adopted the disclosure-only provisions of SFAS 123 for
option grants to employees. Had compensation cost been determined based on the
fair value at the grant date for the awards in 1999
F-18
<PAGE> 100
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and 2000 consistent with the provisions of SFAS 123, the Company's net loss
would have been as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM MAY 7,
1999 (INCEPTION)
TO DECEMBER 31,
1999
------------------
<S> <C>
Net loss -- as reported..................................... $(6,929)
Net loss -- pro forma....................................... $(6,982)
Net loss per common share -- basic and diluted, as
reported.................................................. $ --
Net loss per common share -- basic and diluted, pro forma... $ --
</TABLE>
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made each
year.
The weighted average fair value of options issued during the period ended
December 31, 1999 was $1.37. The fair value of each option grant is estimated on
the date of grant using the minimum value method with the following assumptions
used for grants:
<TABLE>
<CAPTION>
PERIOD FROM MAY 7,
1999 (INCEPTION) TO
DECEMBER 31,
1999
-------------------
<S> <C>
Risk-free interest rate..................................... 6.03%
Expected life of option..................................... 4 years
Expected dividends.......................................... 0%
</TABLE>
NOTE 8 -- 401(k):
The Company sponsors an employee savings and retirement plan intended to
qualify under section 401(k) of the Internal Revenue Code. All eligible
employees may contribute up to 20% of compensation, subject to annual
limitations, which are fully vested at all times. The Company retains the option
of matching employees' contributions with a discretionary employer contribution.
To date, no employer contributions have been made.
NOTE 9 -- INCOME TAXES:
No provisions for income taxes have been recorded as the Company has
incurred net losses since inception.
The Company's effective tax rate varies from the statutory rate as follows:
<TABLE>
<CAPTION>
PERIOD FROM MAY 7,
1999 (INCEPTION) TO
DECEMBER 31,
1999
-------------------
<S> <C>
U.S. Federal income tax rate................................ (34.0)%
State taxes, net of federal tax benefit..................... (5.8)
Stock-based compensation.................................... 3.2
Other....................................................... 3.0
Valuation allowance......................................... 33.6
-----
Effective tax rate........................................ --
=====
</TABLE>
F-19
<PAGE> 101
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 2,253
Various accruals and allowances........................... 12
-------
2,265
-------
Valuation allowance......................................... (2,238)
-------
Net deferred tax assets..................................... 27
Deferred tax liabilities:
Depreciation and amortization............................. (27)
-------
Net deferred tax assets..................................... $ --
=======
</TABLE>
At December 31, 1999, the Company had approximately $5.7 million of federal
and state net operating loss carryforwards available to offset future taxable
income which expire in varying amounts beginning in 2019 and 2007, respectively.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
loss carryforwards may be impaired or limited in certain circumstances. Such
amount, if any, has not been determined. Events which cause limitations in the
amount of net operating losses that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change of more than 50%,
as defined, over a three year period.
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
NOTE 10 -- UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA BALANCE
SHEET:
Upon the closing of the Company's initial public offering, all outstanding
preferred stock will be converted automatically into common stock. The pro forma
effect of this conversion has been presented as a separate column in the
Company's balance sheet, assuming the conversion had occurred as of June 30,
2000. Pro forma basic and diluted net loss per common share have been computed
as described in Note 2 and also give effect to common equivalent shares from
convertible preferred stock that will automatically convert upon the closing of
the Company's initial public offering (using the "as-if-converted method") for
the periods ended December 31, 1999 and June 30, 2000.
A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and fully diluted net loss follows (in thousands, except
share and per share data):
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1999
(INCEPTION) TO SIX MONTHS
DECEMBER 31, ENDED
1999 JUNE 30, 2000
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Net loss.................................................. $ (6,929) $ (39,853)
=========== ===========
Shares used in computing basic and diluted net loss per
share................................................... -- 1,307,330
Assumed conversion of all convertible preferred stock from
date of issuance........................................ 16,182,742 37,457,894
----------- -----------
Weighted average shares used in computing pro forma basic
and diluted net loss.................................... 16,182,742 38,765,224
=========== ===========
Pro forma basic and diluted net loss...................... $ (0.43) $ (1.03)
=========== ===========
</TABLE>
F-20
<PAGE> 102
OMNISKY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SUBSEQUENT EVENTS:
From April through June 2000, the Company issued 13,953,012 shares of
Series C convertible preferred stock at a purchase price of $6.51 per share for
aggregate proceeds of approximately $90.8 million. Included in this are 225,000
shares sold to employees, for which the Company recorded a related recourse note
receivable from stockholders totaling approximately $1.5 million. See also Note
6.
