<PAGE>
Filed Pursuant to Rule 424(B)(1)
Registration No. 333-34514
5,500,000 Shares
[AIRSPAN LOGO APPEARS HERE]
Airspan Networks Inc.
Common Stock
-----------
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "AIRN."
The underwriters have an option to purchase a maximum of 825,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Airspan
----------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................. $15.00 $1.05 $13.95
Total...................................... $82,500,000 $5,775,000 $76,725,000
</TABLE>
Delivery of the shares of common stock will be made on or about July 25,
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
Deutsche Banc Alex. Brown
Lehman Brothers
U.S. Bancorp Piper Jaffray
The date of this prospectus is July 19, 2000.
<PAGE>
Inside front cover artwork
Graphics depicting Airspan logo and products including base stations,
subscriber terminals, and access concentrators.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary..................... 5
Risk Factors........................... 8
Special Note Regarding Forward-
Looking Statements.................... 19
Use Of Proceeds........................ 20
Dividend Policy........................ 20
Capitalization......................... 21
Dilution............................... 23
Selected Consolidated Financial
Data.................................. 25
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations......................... 26
Business............................... 39
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management............................. 51
Certain Relationships and Related
Party Transactions.................... 58
Principal Shareholders................. 63
Description Of Capital Stock........... 65
Shares Eligible For Future Sale........ 68
Underwriting........................... 70
Notice To Canadian Residents........... 73
Legal Matters.......................... 74
Experts................................ 74
Where You Can Find More
Information........................... 74
Index To Consolidated Financial
Statements............................ F-1
</TABLE>
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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 August 13, 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to its unsold allotments or subscriptions.
3
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[This Page Intentionally Left Blank]
4
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PROSPECTUS SUMMARY
Airspan Networks Inc.
We are a global supplier of wireless communications systems that allow
communications service providers to cost effectively deliver both high speed
data and voice services to their customers at fixed geographic locations. Our
systems, which are referred to as fixed wireless, provide wide area coverage,
security and resistance to fading. Our systems can be deployed rapidly and cost
effectively, providing an attractive alternative to copper wire and fiber
communications networks. Our products include software tools that optimize
geographic coverage of our systems using the available spectrum frequencies and
provide ongoing network management. To facilitate the deployment and operation
of our systems, we also offer network installation, training and support
services.
Our systems feature a central radio transmitter and receiver, or base
station, that provides services to multiple customer sites, known as a point-
to-multipoint system. During 1996, we began shipping our products which were
among the first fixed wireless, point-to-multipoint systems to be commercially
deployed. Our systems have been installed by over 40 communications service
providers in approximately 30 countries and are being tested by numerous other
service providers.
We were originally organized in 1994 as a unit within DSC Communications
Corporation. In January 1998 we created a new corporation that purchased the
Airspan unit from DSC. We have generated significant net losses and negative
cash flow since our formation, and expect to continue to have negative cash
flows for the next 36 months. We have an accumulated deficit of $72.1 million
as of April 2, 2000.
The Airspan Strategy
Our goal is to be the leading provider of fixed wireless systems to
communications service providers. Key elements of our strategy include the
following:
. capitalize on existing deployments of our systems to attract new
customers
. continued substantial investment in research and development
. target key growth market opportunities globally
. develop and expand our strategic relationships
. expand global sales, marketing and customer support presence
We are a Washington, USA corporation and our principal executive offices are
located at Cambridge House, Oxford Road, Uxbridge, Middlesex UB8 1UN England.
Our telephone number is + 44 1895 467 100. We have a website located as
www.airspan.com. The information on our website does not form a part of this
prospectus.
5
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The Offering
<TABLE>
<C> <S>
Common stock offered....................... 5,500,000 shares
Common stock outstanding after this
offering.................................. 33,790,372 shares (1)
Use of proceeds............................ Working capital, general
corporate purposes including
increased research and
development and sales and
marketing expenditures and
possible acquisitions
Nasdaq National Market symbol.............. AIRN
</TABLE>
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(1) The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 19, 2000, and does
not include the following:
. 1,739,733 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $2.12 per share
. an aggregate of 2,103,228 shares available for future issuance under our
stock option plan
. an aggregate of 249,998 shares of preferred stock issuable upon the
exercise of 249,998 warrants to purchase preferred stock at an exercise
price of $1.75 per share; upon the closing of this offering these
warrants will convert into warrants to purchase 83,333 shares of common
stock at an exercise price of $5.25 per share
. an aggregate of 500,000 shares reserved for future issuance under our
employee stock purchase plan
Except where we state otherwise, the information we present in this prospectus:
. reflects the three for one reverse split of our common stock effected
May 25, 2000
. reflects the amendment of our charter to increase the authorized number
of shares of common stock to 50,000,000 shares
. assumes that the underwriters do not exercise their over-allotment
option to purchase 825,000 additional shares
. reflects the conversion of our outstanding convertible preferred stock
into common stock upon the closing of this offering
Except where we state otherwise, the number of our outstanding shares of
preferred stock that we present in this prospectus has not been adjusted to
reflect the three for one reverse split of our common stock, into which such
preferred stock will be converted upon the consummation of this offering.
6
<PAGE>
Summary Financial Data
The following tables summarize our financial data. You should read our
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The pro forma balance sheet data reflects
the conversion of our outstanding convertible preferred stock into common stock
upon the closing of this offering, the sale of 578,573 shares of Series C
preferred stock at $2.50 per share on April 11, 2000 and the exercise of 14,980
stock options between April 2, 2000 and June 19, 2000. The pro forma as
adjusted balance sheet data reflect our sale of 5,500,000 shares of common
stock in this offering, after deducting underwriting discounts and commissions
and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Predecessor(1) Company
------------------------ -----------------------------------------------
Eleven Months Quarter Quarter
Year Ended Month Ended Ended Year Ended Ended Ended
December 31, January 25, December 31, December 31, April 4, April 2,
1997 1998 1998 1999 1999 2000
------------ ----------- ------------- ------------ -------- ----------
(in thousands,
except per share
data) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue................. $ 4,818 $ 135 $ 11,485 $ 12,480 $ 1,301 $ 5,661
Gross profit............ 870 35 1,954 4,394 415 2,131
Operating expenses (2).. 17,613 1,850 37,519 33,890 7,564 9,817
-------- ------- -------- ---------- ------- ----------
Loss from operations.... $(16,743) $(1,815) (35,565) (29,496) (7,149) (7,686)
======== =======
Net loss................ -- -- $(35,596) $ (29,449) $(7,057) $ (7,064)
======== ========== ======= ==========
Net loss per share-basic
and diluted............ -- -- $ (65.72) $ (33.84) $(10.33) $ (6.50)
Weighted average shares
outstanding-basic and
diluted................ -- -- 541,667 870,328 682,870 1,087,047
Pro forma net loss per
share-basic and diluted
(3).................... -- -- -- $ (1.37) -- $ (0.26)
Pro forma weighted
average shares
outstanding-basic and
diluted................ -- -- -- 21,446,122 -- 27,633,079
</TABLE>
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(1) The statement of operations data relating to our predecessor are further
described in Note 1 to our financial statements.
(2) The eleven months ended December 31, 1998 includes a charge of $14 million
for acquired in-process research and development in connection with the
acquisition of the net assets of our predecessor.
(3) Pro forma basic and diluted per share calculations reflect the pro forma
conversion at the date of issuance of all outstanding shares of preferred
stock.
<TABLE>
<CAPTION>
As of April 2, 2000
---------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- ------- -----------
(in thousands)
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents (1)....................... $55,906 $57,358 $132,583
Working capital..................................... 66,147 67,599 142,824
Total assets........................................ 85,428 86,880 162,105
Long term debt...................................... 20,440 20,440 20,440
Stockholders' equity................................ 54,179 55,631 130,856
</TABLE>
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(1) Excludes $3.3 million of restricted cash.
7
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in Airspan.
Risks Related To Our Business
If we continue to incur substantial losses and negative operating cash flows,
we may not succeed in achieving or maintaining profitability in the future.
We have incurred net losses since we became an independent company, and as
of April 2, 2000 we had an accumulated deficit of $72.1 million. We anticipate
that we will continue to experience negative cash flow for at least the next 36
months following the offering. Our operating losses have been due in part to
the commitment of significant resources to our research and development and
sales and marketing organizations. We expect to devote additional resources to
these areas and, as a result, will need to continue increasing our quarterly
revenues to achieve and maintain profitability. We cannot be certain that our
revenues will grow at past rates or that we will achieve sufficient revenues
for profitability. If we do achieve profitability, we cannot be certain that we
can sustain or increase profitability on a quarterly or annual basis in the
future.
We are an early-stage company with a limited operating history, and as a result
you have limited financial data with which to evaluate our business.
We are an early-stage company in the emerging fixed wireless communications
access market. We operated as a unit of DSC Communications Corporation
beginning in 1994 and did not become an independent company until January 1998.
As a result of our limited operating history, we have limited financial data
that you can use to evaluate our business. Accordingly, our prospects must be
considered in light of the risks and difficulties frequently encountered by
companies in the early stage of development, particularly companies in new,
rapidly evolving and highly competitive markets.
In addition, the historical financial information for the year ended
December 31, 1997 and the one month ended January 25, 1998 that we have
included in this prospectus may not reflect what our results of operations
would have been had we operated as a separate, stand-alone company during those
periods. The information for these periods has been prepared as a statement of
revenues and direct costs and does not include DSC corporate allocations of
certain overhead, general and administrative expenses, interest expense and
income taxes, as it is impracticable to allocate such expenses arbitrarily on a
retroactive basis. Therefore, those periods are not good indications of our
future performance.
Since we have a limited operating history and a significant percentage of our
expenses are fixed and do not vary with revenues, our quarterly operating
results are volatile and difficult to predict, and our stock price could
decline.