Common stock (unaudited)
During July and August of 2000, the Company issued 1,509,391 shares of
restricted common stock to employees at purchase prices of $4.79, $4.80 and
$10.00 per share and recorded related recourse notes receivable from
stockholders totaling $7.5 million. The notes accrue interest at a rate of 6%
per year and are due July and August 2009. The shares are subject to a right of
repurchase and vest over a 48-month period.
During August 2000, the Company reached on agreement with America Online,
Inc., which will purchase from the Company shares of its common stock having an
aggregate value of $5 million in a private placement that will occur
concurrently with the closing of the Company's initial public offering. The
purchase price of the shares will be the Company's initial public offering price
less the underwriting discount. The Company has also entered into a Strategic
Marketing and Content Agreement with America Online that provides for the
delivery of America Online interactive services, including AOL e-mail and
instant messaging, Web content, Internet content and e-commerce services through
the Company's wireless service and the development of a customized wireless
service for America Online users. The Company also agreed to purchase $3 million
in online advertising from America Online during the term of the agreement.
Deferred stock compensation (unaudited)
Subsequent to June 30, 2000, the Company issued shares and granted options
to purchase 4,875,321 shares of common stock that will result in an additional
$13.7 million of deferred stock compensation. This will be amortized in the
amounts of $4.2 million, $4.4 million, $2.7 million, $1.7 million and $0.7
million for the periods ending December 31, 2000, 2001, 2002, 2003, and 2004,
respectively, assuming no cancellations or additional stock option grants below
deemed fair value.
Stock option plans (unaudited)
In July 2000, the Company adopted the 2000 stock option plan and 2000
employee stock purchase plan, reserving 4.0 million shares and 0.75 million
shares, respectively, for issuance under these plans.
Office lease (unaudited)
During July 2000, the Company entered into an office lease that expires in
2011 for space it intends to occupy in 2001 as its headquarters. In connection
with this lease, the Company provided a $7.4 million irrevocable letter of
credit to the landlord, and is obligated to provide an additional $3.7 million
irrevocable letter of credit to the landlord in early 2001. These letters of
credit are or will be collateralized by a $11.1 million restricted investment
deposit that will be reflected in long-term assets. The Company also granted a
warrant to the landlord to purchase up to 95,901 shares of common stock at $8.91
per share.
F-21
<PAGE> 103
[INSIDE BACK COVER]
The upper right quarter of the inside back cover of the prospectus contains the
following text:
OmniSky Ad Campaign
1. Big Inflatable Bag
Made for print, this ad illustrates the ability to solve problems and
buy products and services online without being tied to a computer.
2. Baby Sitter
This print ad demonstrates how the OmniSky service can be used to
keep in touch, even at times when other means of communication may be
inappropriate or impossible.
3. Zoo
As part of our TV campaign, this ad shows the ease of making things
happen, even in an unusual environment.
4. Game Show
In this TV ad, a game show contestant gains an advantage with
Internet information provided by the OmniSky service.
In the upper left hand corner of the page is a picture with two frames. The
first frame contains a picture of a man using the OmniSky service as he falls
through the sky. The OmniSky logo appears below this frame. The second frame
contains a picture of a large inflatable mattress. A picture of a Palm V device
connected to a wireless modem, the OmniSky logo and the words "Think it. Do it."
appear below this frame. The number "1" appears to the right of this picture.
Below the above picture is another picture with two frames. The first frame
contains a picture of a man at a restaurant being shown by a woman a Palm V
attached to a wireless modem. The OmniSky logo appears below this frame. The
second frame contains a picture of a baby sitter, who has been tied up by
several children, using the OmniSky service. A picture of a Palm V device
connected to a wireless modem, the OmniSky logo and the words "Think it. Do it."
appear below this frame. The number "2" appears to the right of this picture.