We may not be able to accurately forecast our quarterly revenues since our
customers are not required to purchase a specific number of our products in any
given quarter, which will be further affected if major deployments of our
products do not occur in the quarter we anticipated and our customers delay
shipments or payments due to their inability to obtain licenses or for other
reasons. As a result, our quarterly operating results have fluctuated in the
past and will likely vary in the future, which could cause the market price of
our common stock to decline. Other factors that may affect our quarterly
operating results and our stock price include the loss of a major customer,
particularly since we depend on a few major customers, our ability to react
quickly to new competing technologies, products and services which may cause us
to otherwise lose our customers, or if our
8
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suppliers and manufacturers are not able to fulfill our orders as a result of a
shortage of key components which leads to a delay in shipping our products. We
incur expenses in significant part based on our expectations of future revenue,
and we expect our operating expense, in particular salaries and lease payments,
to be relatively fixed in the short run. Accordingly, any unanticipated decline
in revenue for a particular quarter could have an immediate negative effect on
results for that quarter, possibly resulting in a change in financial estimates
or investment recommendations by securities analysts, which could result in a
fall in our stock price. We believe that period-to-period comparisons of our
operating results are not necessarily meaningful. You should not rely on any
one quarter as an indication of future performance.
We currently depend on a few key customers for substantially all of our sales,
and a loss of one or more of those customers could cause a significant decrease
in our net revenue.
We currently derive, and expect to continue to derive, a substantial
percentage of our net sales from fewer than ten customers. For the year ended
December 31, 1999, three customers, Suntel Private Ltd, Aliatel a.s. and eircom
plc, accounted for 59% of our revenue. In the quarter ended April 2, 2000,
three customers, AZ Communications Network Inc., Suntel Private Ltd., and
eircom plc, accounted for 82% of our revenue. A number of our customers are
affiliated in that they may have cross investments in each other, which means
we may lose more than one customer at once if one party decided to discontinue
deploying our equipment. The amount of revenue we derive from a specific
customer is likely to vary from period to period, and a major customer in one
period may not produce significant additional revenue in a subsequent period.
We anticipate that our operating results will continue to depend on sales to a
small number of key customers in the foreseeable future. In general, our
contracts with our customers involve major deployments which require several
months to fulfill, so our results may depend on the same major customers for
consecutive quarters. Once a contract is fulfilled, we cannot assure you that
the customer will continue to purchase upgrades or services from us, or
possibly new products. It is necessary therefore for us to continually seek new
customers in order to increase our revenue. To the extent that any major
customer terminates its relationship with us, our revenues could decline
significantly.
Our customer contracts vary widely in terms and duration with a majority of our
customers executing only short-term purchase orders, and allow our customers to
terminate without significant penalties.
Our contracts and purchase orders are separately negotiated with each of our
customers and the terms may vary widely. A majority of our customers may only
execute short-term purchase orders for a single or a few systems at one time
instead of long-term contracts for large scale deployment of our systems. These
purchase orders do not ensure that they will purchase any additional products
beyond that specifically listed in the order.
Moreover, since we believe that these purchase orders may represent the
early portion of longer term customer programs, we expend significant financial
and personnel resources and expand our operations to be able to fulfill these
programs. If our customers fail to purchase additional products to fulfill
their program as we expect, we may be unable to recover the costs we incurred
and our business could suffer.
In addition, our contracts are generally non-exclusive and contain
provisions allowing our customers to terminate the agreement without
significant penalties, and some contracts are conditional upon our customer's
ability to receive foreign regulatory approvals. Our contracts also may specify
the achievement of shipment, delivery and installation commitments. If we fail
to meet
9
<PAGE>
these commitments or negotiate extensions in a timely manner, our customers may
choose to terminate their contract with us or impose monetary penalties.
Changes in telecommunications regulation or delays in receiving licenses could
adversely affect our customers and may lead to lower sales.
Our customers are subject to extensive regulation as communications service
providers. Changes in legislation or regulation that adversely affect our
existing and potential customers could lead them to spend less, or delay
expenditures, on communications access systems, which would harm our business.
In the past, an anticipated customer order was postponed as a result of
regulatory issues in Ireland, when the licensing process became open to appeal.
Our customer warned us that the appeal process would be lengthy and the outcome
would be unpredictable. We also have received orders from customers that were
contingent upon their receipt of licenses from regulators, the timing of which
are uncertain. The receipt of licenses by our customers may extend for up to a
year after they initially seek those licenses, or even after they place orders
with us.
At present there are few laws or regulations that specifically address our
business of providing communications access equipment. However, future
regulation may include access or settlement charges or tariffs which could
impose economic burdens on us and our customers. We are unable to predict the
impact, if any, that future legislation, judicial decisions or regulations will
have on our business.
Our sales cycle is typically long and unpredictable, making it difficult to
accurately predict inventory requirements, forecast revenues and control
expenses.
Our sales cycle can range from approximately six months to approximately two
years and varies depending on the customer. The length of the sales cycle with
a particular customer is influenced by a number of factors, including:
. the particular communications market that the customer serves
. the testing requirements imposed by the customer on our systems
. the customer's experience with sophisticated communications equipment
including fixed wireless technology
. the cost of purchasing our systems, including the cost of converting to
our products from previously installed equipment, which may be
significant
Before we receive orders, our customers typically test and evaluate our
products for a period of months or, in some cases, more than a year. In
addition, the emerging and evolving nature of the communication access market
may cause prospective customers to delay their purchase decisions as they
evaluate new technologies or competing technologies or wait for new products or
technologies. As the average order size for our products increases, our
customers' processes for approving purchases could become more complex, leading
to a longer sales cycle. We expect that our sales cycle will continue to be
long and unpredictable. Accordingly it is difficult for us to anticipate the
quarter in which particular sales may occur, to determine product shipment
schedules and provide our manufacturers and suppliers with enough lead time to
ensure that they have sufficient inventory on hand. In addition, our sales
cycle impairs our ability to forecast revenues and control expenses.
10
<PAGE>
Our international operations in Asia, Latin America and Africa may be difficult
and costly as a result of the political, economic and regulatory risks in those
regions.
Sales to customers based outside the U.S. have historically accounted for a
substantial majority of our revenues. In 1999, our international sales
accounted for 96% of our total revenue with sales to customers in Asia Pacific,
particularly Sri Lanka and the Philippines, accounting for 39.5%. Our
international sales for the quarter ended April 2, 2000 accounted for 98% of
our total revenue with sales to customers in Asia Pacific, particularly Sri
Lanka and the Philippines, accounting for 72.3%. We are a U.K. based operation
with primarily international sales, and sales in Asia, Latin America and Africa
in particular expose us to risks associated with international operations
including:
. longer payment cycles and customers seeking extended payment terms,
particularly since our customers in Asia and Latin America have
difficulty borrowing money or receiving lines of credit if there is
political and economic turmoil in their country
. tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers imposed by foreign countries; for example,
the tariffs in Brazil make our systems expensive and not competitive for
local customers
. import or export licensing or product certification requirements
. unexpected changes in regulatory requirements and delay in receiving
licenses to operate
. political and economic instability, including the impact of economic
recessions. Currently Sri Lanka is in the midst of a civil war and we
face the possibility that the war will harm the economy in Sri Lanka,
which may mean that our local customer will not be able to accept
shipments or make payments
. our reluctance to staff and manage foreign operations as a result of
political unrest even though we may have business opportunities in that
country, in particular, in Nigeria
. limited ability to enforce agreements in regions where the judicial
systems may be less developed
In addition, changes in foreign currency exchange rates also affect our
revenue. See "Since we incur most of our expenses and a majority of our cost of
goods sold in foreign currencies, fluctuations in the values of foreign
currencies could have a negative impact on our profitability."
We may not be able to expand our sales and distribution capabilities, including
establishing relationships with international distributors, which would harm
our ability to generate revenue.
We believe that our future success depends upon our ability to expand our
direct and indirect sales operations, including establishing relationships with
international distributors. We cannot be certain that we will be successful in
these efforts. In addition, our distributors may not devote adequate resources
to marketing, selling and supporting our products. If we fail to expand these
sales channels, our business will be seriously harmed.
Our rapid growth has strained our resources, and our results of operations
could be negatively affected if we are unable to manage our continued expansion
effectively.
We have experienced a period of rapid growth and expansion that has strained
our resources. Since we became an independent company, the number of our
employees, including contract personnel, increased from 74 to 224 as of June
19, 2000. We intend to continue to expand rapidly. In order to manage growth
effectively, we must continue to develop and expand our operational systems,
procedures and controls. A failure to do so would impair our ability to
accurately forecast
11
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sales demand, manage our product inventory and record and report financial and
management information on a timely and accurate basis. Our inability to manage
growth effectively could seriously harm our business.
Competition from alternative communications systems, as well as larger, better
capitalized or emerging competitors for our products, could result in price
reductions, reduced gross margins and loss of market share.
We compete in a new, rapidly evolving and highly competitive and fragmented
market. We compete with companies that are producing fixed wireless
communications access systems, satellite access systems, cable access systems
and other new entrants to this industry, as well as traditional communications
companies.
We expect competition to persist and intensify in the future. In the
particular frequencies where we operate, we compete directly with ECI and
Lucent, as well as smaller start-up companies. We compete indirectly with a
number of large telecommunication equipment suppliers such as Alcatel,
Ericsson, Hughes, and Nortel. In addition, our technology competes with
alternative technologies, including traditional copper wire and fiber, digital
subscriber lines, optical fiber cable, cable modems and high speed leased lines
and satellite technologies. The performance and coverage area of our fixed
wireless systems are dependent on some factors which are outside of our
control, including features of the environment in which the systems are
deployed such as the amount of clutter (natural terrain features and man-made
obstructions) and the radio frequency available. Any inability to overcome
these obstacles may make our technology less competitive in comparison with
other technologies and make other technologies less expensive or more
accessible.
Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion, sale and financing of their products than we can.
Furthermore, some of our competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties to
increase their ability to gain customer market share rapidly. These competitors
may enter our existing or future markets with systems that may be less
expensive, provide higher performance or contain additional features.
We expect our competitors to continue to improve the performance of their
current products and to introduce new products or new technologies that may
supplant or provide lower cost alternatives to our systems. This or other
factors may result in changes in the market valuations of our competitors,
which has been volatile recently, and could cause our stock price to fall. To
remain competitive, we must continue to invest significant resources in
research and development, sales and marketing and customer support. We cannot
be certain that we will have sufficient resources to make these investments or
that we will be able to make the technological advances necessary to remain
competitive.
We are entirely dependent on our line of fixed wireless communications systems
and our future revenue depends on their commercial success and our ability to
adapt to evolving industry standards and new technologies.
The market for communications systems has been characterized by rapid
technological developments and evolving industry standards. Our ability to
increase revenue in the future depends
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on the commercial success of our line of fixed wireless communications systems
and our ability to adapt to changing technologies, industry standards and
customer preferences in a timely and cost effective manner. To date, AS4000
fixed wireless access systems, AS8100 network management system and AS9000
Airspan planning and configuration tools are the only products that have been
shipped to customers and we expect that revenue from these products will
account for a substantial portion of our revenue for the foreseeable future. In
developing our products, we made assumptions about the standards that may
become adopted. If our assumptions are incorrect and products based on new or
alternative technologies or the emergence of new industry standards are
introduced, our products could be rendered obsolete. We cannot assure you that
we will be successful in developing enhancements to existing products or new
products to meet evolving standards in the future.
In addition, because the market for fixed wireless communications is in an
early stage of development, we cannot assess the size of the market accurately,
and we have limited insight into trends that may emerge and affect our
business. For example, we may have difficulty in predicting customer needs,
developing products that could address those needs and establishing a
distribution strategy for those products.
Our dependence on key suppliers for some of our components and a single
contract manufacturer may result in product delivery delays if they do not have
components in stock or terminate their non-exclusive arrangements with us.
Some of the key components of our products are purchased from single
vendors, including printed circuit boards from Flextronics International Sweden
AB, cabinets from Ripley Engineering Limited and electronic connector panels
from Sanmina (Ireland) Limited, for which alternative sources are generally not
readily available. If our vendors fail to supply us with components because
they do not have them in stock when we need them, they reduce or eliminate
their manufacturing capacity for these components or they enter into exclusive
relationships with other parties which prevents them from selling to us, we
could experience significant delays in shipping our products while we seek
other sources, which may result in our customers claiming damages. At times we
have been forced to purchase these components from distributors instead of from
the manufacturers, which significantly increases our costs. We do not have
long-term contracts with most of these suppliers. Instead, we execute purchase
orders approximately three to six months in advance of when we believe we may
need the components. These purchase orders are non-exclusive, and we are
generally not required to purchase any minimum volume of components from any of
these suppliers. Since we do not have long-term contracts with these suppliers,
they may terminate our relationship with up to four months' notice.
In addition, we outsource most of our manufacturing processes to
Flextronics. Flextronics relies on our forecasts of future orders to make
purchasing and manufacturing decisions. We provide them with forecasts on a
biweekly basis. If our forecast turns out to be inaccurate, it may lead either
to excess inventory that would increase our costs or a shortage of components
that would delay shipments of our systems. Our contract with Flextronics is
non-exclusive and may be terminated with four months' notice by either party
without significant penalty. Other than agreeing to purchase the materials we
request in the forecasts, we do not have any agreements with them to purchase
any minimum volume. It is possible that our major competitors may enter into
contracts with Flextronics.
We depend on a single third party for our radio planning software, and if they
fail to support the software adequately, our business may be harmed.
We use software developed and maintained by Metapath Software International,
or MSI, for our radio planning software. We depend on MSI to deliver, support
and enhance their software in a way
13
<PAGE>
that will meet our needs, the failure of which could seriously harm our
business. Under a contract with MSI, we have four licenses for internal use on
a non-exclusive and non-transferable basis, and a license agreement for our
end-users, for which we pay annual fees. The licenses have no fixed termination
date but can be terminated by either party that gives not less than 12 months'
notice.
We may not be able to recruit or retain highly skilled employees, which could
result in delays in product development and loss of customers and sales.
The design and development of fixed wireless communications access systems
is complex and requires highly trained professional software, hardware and
radio frequency engineers and customer support personnel. In particular, the
availability of radio frequency engineers is limited because of the high demand
for such engineers and their skills can be applied to a broader range of
applications than the spectrum in which we operate. Our business strategy of
developing and delivering sophisticated products and providing our customers
with the appropriate levels of technical support will suffer if we do not have
the skilled personnel working for us. For example, our inability to hire radio
frequency engineers will adversely affect our product development schedule. In
addition, our future growth also depends upon our ability to expand our sales
and marketing operations in order to seek new customers, maintain key customer
relationships and increase market awareness of our products.
Even if we are able to hire these personnel, we will need to train them, and
they will need time to become fully productive. Competition for skilled
personnel is intense, especially in the London, England area where we maintain
our primary operations. Our competitors, especially companies that are larger
than we are, frequently place advertisements in the local newspapers to attract
the same personnel we are seeking, and in the past some of our employees have
left us to join our competitors. The inability to attract or retain qualified
personnel in the future or delays in hiring required personnel, particularly
engineers and sales and marketing professionals, may hinder our ability to keep
up with new technologies or continue to increase our customer base.
If we lose Eric Stonestrom or any of our other executive officers, we may
encounter difficulty replacing their expertise, which could impair our ability
to implement our business plan successfully.
We believe that our ability to implement our business strategy and our
future success depends on the continued employment of our senior management
team, in particular our president and chief executive officer, Eric Stonestrom.
Our senior management team, who have extensive experience in our industry and
are vital to maintaining some of our major customer relationships, would be
very difficult to replace. The loss of the technical knowledge and management
and industry expertise of these key employees could make it difficult for us to
execute our business plan effectively, could result in delays in new products
being developed, lost customers and diversion of resources while we seek
replacements.
If we are not able to implement a program to reduce costs over time, introduce
new products or increase sales volume to respond to declines in the average
selling prices of our products, our gross margin may decline.
We expect the average selling prices of our products to decline due to a
number of factors, including competitive pricing pressures, rapid technological
change and volume sales discounts. Accordingly, to maintain or increase our
gross margin, we must develop and introduce new products or product
enhancements with higher gross margins and implement cost reductions.
14
<PAGE>
If our average selling prices continue to decline and we are not able to
maintain or increase our gross margin, our results of operations could be
harmed.
We may not have adequate protection for our intellectual property, which may
make it easier for others to misappropriate our technology and enable our
competitors to sell competing products at lower prices and harm our business.
Our success depends in part on proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret laws and
contractual restrictions on disclosure to protect our intellectual property
rights. Despite our efforts to protect our proprietary rights, we cannot be
certain that the steps we have taken will prevent misappropriation of our
technology, and we may not be able to detect unauthorized use or take
appropriate steps to enforce our intellectual property rights. The laws of some
foreign countries, particularly in Asia, do not protect our proprietary rights
to the same extent as the laws of the U.S. and the U.K., and we may encounter
substantial infringement problems in those countries. In addition, we do not
file for patent protection in every country where we conduct business. If we
fail to adequately protect our intellectual property rights, or fail to do so
under applicable law, it would be easier for our competitors to copy our
products and sell competing products at lower prices, which would harm our
business.
Our products may infringe on the intellectual property rights of third parties,
which may result in lawsuits that could be costly to defend and prohibit us
from selling our products.
Third parties could assert exclusive patent, copyright, trademark and other
intellectual property infringement claims against the technologies that are
important to us. In the past, we have dropped a trademark application for a
product name, and we are stopping our use of that name because we found that a
third party had already obtained a trademark for it. We recently received an
inquiry from Telular Corporation relating to a possible infringement of that
party's wireless technology patents by us. If this inquiry leads to a
proceeding against us and we are unable to defend ourselves successfully, our
ability to sell our products may be adversely affected and our business would
be harmed. In addition, third parties may assert claims, or initiate litigation
against us, or our manufacturers, suppliers or customers with respect to
existing or future products, trademarks or other proprietary rights. There is a
substantial risk of litigation regarding intellectual property rights in our
industry. Any claims against us or customers that we indemnify against
intellectual property claims, with or without merit, may:
. be time-consuming, costly to defend and harm our reputation
. divert management's attention and resources
. cause delays in the delivery of our products
. require the payment of money damages
. result in an injunction, which would prohibit us from using these
technologies and require us to stop shipping our systems until they
could be, if possible, redesigned
. require us to enter into license or royalty agreements, which may not be
available on acceptable terms or require payment of substantial sums
Since we incur most of our expenses and a majority of our cost of goods sold in
foreign currencies, fluctuations in the values of foreign currencies could have
a negative impact on our profitability.
Although 87% of our sales in 1999 were denominated in U.S. dollars, we incur
most of our expenses in British pounds and a majority of our cost of goods sold
in Swedish krona. We expect
15
<PAGE>
these percentages to fluctuate over time. Fluctuations in the value of foreign
currencies could have a negative impact on the profitability of our global
operations and our business and our currency hedging activities may not limit
these risks. The value of foreign currencies may also make our products more
expensive than local products.
A material defect in our products that either delays the commencement of
services or affects customer networks could seriously harm our credibility and
our business, and we may not have sufficient insurance to cover any potential
liability.
Fixed wireless devices are highly complex and frequently contain undetected
software or hardware errors when first introduced or as new versions are
released. We have detected and are likely to continue to detect errors and
product defects in connection with new product releases and product upgrades.
In the past, some of our products have contained defects that delayed the
commencement of service.
If our hardware or software contains undetected errors, we could experience:
. delayed or lost revenues and market share due to adverse customer
reactions
. higher costs and expenses due to the need to provide additional products
and services to a customer at a reduced charge or at no charge
. claims for substantial damages against us, regardless of our
responsibility for any failure, which may lead to increased insurance
costs
. negative publicity regarding us and our products, which could adversely
affect our ability to attract new customers
. diversion of management and development time and resources
Our general liability insurance coverage may not continue to be available on
reasonable terms or in sufficient amounts to cover one or more large claims, or
our insurer may disclaim coverage as to any future claim. The successful
assertion of any large claim against us could adversely affect our business.