Below the above picture is a picture with five frames. The first frame contains
a picture of an orangutan sleeping on a rock at a zoo. The second frame contains
a picture of the orangutan taking from a zoo keeper's pocket a Palm V attached
to a wireless modem. The third frame shows the orangutan using the OmniSky
service. The fourth frame shows several orangutans playing on a heart-shaped
bed. In the fifth frame appears the OmniSky logo. The number "3" appears above
the upper left hand corner of this picture.
<PAGE> 104
Below the above picture is another picture with five frames. The first frame
contains a picture of the stage of a game show. The second frame contains a
picture of a woman speaking into a microphone. The third frame shows a Palm V
attached to a wireless modem with the OmniSky logo strapped to an arm. The
fourth frame contains a picture of a man and woman. In the fifth frame appears
the OmniSky logo. The number "4" appears above the upper left hand corner of
this picture.
The OmniSky logo appears on the bottom of the page against a dark background,
together with the words "Think it. Do it."
<PAGE> 105
OmniSky logo
<PAGE> 106
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
underwriting discounts and commissions, payable by OmniSky in connection with
the sale of common stock being registered hereby. All amounts are estimates
except the SEC registration fee, the NASD filing fee and The Nasdaq National
Market listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 33,154
NASD filing fee............................................. 13,058
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving costs................................ 250,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 200,000
Blue Sky fees and expenses.................................. 5,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous expenses...................................... 43,788
----------
Total..................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article IX of the Registrant's Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if such
person acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the Registrant, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the registrant and its executive officers
and directors, and by the registrant of the underwriters for some liabilities,
including liabilities arising under the Securities Act, in connection with
matters specifically provided in writing by the Underwriters for inclusion in
the Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the registrant's inception in May 1999, the registrant has issued
unregistered securities to a limited number of persons as described below:
(a) On July 12, 1999, the registrant issued and sold an aggregate of
6,137,641 shares of common stock to Patrick McVeigh, the Chief Executive
Officer of the registrant, Barak Berkowitz, the President of the
registrant, Michael Dolbec, the Senior Vice President, Business Development
of the registrant and Andy Simms, the Vice President, Sales for the
Americas of the registrant, for $0.051 per share, or an aggregate of
$315,000.
II-1
<PAGE> 107
(b) On August 9, 1999, the registrant issued and sold an aggregate of
17,219,335 shares of Series A preferred stock to a total of 11 investors,
of which 3 Com Ventures, Inc., Aether OpenSky Investments LLC and WS
Investment 99B are corporate-type entities and Larry Sonsini, Boris
Feldman, Aaron Alter, Keith Eggleton, Cynthia Dy, Richard Arnold, Mark
Beariault and Selwyn Goldberg are individuals, for $0.75 per share, or an
aggregate of $12,914,501.25.
(c) On August 9, 1999, the registrant granted a warrant to Aether
OpenSky Investments LLC, which is a corporate entity, to purchase up to
3,000,000 shares of Series A preferred stock at $0.83 1/3 per share, or an
aggregate exercise price of $2,500,000. This warrant was exercised in
November 1999.
(d) On January 18, 2000, the registrant issued and sold an aggregate
of 4,319,427 shares of Series B preferred stock to a total of 20 investors,
of which DLJ Capital Corp., DLJ ESC II, L.P., Sprout Capital VIII, L.P.,
Sprout Venture Capital, L.P., Aether Opensky Investments LLC and WS
Investments 99B, are corporate-type entities and Ronald F. Zampolin, Colin
Knudsen, Louis Friedman, Michael Brabant, Eric Weinstein, Jerry J. Hall and
Gail E. Hall 1999 Revocable Trust, Raymond Cleeman, Aaron Alter, Keith
Eggleton, Cynthia Dy, Richard Arnold, Mark Beariault, Richard Kline and
Kevin Kakareka are individuals or a trust, for $4.63 per share, or an
aggregate of $19,998,947.01.