Since our products typically contain components from several sources, if there
is a problem in one of our networks, we may have difficulty identifying the
source of the problem.
Our products must successfully integrate with products from other companies.
When problems occur in a network, it may be difficult to identify the source of
the problem. Although a third-party's product may be the source of hardware or
software errors in our network, our customers may hold us responsible. We may
not be able to respond quickly to correct these problems, which may result in
the loss of future sales and harm to our reputation. In addition, we may be
forced to incur significant expenses.
Because our executive office and our executive officers are in the United
Kingdom, you may not be able to enforce judgments against us that are obtained
in U.S. courts.
Since our executive office is located in Middlesex, England, our executive
officers reside outside the U.S. and a portion of our assets are located
outside the U.S. As a result, it may be difficult or impossible for investors
to effect service of process upon such persons within the U.S. or to enforce
against such persons judgments obtained in the U.S. courts, including judgments
predicated upon the civil liability provisions of the federal securities laws
of the U.S.
16
<PAGE>
Risks Related to the Offering
Our existing shareholders have significant control over matters requiring
shareholder approval, which may delay or prevent third party takeover attempts.
On completion of this offering, our executive officers and directors and
their affiliates will beneficially own in the aggregate approximately 32.7% of
our outstanding common stock. This percentage will be 31.9% if the underwriters
exercise their over-allotment option in full. As a result, these shareholders
will be able to exercise significant control over all matters requiring
shareholder 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.
We may need to raise additional capital after this offering and if we are not
able to raise capital on acceptable terms or on a timely basis, we may not be
able to continue our business operations.
We believe that the net proceeds of this offering, together with our cash,
cash equivalents and borrowing capacity, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at
least the next 18 months. However, we anticipate that we will continue to
experience negative cash flow for at least the next 36 months following the
offering. Therefore, we are likely to need to raise additional funds until we
are able to become profitable. We may need more funds than we have used in the
past, for example, if changes in technology or industry standards require us to
redesign our products or change our product development focus. In addition, the
loss of any large customer given our customer concentration may require us to
seek additional funding if we are unable to replace the anticipated revenue. If
we cannot secure needed funds on acceptable terms, we may not be able to
develop or enhance our technologies or products, take advantage of future
opportunities or respond to competitive pressures or unanticipated cash
requirements, or hire and recruit additional personnel, which could seriously
harm our business. If we issue additional equity securities to raise funds, the
ownership percentage of existing shareholders would be reduced. New investors
may demand rights, preferences or privileges senior to those of existing
holders of our common stock.
Our articles of incorporation and bylaws and Washington law contain provisions
that could delay or prevent a change of control of Airspan that our
shareholders may consider favorable.
Certain provisions of our articles of incorporation and bylaws and
Washington law may discourage, delay or prevent a merger or acquisition that a
shareholder may consider favorable. These provisions include:
. authorizing the board of directors to issue additional common and
preferred stock
. not permitting cumulative voting in the election of directors
. limiting the persons who may call special meetings of shareholders
. not permitting shareholder action by written consent
. establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
shareholders at shareholder meetings
We are also subject to certain provisions of Washington law that could
delay, deter or prevent us from entering into an acquisition. Chapter 19 of the
Washington Business Corporation Act prohibits a
17
<PAGE>
Washington corporation such as Airspan from engaging in a business combination
with an interested shareholder unless specific conditions are met.
Following this offering our existing shareholders may decide to sell their
shares, and substantial future sales of our shares in the public market may
cause our stock price to fall.
If our shareholders (especially our existing shareholders) sell substantial
amounts of our common stock in the public market after this offering, our stock
price may decline significantly. These sales also might make it more difficult
for us to sell equity securities in the future. All of the shares sold in this
offering will be freely tradable. Substantially all of the remaining shares are
subject to lock-up arrangements between the shareholders and us or the
underwriters. Of the remaining shares of common stock outstanding after this
offering, 27,564,181 shares will be eligible for sale in the public market 180
days following the date of this prospectus. Of these shares, 13,114,352 shares
will be subject to volume limitations under federal securities laws.
In addition, on the date 180 days following the date of this prospectus,
approximately 669,108 shares will be subject to vested options.
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under the captions "Prospectus Summary", "Risk
Factors", "Use of Proceeds", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements". These statements involve known and
unknown risks and uncertainties, such as our plans, objectives, expectations
and intentions, 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 the forward-looking statements. These
factors are listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "expects", "anticipates", "intends", "may", "should", "plans",
"believes", "seeks", "estimates" or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we do not guarantee future results, levels of
activity, performance or achievements. Our actual results and the timing of
certain events could differ materially from those anticipated in these forward-
looking statements.
19
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $75.2 million from the sale of
5,500,000 shares of common stock, and an additional $11.5 million from the sale
of 825,000 shares if the underwriters' over-allotment option is exercised in
full, after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including in management's
estimation continued investment in research and development of between $15
million and $25 million and sales and marketing expenditures of between $10
million and $20 million. The amounts and timing of these expenditures will vary
depending on a number of factors, including the amount of cash generated by our
operations, competitive and technological developments and the rate of growth,
if any, of our business. While we have no specific plans for any remaining
proceeds, we may also use a portion of the net proceeds to acquire businesses,
products and technologies or to establish joint ventures that we believe will
complement our current or future business. However, we have no specific plans,
agreements or commitments to do so and are not currently engaged in any
negotiations for any acquisition or joint venture. We may also use a portion of
the net proceeds to repay existing indebtedness to DSC. The debt is under a
promissory note of $17.5 million, consisting of $15.0 million in principal
amount plus accrued but unpaid interest at an annual rate of 7%. The debt was
incurred in relation to our purchase of DSC's assets in January 1998.
Pending the uses described above, we intend to invest the net proceeds in
short-term, interest bearing, investment-grade securities. We cannot predict
whether the proceeds will be invested to yield a favorable return.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. In addition, pursuant to a loan agreement with a
capital equipment lessor, we cannot pay dividends without such lender's
consent. Accordingly, we do not currently anticipate paying any cash dividends
in the foreseeable future.
20
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of April 2, 2000:
. on an actual basis
. on a pro forma basis to reflect the conversion of our outstanding
convertible preferred stock into common stock upon the closing of this
offering, the sale of 578,573 shares of Series C preferred stock at
$2.50 per share on April 11, 2000 and the exercise of 14,980 stock
options between April 2, 2000 and June 19, 2000
. on a pro forma as adjusted basis to reflect our sale of 5,500,000 shares
of common stock in this offering, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us
The information set forth in the table below is qualified by, and you should
read it in conjunction with, our more detailed consolidated financial
statements and notes to financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
As of April 2, 2000
---------------------------------
Pro Pro Forma
Actual Forma as Adjusted
-------- ----------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 55,906 $ 57,358 $132,583
======== ======== ========
Long-term debt, net of current portion....... $ 20,440 $ 20,440 $ 20,440
Stockholders' equity:
Convertible preferred stock $0.0001 par
value; in series A, B and C, 81,000,000
shares authorized, 80,171,429 shares issued
and outstanding, actual; 5,000,000
authorized, none issued and outstanding, pro
forma and pro forma as adjusted............. 801 -- --
Common stock, $0.0001 par value; 50,000,000
shares authorized, 1,358,725 shares issued
and outstanding, actual; 50,000,000 shares
authorized, 28,290,372 shares issued and
outstanding, pro forma; 50,000,000 shares
authorized, 33,790,372 shares issued and
outstanding, pro forma as adjusted.......... 41 65 67
Notes receivable--stockholder................ (130) (130) (130)
Additional paid-in capital................... 125,576 127,805 203,028
Accumulated deficit.......................... (72,109) (72,109) (72,109)
-------- -------- --------
Total stockholders' equity ................ 54,179 55,631 130,856
-------- -------- --------
Total capitalization....................... $ 74,619 $ 76,071 $151,296
======== ======== ========
</TABLE>
--------
This table excludes the following shares as of June 19, 2000:
. 1,739,733 shares issuable upon exercise of outstanding options at a weighted
average exercise price of $2.12 per share
. an aggregate of 2,103,228 shares available for future issuance under our
stock option plan
21
<PAGE>
. an aggregate of 249,998 shares of preferred stock issuable upon the exercise
of 249,998 warrants to purchase preferred stock at an exercise price of
$1.75 per share; upon the closing of this offering these warrants will
convert into warrants to purchase 83,333 shares of common stock at an
exercise price of $5.25 per share
. an aggregate of 500,000 shares reserved for future issuance under our
employee stock purchase plan
The pro forma and pro forma as adjusted columns of this table reflect the three
for one reverse split of the common stock effected May 25, 2000.
22
<PAGE>
DILUTION
Our pro forma net tangible book value as of April 2, 2000 was approximately
$54.1 million, or $1.91 per share. This is after giving effect to the
conversion of all of our outstanding preferred stock as of April 2, 2000 into
common stock upon the closing of this offering, the sale of 578,573 shares of
Series C preferred stock at $2.50 per share on April 11, 2000 and the exercise
of 14,980 stock options between April 2, 2000 and June 19, 2000. 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, after giving effect to the conversion of all of our outstanding
preferred stock as of April 2, 2000 into common stock upon the closing of this
offering, the sale of 578,573 shares of Series C preferred stock at $2.50 per
share on April 11, 2000 and the exercise of 14,980 stock options between April
2, 2000 and June 19, 2000.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the pro forma net tangible book value per share of common stock immediately
after the completion of this offering. After giving effect to the sale of the
5,500,000 shares of common stock in this offering and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us, our pro forma net tangible book value at April 2, 2000 would have been
approximately $129.3 million, or $3.83 per share. This represents an immediate
increase in net tangible book value of $1.92 per share to existing shareholders
and an immediate dilution in net tangible book value of $11.17 per share to new
investors of common stock in this offering. The following table illustrates
this dilution on a per share basis:
<TABLE>
<S> <C>
Initial public offering price per share................................. $15.00
Pro forma net tangible book value per share as of April 2, 2000....... 1.91
Increase per share attributable to new investors...................... 1.92
------
Pro forma net tangible book value per share after this offering......... 3.83
Dilution per share to new investors................................... $11.17
======
</TABLE>
The following table sets forth, on a pro forma basis as of June 19, 2000,
after giving effect to the conversion of all of our outstanding convertible
preferred stock into common stock upon the closing of this offering, the
difference between the number of shares of common stock purchased from us, the
total consideration paid and the average price per share paid by existing
holders of common stock and by the new investors, before deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......... 28,290,372 83.7% $127,870,277 60.8% $4.52
New investors................. 5,500,000 16.3 82,500,000 39.2 15.00
---------- ---- ------------ ---- -----
Total......................... 33,790,372 100% $210,370,277 100%
========== ==== ============ ====
</TABLE>
This table excludes the following shares as of June 19, 2000:
. 1,739,733 shares issuable upon exercise of outstanding options at a weighted
average exercise price of $2.12 per share
23
<PAGE>
. an aggregate of 2,103,228 shares available for future issuance under our
stock option plan
. an aggregate of 249,998 shares of preferred stock issuable upon the exercise
of 249,998 warrants to purchase preferred stock at an exercise price of
$1.75 per share; upon the closing of this offering these warrants will
convert into warrants to purchase 83,333 shares of common stock at an
exercise price of $5.25 per share
. an aggregate of 500,000 shares reserved for future issuance under our
employee stock purchase plan
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read together
with our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The financial information for the year
ended December 31, 1997 and month ended January 25, 1998 relates to the periods
while we were a unit of DSC, which we refer to as the predecessor business. The
information relating to the predecessor business has been prepared as a
statement of revenues and direct costs and expenses and is not intended to be a
complete presentation of the financial results of operations of the predecessor
business. The statement of revenues and direct costs and expenses for the year
ended December 31, 1997 and month ended January 25, 1998 and the consolidated
statement of operations data and balance sheet data for the eleven months ended
or as of December 31, 1998 and the year ended or as of December 31, 1999 are
derived from our audited consolidated financial statements included elsewhere
in this prospectus which have been audited by Ernst & Young, independent
auditors, whose report thereon is also included elsewhere in this prospectus.
The consolidated statement of operations data for the quarters ended April 4,
1999 and April 2, 2000 and the balance sheet data as of April 2, 2000 are
derived from our unaudited condensed consolidated financial statements included
elsewhere in this prospectus and include, in the opinion of management, all
adjustments necessary for the fair presentation of our financial position and
results of operations.
<TABLE>
<CAPTION>
Predecessor(1) Company
------------------------ ---------------------------------------------------------------
Year Ended Month Ended Eleven
December 31, January 25, Months Ended Year Ended Quarter Ended Quarter Ended
1997 1998 December 31, 1998 December 31, 1999 April 4, 1999 April 2, 2000
------------ ----------- ----------------- ----------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue................. $ 4,818 $ 135 $ 11,485 $ 12,480 $ 1,301 $ 5,661
Cost of revenue......... 3,948 100 9,531 8,086 886 3,530
-------- ------- -------- ----------- ------- ----------
Gross profit............ 870 35 1,954 4,394 415 2,131
-------- ------- -------- ----------- ------- ----------
Research and
development............ 9,747 1,074 10,524 13,845 3,215 4,199
Sales and marketing..... 3,832 398 6,765 9,883 1,931 3,099
General and
administrative......... 4,034 378 3,960 7,686 1,799 2,243
Acquired in-process
research and
development and
amortization of
intangibles (2)........ -- -- 16,270 2,476 619 276
-------- ------- -------- ----------- ------- ----------
Total operating
expenses............... 17,613 1,850 37,519 33,890 7,564 9,817
-------- ------- -------- ----------- ------- ----------
Loss from operations.... $(16,743) $(1,815) (35,565) (29,496) (7,149) (7,686)
======== =======
Interest and other
income, net............ -- -- 119 147 110 638
Income taxes............ -- -- (150) (100) (18) (16)
-------- ----------- ------- ----------
Net loss................ -- -- $(35,596) $ (29,449) $(7,057) $ (7,064)
======== =========== ======= ==========
Net loss per share--
basic and diluted...... -- -- $ (65.72) $ (33.84) $(10.33) $ (6.50)
Shares used to compute
net loss per share--
basic and diluted...... -- -- 541,667 870,328 682,870 1,087,047
Pro forma net loss per
share--basic and
diluted (3)............ -- -- -- $ (1.37) -- $ (0.26)
Shares used to compute
pro forma net loss per
share--basic and
diluted................ -- -- -- 21,446,122 -- 27,633,079
</TABLE>
<TABLE>
<CAPTION>
As of
-------------------------------------------------
December 31, 1998 December 31, 1999 April 2, 2000
----------------- ----------------- -------------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents... $36,178 $58,828 $55,906
Working capital............. 39,758 68,795 66,147
Total asset................. 57,840 88,220 85,428
Long term debt.............. 16,095 20,138 20,440
Stockholders' equity........ 32,624 57,212 54,179
</TABLE>
--------
(1) The statement of operations data relating to our predecessor are further
described in Note 1 to our financial statements.
(2) The eleven months ended December 31, 1998 includes a charge of $14 million
for acquired in-process research and development in connection with the
acquisition of the net assets of our predecessor.
(3) Pro forma basic and diluted per share calculations reflect the pro forma
conversion at the date of issuance of all outstanding preferred stock into
common stock.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included else where in
the prospectus. The financial information for the year ended December 31, 1997
and January 1998 relate to the periods while we were a unit of DSC, which we
refer to as the predecessor business. The information relating to the
predecessor business has been prepared as a statement of revenues and direct
costs and expenses and is not intended to be a complete presentation of the
financial results of operations of the predecessor business. Since our
financial information for the eleven months ended December 31, 1998 is not a
full year, we refer to that period as "fiscal 1998" in the following discussion
and analysis.
Overview
We are a global supplier of wireless communications systems that allow
communications service providers to cost effectively deliver both high speed
data and voice services to their customers at fixed geographic locations. We
were originally organized in 1994 as a unit within DSC Communications
Corporation, a telecommunications equipment manufacturer acquired by Alcatel in
1998. DSC began developing fixed wireless access systems in 1992. In January
1998 we created a new corporation that purchased the Airspan unit from DSC for
$25 million, consisting of $15 million of debt payable over three years
beginning February 1, 2001 and 10 million shares of preferred stock. Following
the acquisition of DSC by Alcatel, we redeemed the preferred stock held by DSC
for a cash payment of $10 million. During February 1999 we moved to our own
premises in Uxbridge, U.K.
We generated revenue of $4.8 million in 1997, $11.5 million in fiscal 1998,
$12.5 million in 1999, and $5.7 million in the quarter ended April 2, 2000. We
have incurred net losses of $16.7 million, $35.6 million, and $29.4 million for
1997, fiscal 1998 and 1999, respectively and we incurred net losses of $7.1
million in the first quarter of 2000. Since becoming an independent company we
have generated significant net losses and negative cash flow and expect to
continue to do so. We have an accumulated deficit of $72.1 million as of April
2, 2000. We expect to continue to have negative cash flows for at least the
next 36 months.
We generate revenue from sales of our integrated systems including hardware
and software and from services related to implementation and support
activities. Sales of our systems, primarily our AS4000 systems, constituted 93%
in fiscal 1998 and 89% in 1999. Our sales have been from a relatively small
number of our systems. Following our purchase of the Airspan unit from DSC, we
continued to sell products developed while we were a division of DSC, which we
refer to as our older generation products. Our older generation products
allowed only one subscriber terminal, or the equipment used by our customers at
their locations, on each radio channel, which limited the number of subscriber
lines per base station to 120. In 1998, we introduced products that assign
frequencies to users only when needed, which significantly expanded the
potential number of users per system. We refer to these products, which have
higher margins than our older generation products, as our newer generation
products. Our newer generation product uses technology that allocates a radio
channel on subscriber demand and allows a single base station to support up to
2,000 subscriber lines. Older generation product sales accounted for 15% of
total sales in 1999 and 4% of total sales in the first quarter of 2000. We
expect future sales of older generation products to be insignificant.
Our proprietary software is integral to our products and is not sold
separately. Customer service contracts are generally of a short-term nature,
for days and weeks rather than months and are sold
26
<PAGE>
separately from sales of our systems. Although service revenue does not
currently constitute a material portion of our revenue, we believe services
will increase as a percentage of our revenue.
Revenue is recognized when all significant contractual obligations have been
satisfied and the collection of resulting revenues is reasonably assured. For
most product sales, revenue recognition occurs on shipment. For contracts with
nonstandard terms revenue is recognized when these terms have been satisfied.
Revenue from customer service contracts is recognized once the services have
been rendered. Any billings in excess of revenue recognized for products or
services are classified as deferred income or customer advances.
We sell our products primarily through our direct sales force and, to a
lesser extent, through distribution channels. We have a direct sales presence
in the U.S., U.K., Sweden, Denmark, Poland, Czech Republic, Brazil, the
Philippines, South Korea, Sri Lanka and Canada. We also sell through
independent agents and resellers in markets where we do not have a direct sales
presence and to original equipment manufacturers, or OEMs, who may sell our
products under their name. Our sales cycle is typically long and unpredictable
and varies between six months to two years, and often involves extensive
testing and evaluation by prospective customers, which makes it difficult for
us to anticipate the quarter in which particular sales may occur.