(e) On April 5, 2000, the registrant issued and sold an aggregate of
1,534,410 shares of common stock to Lawrence Winkler, our Senior Vice
President and Chief Financial Officer, Raymond Cleeman, our Vice President,
Treasurer, and Michael Malesardi, our Vice President, Controller, for
$2.053 per share or an aggregate of $3,150,000.
(f) On April 24, 2000, the registrant issued and sold an aggregate of
4,377,879 shares of Series C preferred stock to a total of 3 corporate
entities, Omni Holdings, Inc., PSINet Strategic Investments, Inc. and
Sunrise Valley Ventures I, LLC, for $6.51 per share or an aggregate of
$28,499,992.29.
(g) On April 27, 2000, the registrant agreed to issue and sell 328,802
shares of common stock to Scott Wornow, our Vice President, General Counsel
and Secretary, for $3.148 per share or an aggregate of $1,035,000.
(h) On May 12, 2000, the registrant issued and sold an aggregate of
685,421 shares of Series C preferred stock to a total of 10 investors, of
which Infospace Venture Capital Fund 2000, LLC is a corporate entity,
Lawrence Winkler is an executive officer of the registrant, Raymond Cleeman
and Michael Malesardi are key employees of the registrant, and Ronald F.
Zampolin, Eric Weinstein, Donal Orr, Karl Knight, William J. Takeuchi, and
Qazi Munirul Alam are individuals, for $6.51 per share or an aggregate of
$4,462,090.71.
(i) On May 19, 2000, the registrant issued and sold an aggregate of
1,906,717 shares of Series C preferred stock to a total of 7 investors, of
which AT&T Corporation, Akamai Technologies, Inc. and PSINet Strategic
Investments, Inc. are corporate entities, Scott Wornow is a key employee of
the registrant, and John F. Otto, Robert F. Doherty and Thomas E. Wheeler
(through a trust) are individuals, for $6.51 per share or an aggregate of
$12,412,727.67.
(j) On June 9, 2000, the registrant issued and sold 6,982,995 shares
of Series C preferred stock to Omni Holdings, Inc., a wholly-owned
subsidiary of The News Corporation Limited, for $6.51 per share or
$45,459,297.45.
(k) On July 11, 2000, the registrant agreed to issue and sell an
aggregate of 990,059 shares of common stock to six individuals, of which
Patrick McVeigh, Barak Berkowitz and James Obot are executive officers of
the registrant, Elan Amir, Chief Technical Officer of the registrant, and
Andy Simms, are key employees of the registrant and Robert Taylor, a
director of business development, is an employee of the registrant, for
$4.79 per share, or an aggregate of $4,742,383.
II-2
<PAGE> 108
(l) On July 27, 2000, the registrant granted a warrant to its
landlord, a real estate investment trust, to purchase up to 95,901 shares
of common stock at $8.91 per share.
(m) On August 11, 2000, the registrant agreed to issue and sell an
aggregate of 519,332 shares of common stock to David K. Rensin, Chief
Products Officer of the registrant, James J. Obot, Senior Vice President,
Operations of the registrant, and Andy R. Simms, Vice President, Sales for
the Americas of the registrant, for $4.80, $4.79 and $10.00 per share,
respectively, or an aggregate of $2,762,520.
(n) On August 31, 2000, the registrant agreed to issue and sell shares
of its common stock to America Online, Inc. concurrent with the closing of
its initial public offering. The number of shares issued will be determined
by dividing $5 million by the price per share to the public, less the
underwriting discount (or 488,759 assuming an initial public offering price
of $11.00 per share).
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof and/or Regulation D promulgated
thereunder. The recipients in such transactions 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 such transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
1.1** Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Bylaws of the Registrant.
3.3** Form of Amended and Restated Certificate of Incorporation of
Registrant to be effective upon the closing of this
offering.
3.4** Form of Amended and Restated Bylaws of Registrant to be
effective upon the closing of this offering.
3.5** Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant.
4.1** Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2** 1999 Stock Plan and form of agreement thereunder.
10.3** Form of 2000 Stock Plan.
10.4** Form of 2000 Employee Stock Purchase Plan.
10.5** Second Amended and Restated Investors Rights Agreement dated
April 24, 2000.
10.6** Lease at 1001 Elwell Court, Palo Alto, CA.