In 1999, our international sales accounted for 96% of our total revenue,
while U.S. sales accounted for 4%. Most of the U.S. sales consisted of systems
sold to U.S. customers but were shipped to destinations outside the U.S. In the
future, we expect U.S. sales to increase as a percentage of our total sales. In
1999, our top ten customers accounted for 89% of our revenue. We currently
derive, and expect to continue to derive, a substantial percentage of our
revenue from fewer than ten customers. In the quarter ended April 2, 2000, AZ
Communications Network, Inc., Suntel Private Ltd. and eircom, plc represented
36%, 28% and 17%, respectively, of our revenue. For the year ended December 31,
1999, Suntel Private Ltd., Aliatel a.s. and eircom, plc represented 28%, 18%
and 13%, respectively, of our revenue. For the eleven months ended December 31,
1998, Smart Communications, Aliatel a.s. and Telbank represented 18%, 14% and
14%, respectively, of our revenue. We anticipate that our operating results
will continue to depend on sales to a small number of key customers in the
foreseeable future. The following table identifies the percentage of our
revenue by geographic region in the periods identified.
<TABLE>
<CAPTION>
Percentage of
Revenue
-------------------------------------------------
Eleven Months
Ended Year Ended Quarter Ended
Geographic Area December 31, 1998 December 31, 1999 April 2, 2000
--------------- ----------------- ----------------- -------------
<S> <C> <C> <C>
United States........... 26.5% 3.9% 2.1%
Asia Pacific............ 11.5 39.5 72.3
Europe.................. 47.9 41.3 23.7
Africa and Middle East.. 12.7 13.8 1.5
Other location.......... 1.4 1.5 0.4
</TABLE>
Cost of revenue consists of component and material costs, direct labor
costs, warranty costs, royalties, overhead related to manufacturing our
products and customer support costs. Our gross margin is affected by changes in
our product mix because our gross margin on base stations and related equipment
is substantially higher than the gross margin on subscriber terminals. In
addition, our gross margin is affected by changes in the average selling price
of our systems, volume discounts granted to significant customers and the
proportion of total revenue of sales of software which typically carries a
higher gross margin than hardware. We expect the average selling prices of our
27
<PAGE>
products to decline and we intend to continue to implement product cost
reductions and develop and introduce new products or product enhancements to
maintain or increase our gross margins. Further, we expect to derive an
increasing proportion of our revenue from the sale of our integrated systems
through distribution channels. Revenue derived from these sales channels
typically carry a lower gross margin than direct sales.
Research and development expenses consist primarily of salaries and related
costs for personnel and expenses for design, development and testing facilities
and equipment. These expenses also include costs associated with product
development efforts, including consulting fees and prototyping costs from
initial product concept to manufacture and production. We expect to continue to
make substantial investments in research and development.
Sales and marketing expenses consist of salaries and related costs for
personnel, sales commissions, consulting fees and expenses for advertising,
travel, technical assistance, trade shows, and promotional and demonstration
materials. We expect to continue to incur substantial expenditures related to
sales and marketing activities including cost associated with the recruitment
of additional sales and marketing personnel and for the expansion of our
distribution channels.
General and administrative expenses consist of salaries and related expenses
for personnel, professional and consulting fees and other related expenses
including facilities costs. We expect general and administrative expenses to
continue to increase as we add personnel and incur additional costs related to
the anticipated growth of our business and operation as a public company.
We expect research and development, sales and marketing and general and
administrative expense categories to increase in absolute dollars. However, the
percentage of revenue that each of these categories represents will vary
depending on the rate of our revenue growth and investments that may be
required to support the development of new products and our penetration of new
markets.
We have recently announced new contracts for the sale of our AS 4000 and
related products and services to Motorola and N-abler, an equipment operator
for AZ Communications Network, Inc. On February 28, 2000, we announced that we
have executed an agreement with Motorola whereby Motorola will offer our
systems as part of its wireless solutions portfolio, opening up a new sales
channel for our products. This agreement is initially for a two-year period,
has no minimum volume commitments and Motorola is not obligated to purchase our
products. On April 18, 2000, we announced that N-abler Communications Inc.,
will purchase our AS 4000 systems and deploy those systems to large corporate
customers in the Philippines. This agreement is for 20 AS4000 base stations and
subscriber terminals and this contract accounted for 36% of revenue for the
quarter ended April 2, 2000. The percentage of revenue derived from the N-abler
agreement is expected to decrease as a proportion of our revenue in the future
as we fulfill the contract. We do not expect that these agreements will account
for a material percentage of our future revenues.
We outsource most of our manufacturing processes to Flextronics
International and expect to continue to use contract manufacturers. We also
purchase some of the key components of our products from single vendors for
which alternative sources are generally not readily available.
28
<PAGE>
Results of Operations
The results of operations have been prepared for the periods:
. the year ended December 31, 1997 from the predecessor business
. the month ended January 25, 1998 from the predecessor business
. the eleven months ended December 31, 1998 as an independent company
. the year ended December 31, 1999 as an independent company
. the quarter ended April 4, 1999 as an independent company
. the quarter ended April 2, 2000 as an independent company
The following table provides operating data as a percentage of revenue for
the periods presented.
<TABLE>
<CAPTION>
Predecessor Company
------------------------ ---------------------------------------------
Eleven Months Quarter Quarter
Year Ended Month Ended Ended Year Ended Ended Ended
December 31, January 25, December 31, December 31, April 4, April 2,
1997 1998 1998 1999 1999 2000
------------ ----------- ------------- ------------ -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue......... 81.9 74.1 83.0 64.8 68.1 62.4
------ -------- ------ ------ ------ ------
Gross Profit.......... 18.1 25.9 17.0 35.2 31.9 37.6
------ -------- ------ ------ ------ ------
Operating expenses:
Research and
development.......... 202.3 795.6 91.6 110.9 247.1 74.2
Sales and marketing... 79.5 294.8 58.9 79.2 148.4 54.7
General and
administrative....... 83.7 280.0 34.5 61.6 138.3 39.6
Acquired in-process
research and
development and
amortization of
intangibles.......... -- -- 141.7 19.8 47.6 4.9
------ -------- ------ ------ ------ ------
Total operating
expenses............... 365.6 1,370.4 326.7 271.6 581.4 173.4
------ -------- ------ ------ ------ ------
Loss from operations.... (347.5) (1,344.4) (309.7) (236.3) (549.5) (135.8)
Interest and other
income, net............ -- -- 1.0 1.2 8.5 11.3
Income taxes............ -- -- 1.3 0.8 1.4 0.3
------ -------- ------ ------ ------ ------
Net loss................ (347.5)% (1,344.4)% (309.9)% (236.0)% (542.4)% (124.8)%
====== ======== ====== ====== ====== ======
</TABLE>
Recent Developments
Our revenue for the quarter ended July 2, 2000 was $6.9 million, an increase
of 228% from the second quarter of 1999. The increase in revenue was driven by
shipments to customers in Europe and in Asia. Gross margin for the quarter
ended July 2, 2000 was 35% compared with 47% for the second quarter of 1999. In
addition, we recorded research and development expenses of $4.2 million, sales
and marketing expenses of $3.4 million, and general and administrative expenses
of $2.1 million for the second quarter 2000, compared with $3.3 million, $1.7
million and $1.8 million, respectively, for the second quarter of 1999.
Operating loss and net loss were $7.4 million and $7.0 million, respectively,
for the quarter ended July 2, 2000, compared with an operating loss of $6.5
million and net loss of $6.4 million for the second quarter of 1999.
29
<PAGE>
For the six month period ended July 2, 2000 our revenue was $12.5 million, a
269% increase from the corresponding 1999 period, while gross margin was 36%
compared with 41% for the six month period ended July 3, 1999. Research and
development expenses were $8.4 million, sales and marketing expenses $6.5
million and general and administrative expenses $4.3 million, compared with
$6.5 million, $3.6 million and $3.6 million, respectively, for the six months
ended July 3, 1999. Operating loss and net loss were $15.1 million and $14.1
million, respectively, for the six month period ended July 2, 2000, compared
with an operating loss of $13.6 million and net loss of $13.4 million for the
six month period ended July 3, 1999.
Comparison of the Quarter Ended April 2, 2000 to the Quarter Ended April 4,
1999
Revenue
Revenue increased 335% from $1.3 million for the quarter ended April 4, 1999
to $5.7 million for the quarter ended April 2, 2000. The growth in revenue has
been due to the increased demand of our newer generation, higher priced
products predominantly from customers located in Asia Pacific and Europe, which
increased 960% and 185%, respectively. Our increase in revenue is due to
volume, rather than price increases.
Cost of Revenue
Cost of revenue increased 298% from $0.9 million in the quarter ended April
4, 1999 to $3.5 million in the quarter ended April 2, 2000, resulting from the
substantial increase in revenue. Gross margin increased from 31.9% for the
quarter ended April 4, 1999 to 37.6% for the quarter ended April 2, 2000. The
gross margin improvement reflected primarily the results of product design
changes and, to a lesser extent, increased volume and introduction of lower
priced products, partly offset by lower average selling prices.
Research and Development Expenses
Research and development expenses increased 30.6% from $3.2 million in the
quarter ended April 4, 1999 to $4.2 million in the quarter ended April 2, 2000,
due to increased headcount.
Sales and Marketing Expenses
Sales and marketing expenses increased 60.5% from $1.9 million in the
quarter ended April 4, 1999 to $3.1 million in the quarter ended April 2, 2000,
reflecting a higher headcount and the expansion of our sales and marketing
activities. In addition, sales and marketing expenses for the first quarter of
1999 and 2000 included provisions totaling $0.0 million and $0.1 million,
respectively, for potential bad debt expense.
General and Administrative Expenses
General and administrative expenses increased 24.6% from $1.8 million in
quarter ended April 4, 1999 to $2.2 million in the quarter ended April 2, 2000,
reflecting a higher headcount.
Acquired In-process Research and Development and Amortization of Intangibles
Acquired in-process research and development and amortization of intangibles
expense decreased 55.3% from $0.6 million in the quarter ended April 4, 1999 to
$0.3 million in the quarter ended April 2, 2000, reflecting the full write off
of developed technology, purchase contracts and patents.