10.7**+ Palm Computing Software License dated January 6, 2000.
10.8**+ AT&T Wireless Services Value Added Reseller Agreement dated
December 2, 1999.
10.9** The News Corporation Limited Joint Venture Agreement dated
April 18, 2000.
10.10**+ Novatel Wireless, Inc. Supply Agreement dated July 15, 1999,
as amended in October 1999.
10.11** Aether Technologies International, L.L.C. Software License
Agreement dated August 9, 1999.
10.12** Lease at One Market Street, San Francisco, CA.
10.13**+ Tellus Technology Incorporated Supply Agreement.
</TABLE>
II-3
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
10.14**+ Riverbed Technologies ScoutIT Software License and Services
Agreement dated November 15, 1999.
10.15**+ Aether Software ScoutWeb Software License and Services
Agreement dated July 7, 2000.
23.1 Consent of Independent Accountants.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedules.
</TABLE>
---------------
** Previously filed.
+ The registrant is seeking confidential treatment on certain portions of this
exhibit from the Commission. The omitted portions have been filed separately
with the Commission.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes 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 by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(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 the Registrant 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> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant 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 Palo Alto, State of California, on the 1st day of September 2000.
OMNISKY CORPORATION
By: /s/ PATRICK S. MCVEIGH
------------------------------------
Patrick S. McVeigh
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ PATRICK S. MCVEIGH Chief Executive Officer and September 1, 2000
------------------------------------------------ Chairman of the Board
Patrick S. McVeigh (Principal Executive Officer)
/s/ LAWRENCE S. WINKLER Chief Financial Officer September 1, 2000
------------------------------------------------ (Principal Financial Officer)
Lawrence S. Winkler
/s/ MICHAEL J. MALESARDI Vice President, Controller September 1, 2000
------------------------------------------------ (Principal Accounting Officer)
Michael J. Malesardi
* Director September 1, 2000
------------------------------------------------
David S. Oros
* Director September 1, 2000
------------------------------------------------
Janice M. Roberts
* Director September 1, 2000
------------------------------------------------
Stephen M. Diamond
* Director September 1, 2000
------------------------------------------------
Thomas E. Wheeler
* Director September 1, 2000
------------------------------------------------
Lachlan K. Murdoch
</TABLE>
*By /s/ LAWRENCE S. WINKLER
-----------------------------
Attorney-in-fact
II-5
<PAGE> 111
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ------------------------------------------------------------ ------------
<S> <C> <C>
1.1** Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Bylaws of the Registrant.
3.3** Form of Amended and Restated Certificate of Incorporation of
Registrant to be effective upon the closing of this
offering.
3.4** Form of Amended and Restated Bylaws of Registrant to be
effective upon the closing of this offering.
3.5** Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant.
4.1** Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2** 1999 Stock Plan and form of agreement thereunder.
10.3** Form of 2000 Stock Plan.
10.4** Form of 2000 Employee Stock Purchase Plan.
10.5** Second Amended and Restated Investors Rights Agreement dated
April 24, 2000.
10.6** Lease at 1001 Elwell Court, Palo Alto, CA.
10.7**+ Palm Computing Software License dated January 6, 2000.
10.8**+ AT&T Wireless Services Value Added Reseller Agreement dated
December 2, 1999.
10.9** The News Corporation Limited Joint Venture Agreement dated
April 18, 2000.
10.10**+ Novatel Wireless, Inc. Supply Agreement dated July 15, 1999,
as amended in October 1999.
10.11** Aether Technologies International, L.L.C. Software License
Agreement dated August 9, 1999.
10.12** Lease at One Market Street, San Francisco, CA.
10.13**+ Tellus Technology Incorporated Supply Agreement.
10.14**+ Riverbed Technologies ScoutIT Software License and Services
Agreement dated November 15, 1999.
10.15**+ Aether Software ScoutWeb Software License and Services
Agreement dated July 7, 2000.
23.1 Consent of Independent Accountants.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedules.
</TABLE>
---------------
** Previously filed.
+ The registrant is seeking confidential treatment on certain portions of this
exhibit from the Commission. The omitted portions have been filed separately
with the Commission.