30
<PAGE>
Interest and Other Income
Interest and other income increased 183.4% from $0.4 million for the quarter
ended April 4,1999 to $1.1 million in the quarter ended April 2, 2000 and
consisted of interest earned on cash deposits with financial institutions. The
increased interest was from higher cash balances from additional equity
capital. Amounts from interest income were partially offset by interest expense
of $0.3 million and $0.5 million respectively, predominantly on outstanding
indebtedness owed to DSC related to the purchase of the company's assets in
January 1998.
Income Taxes
We did not record an income tax benefit for the tax losses generated in the
U.K. because we have experienced operating losses since inception. The first
quarter 1999 and 2000 tax provisions relates to U.S. federal income taxes
currently payable primarily attributable to intercompany interest income.
Net Loss
Net loss remained essentially unchanged at $7.1 million from first quarter
1999 to first quarter 2000. Increases in revenue and gross profits were offset
by increases in research and development, sales and marketing and general and
administrative expenses.
Comparison of Fiscal Period Ended December 31, 1998 and Year Ended December 31,
1999
Revenue
Revenue increased 9% from $11.5 million in fiscal 1998 to $12.5 million in
1999. During 1999, revenue from older generation products decreased
approximately $8.8 million but was more than offset by revenue from sales of
newer generation products to customers located in Asia Pacific and Europe.
Sales to customers in Asia Pacific increased 274% while sales to customers in
the U.S. declined 84%.
Cost of Revenue
Cost of revenue decreased 15% from $9.5 million in fiscal 1998 to $8.1
million in 1999, resulting from shipment of lower cost products and a $2.1
million provision for excess inventory for older generation products in fiscal
1998. Gross margin increased from 17.0% during fiscal 1998 to 35.2% during
1999. Excluding the inventory provision for older generation products of $2.1
million, gross margin remained constant from fiscal 1998 to 1999.
Research and Development Expenses
Research and development expenses increased 32% from $10.5 million in fiscal
1998 to $13.8 million in 1999, reflecting increased headcount related costs of
$2.5 million, and increased product manufacturing development costs as newer
generation products moved from development to manufacturing.
Sales and Marketing Expenses
Sales and marketing expenses increased 46% from $6.8 million in fiscal 1998
to $9.9 million in 1999, reflecting higher headcount and the expansion of our
sales and marketing activities. In addition, sales and marketing expenses for
fiscal 1998 and 1999 included provisions totaling $0.6 million and $0.7
million, respectively, for potential bad debt expense.
31
<PAGE>
General and Administrative Expenses
General and administrative expenses increased 94% from $4.0 million in
fiscal 1998 to $7.7 million in 1999, reflecting higher headcount related costs
of $1.3 million, increased costs of our new facilities of $0.8 million and
additional costs of implementing systems and procedures for an independent
company.
Acquired in-process research and development and amortization of intangibles
Acquired in-process research and development and amortization of intangibles
expense decreased 85% from $16.3 million in fiscal 1998 to $2.5 million in
1999, primarily reflecting the one-time write-off in fiscal 1998 of in-process
technology. The acquired in-process research and development represent the
development of technologies associated with a new generation of the AS4000
System, which allows a significantly larger number of subscribers to be
supported on a single radio channel. These products under development were 80%
complete at the time we purchased the Airspan unit from DSC, with an estimated
$4.1 million required to complete the project, including costs for final
development, system verification and test, documentation and release to
manufacturing processes. The new product uses a fundamentally different product
engineering design and software and required an entirely new design and
engineering effort. The project was materially completed by March 31, 1998,
with the first shipment in June 1998 and revenue first recognized in December
1998. We expect substantially all of our hardware product revenue will be
derived from this product in 2000. See also Note 2 to the financial statements.
Following a detailed review of the fair value and remaining economic lives
for all material intangible assets, we used the following asset valuation and
economic life estimations for the assets we acquired from DSC.
<TABLE>
<CAPTION>
Estimated Fair Value Estimated Economic
Asset ($ in millions) Life
------------------------- -------------------- ------------------
<S> <C> <C>
In-process technology $14.0 0 Years
Core/developed technology 1.9 2 Years
Purchase contracts 2.1 2 Years
Patents 0.1 2 Years
Assembled workforce 1.2 4 Years
</TABLE>
The amount allocated to in-process research and development was recorded as
a one-time charge to operations in 1998 because the technology was not fully
developed and had no future alternative use. As we expect significant revenue
to be generated from this technology, we allocated a material amount of the
purchase price to in-process research and development.
The appraisal method used to value the in-process technology was the income
approach where the valuation is focused on the income-producing capability of
the demand assigned product with the premise being that the value of an asset
can be measured by the present worth of the net economic benefit to be received
over the life of the asset. Expected cash flows attributable to the demand
assigned product over its product life cycle were converted to present value
through discounting. The discounting process used a rate of return that
accounted for the time value of money and risk factors.
For a description of the significant assumptions made, see Note 2 to our
consolidated financial statements.
The purchase contracts represented contractual obligations as of the
acquisition date to provide existing products to customers in the future. The
revenue would not be recognized until such delivery
32
<PAGE>
occurred. The products were to be delivered during fiscal 1998 and 1999. To
arrive at an indication of value, the benefit was quantified over the life of
the contract through application of the income approach.
Interest and Other Income, Net
Interest and other income increased 42% from $1.1 million in fiscal 1998 to
$1.6 million in 1999 and consisted of interest earned on cash deposits with
financial institutions. The increase from fiscal 1998 to 1999 was caused by
higher cash balances from the additional equity capital we raised. Amounts from
interest income were partially offset by fiscal 1998 and 1999 interest expense
of $1.0 million and $1.4 million, respectively, predominantly on outstanding
indebtedness owed to DSC related to the purchase of the Airspan unit in January
1998.
Income taxes
We did not record an income tax benefit for the tax losses generated in the
U.K. The fiscal 1998 and 1999 tax provision of $0.2 million and $0.1 million,
respectively, relates to U.S. federal income taxes currently payable primarily
attributable to intercompany interest income.
Net Loss
Net loss decreased 17% from $35.6 million in fiscal 1998 to $29.5 million in
1999, primarily due to a decrease in acquired in-process research and
development and amortization of intangibles of $13.8 million and a $2.4 million
increase in gross margin. This decrease was offset in part by increases in
research and development, sales and marketing and general and administrative
expenses.
Comparison of Year Ended December 31, 1997 and Fiscal Period Ended December 31,
1998
Revenue
Revenue increased 138% from $4.8 million in 1997 to $11.5 million in fiscal
1998. Substantially all of our revenue was attributable to the older generation
products. The $6.7 million increase during fiscal 1998 was primarily a result
of system sales to new customers located in Asia Pacific and Europe. Sales to
customers in Asia Pacific increased from 0% in the year ended December 31, 1997
to 11.5% of our revenue in the fiscal period ended December 31, 1998. Sales to
customers in Europe increased from 35% in the year ended December 31, 1997 to
47.9% in the fiscal period ended December 31, 1998.
Cost of Revenue
Cost of revenue increased 141% from $3.9 million in 1997 to $9.5 million in
fiscal 1998. The $5.6 million increase during fiscal 1998 was largely
attributable to higher revenues as well as a $2.1 million excess inventory
provision related to older generation products. Gross margin decreased from
18.1% in 1997 to 17.0% in fiscal 1998 due primarily to the inventory reserve.
Gross margin in fiscal 1998 excluding the $2.1 million inventory provision for
older generation products would have been 35.2%.
Research and Development Expenses
Research and development expenses increased 8% from $9.7 million in 1997 to
$10.5 million in fiscal 1998. This increase was due to an increase in
headcount.
33
<PAGE>
Sales and Marketing Expenses
Sales and marketing expenses increased 77% from $3.8 million in 1997 to $6.8
million in fiscal 1998. The increase was largely attributable to recruiting,
hiring and relocating a direct sales, marketing and technical assistance staff
during fiscal 1998. During 1997, sales of our products were made through DSC's
sales organization, which sold a variety of DSC's products, including ours. The
costs of the sales organization were not allocated by DSC and are not reflected
in our 1997 expenses.
General and Administrative Expenses
General and administrative expenses were unchanged at $4.0 million in 1997
and in fiscal 1998. This reflects an increase in costs related to
administrative personnel and being an independent company offset by lower
facilities related expenses.
Acquired in-process research and development and amortization of intangibles
Acquired in-process research and development and amortization of intangibles
expense increased from $0.0 in 1997 to $16.3 million in fiscal 1998 primarily
reflecting the one time write-off in fiscal 1998 of in-process technology.
Interest and Other Income, Net
We did not have any interest income or expense in 1997 while we were a unit
of DSC. Interest and other income increased to $1.1 million for fiscal 1998 and
consisted of interest earned on cash deposits with financial institutions. This
amount was partially offset by interest expense of $1.0 million on outstanding
indebtedness of $16.0 million owed to DSC related to the purchase of the
company's assets in January 1998.
Income Taxes
We did not have any direct income taxes in 1997 while we were a unit of DSC.
The fiscal 1998 tax provision of $0.2 million relates to U.S. federal income
taxes primarily attributable to intercompany interest income.
Net Loss
We did not record net loss while we were a unit of DSC. Net loss in fiscal
1998 was $35.6 million for the reasons listed above.
Month Ended January 25, 1998
Revenue during this period was in line with prior period revenue. Other
expenses, including research and development, sales and marketing and general
and administrative were also in line with prior period expenses. Gross margin
for this period was 25.9%.
34
<PAGE>
Quarterly Results of Operations
The following table represents our consolidated operating results for each
of the eight quarters ending April 2, 2000. The information for each of these
quarters is unaudited and has been prepared on the same basis as our audited
consolidated financial statements appearing elsewhere in this prospectus. In
the opinion of management, all necessary material adjustments have been
included to present fairly the unaudited quarterly results when read in
conjunction with our audited financial statements and related notes.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
July 3, Oct. 2, Dec. 31, April 4, July 3, Oct. 3, Dec. 31, April 2,
1998 1998 1998 1999 1999 1999 1999 2000
------- ------- -------- -------- ------- ------- -------- --------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue................. $ 3,030 $ 2,696 $ 4,783 $ 1,301 $ 2,094 $ 3,509 $ 5,576 $ 5,661
Cost of revenue......... 2,110 1,794 4,934 886 1,112 2,209 3,879 3,530
------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss)..... 920 902 (151) 415 982 1,300 1,697 2,131
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 2,341 2,920 3,413 3,215 3,330 3,460 3,840 4,199
Sales and marketing.... 1,414 1,779 2,933 1,931 1,707 2,388 3,857 3,099
General and
administrative........ 884 1,164 1,319 1,799 1,783 1,900 2,204 2,243
Acquired in-process
research and
development and
amortization of
intangibles........... 619 619 619 619 619 619 619 276
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 5,258 6,482 8,284 7,564 7,439 8,367 10,520 9,817
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (4,338) (5,580) (8,435) (7,149) (6,457) (7,067) (8,823) (7,686)
Other income (expense):
Interest expense....... (265) (273) (280) (282) (403) (377) (372) (473)
Interest and other
income................ 224 302 345 392 471 334 384 1,111
------- ------- ------- ------- ------- ------- ------- -------
Total other income
(expense)............. (41) 29 65 110 68 (43) 12 638
------- ------- ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. $(4,379) $(5,551) $(8,370) $(7,039) $(6,389) $(7,110) $(8,811) $(7,048)
======= ======= ======= ======= ======= ======= ======= =======
As a Percentage of
Revenue:
Revenue................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue......... 69.6 66.5 103.2 68.1 53.1 63.0 69.6 62.4
------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss)..... 30.4 33.5 (3.2) 31.9 46.9 37.0 30.4 37.6
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 77.3 108.3 71.4 247.1 159.0 98.6 68.9 74.2
Sales and marketing.... 46.7 66.0 61.3 148.4 81.5 68.1 69.2 54.7
General and
administrative........ 29.2 43.2 27.6 138.3 85.1 54.1 39.5 39.6
Acquired in-process
research and
development and
amortization of
intangibles........... 20.4 23.0 12.9 47.6 29.6 17.6 11.1 4.9
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 173.5 240.5 173.2 581.4 355.3 238.4 188.7 173.4
------- ------- ------- ------- ------- ------- ------- -------
Operating loss.......... (143.2) (207.0) (176.4) (549.5) (308.4) (201.4) (158.2) (135.8)
Other income (expense):
Interest expense....... (8.7) (10.1) (5.9) (21.7) (19.2) (10.7) (6.7) (8.4)
Interest income........ 7.4 11.2 7.2 30.1 22.5 9.5 6.9 19.6
------- ------- ------- ------- ------- ------- ------- -------
Total other income
(expense)............. (1.4) 1.1 1.4 8.5 3.2 (1.2) 0.2 11.3
------- ------- ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (144.5)% (205.9)% (175.0)% (541.0)% (305.1)% (202.6)% (158.0)% (124.5)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Our revenue and results of operations have fluctuated significantly from
quarter to quarter in the past, and we expect these fluctuations to continue in
the future. We have also incurred net losses in each quarter since inception,
and we expect to continue to incur losses for the foreseeable future. The
following discussion highlights significant events that have impacted our
revenues and financial results for the eight quarters ended April 2, 2000.
During fiscal 1998, our revenue was predominantly from sales of our older
generation products. Revenue substantially decreased in the first quarter of
1999 from the fourth quarter of fiscal 1998 due
35
<PAGE>
to a combination of customers spending budgeted funds prior to year-end, and a
transition during the first quarter of 1999 from older generation products to
newer generation products, including a lower-priced subscriber terminal.
Following the commercial introduction of our new products, revenues increased
in each subsequent quarter of 1999.
Cost of revenue, in absolute dollars, fluctuated throughout 1998, 1999 and
2000, due to a combination of manufacturing start up costs and low volume
production. Gross profits fluctuated during each year in part due to changes in
product mix and were also adversely affected by volume price discounts. We made
provisions of $2.3 million and $0.2 million for excess inventory in the fourth
quarter of fiscal 1998 and the third quarter of 1999, respectively.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock, which totaled $115.9 million (net of
transaction expenses) through April 2, 2000. We have also financed our
operations through loans aggregating an additional $5.0 million.
At April 2, 2000, our cash and cash equivalents totaled $59.2 million,
including $3.3 million of restricted cash that is held as collateral for
performance guarantees on customer and supplier contracts and with landlords.
We do not have a line of credit or similar borrowing facility, nor do we have
any material capital commitments.
Our long term debt consists primarily of the amount owed to DSC as part of
the purchase price paid for the company in January 1998. The debt, under a
promissory note of $17.5 million, consists of the original principal amount of
$15.0 million, plus accrued but unpaid interest. Interest accrues on the debt
at an annual rate of 7% and is compounded on a quarterly basis until February
2001, at which time principal and interest are to be repaid in equal
installments over the subsequent 36 months. The promissory note to DSC is
secured by a lien over equipment, debts, stock and all other assets of our
wholly-owned subsidiary based in the U.K. We have other term loans or
subordinated debt aggregating $4.7 million at rates ranging from 6% to 9%
annually, payable in installments over periods ranging from 21 to 54 months.
There are no financial or operating covenants attached to our DSC note or other
term loans or subordinated debt. The amount payable under the promissory note
is still under negotiation where we are seeking to reduce the principal to be
paid as a result of certain claims against DSC in connection with the
acquisition. These claims relate primarily to the value of transferred customer
contracts, understated accounts payable, unusable inventory, assets not
delivered and undisclosed contingent liabilities.
We used cash in operating activities of $16.2 million in fiscal 1998, $29.8
million in 1999 and $6.8 million in the quarter ended April 2, 2000. The cash
used in fiscal 1998 was primarily attributable to an operating loss of $35.6
million and an increase in accounts receivables and other current assets of
$5.8 million. This use of cash was partly offset by an in-process research and
development charge of $14.0 million, in addition to reductions in inventory,
accounts payable, other accrued expenses and depreciation and amortization of
$10.4 million. The cash we used in 1999 was mainly attributable to an operating
loss of $29.5 million, an increase in accounts receivables, inventory and other
current assets of $6.4 million and a reduction of accounts payable of
$0.3 million. These amounts were partly offset by accruals, accretion of
interest on notes payable, and depreciation and amortization of $6.3 million.
The cash used during the first quarter of 2000 was primarily attributable to an
operating loss of $7.1 million and an increase in accounts receivable,
inventory and other current assets of $1.0 million and a reduction in accounts
payable of $0.5 million. These amounts were partly offset by accruals,
accretion of interest on notes payable and depreciation and amortization of
$1.7 million.
36
<PAGE>
We used $3.3 million in cash in fiscal 1998, $4.3 million in 1999 and $0.9
million in the quarter ended April 2, 2000, for investing activities. In each
period these amounts related primarily to capital equipment purchases.
Our financing activities from the sale of convertible preferred stock
provided us with cash of $58.2 million in fiscal 1998, $53.7 million in 1999
and $4.0 million in the quarter ended April 2, 2000. In addition, we obtained
term loan and subordinated debt aggregating $5.0 million in 1999, which was
offset in part by payments on long-term debt, including capital lease
obligations and depositing cash into a restricted account as collateral.
We believe that the net proceeds from this offering, together with our
current cash, cash equivalents and borrowing capacity, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next 18 months.
Year 2000 Issues
As a result of the change over from 1999 to 2000, none of our systems or
products were affected nor are we aware of any issues that have affected our
third party suppliers or customers.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued FASB Statement
No. 133, "Accounting for Derivative and Hedging Activities." Statement 133
establishes standards for accounting for derivative financial instruments and
hedging activities and is effective for fiscal year ending December 31, 2001.
We currently hold no derivative instruments nor do we engage in hedging
activities. Accordingly, we anticipate that the adoption of Statement 133 will
not have a material impact on our financial positions, results of operations or
cash flows.
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP, 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 will be
effective for fiscal year ending September 30, 2000. SOP 98-1 provides guidance
on accounting for computer software developed or obtained for internal use
including the requirement to capitalize specified costs and amortization of
such costs. We have begun capitalizing costs in calendar year 2000.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities." SOP 98-5 is effective for our year ending December 31, 2000.
This SOP provides guidance on the financial reporting of start-up costs and
organization costs. It requires the costs of start-up activities and
organization costs to be expensed as incurred. We do not expect that the
adoption of SOP 98-5 will have any material impact on our financial positions,
results of operations or cash flows.
During December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation and disclosure of
revenue in the financial statements. Implementation of guidance prescribed in
the bulletin which applies to all registrants will not result in a change to
our revenue recognition policy.
Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that
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are exposed to risks and uncertainties. Actual results could vary materially as
a result of a number of factors, including those discussed in "Risk Factors"
and elsewhere in this prospectus.
As of April 2, 2000, we had cash and cash equivalents of $59.2 million
(including restricted cash). Substantially all of these amounts consisted of
highly liquid investments with remaining maturities at the date of purchase of
less than 90 days. These investments are exposed to interest rate risk and will
decrease in value if market interest rates increase. A hypothetical increase or
decrease in market interest rates by 10 percent from the April 2, 2000 rates
would cause the fair market value of these short-term investments to change by
an insignificant amount. Due to the short duration of these investments, an
immediate increase in interest rates would not have a material effect on our
financial condition or results of operations. Declines in interest rates over
time will, however, reduce our interest income.
We do not own any equity investments, other than in our subsidiaries. As a
result, we do not currently have any direct equity price risk.
In 1999, 87% of our sales were denominated in U.S. dollars. Since a majority
of our manufacturing occurs in Sweden, a majority of our cost of goods are
denominated in Swedish krona. A large proportion of our expenses are
denominated in British pounds. We expect these proportions to fluctuate over
time.
In connection with sales contracts where our customer is to pay in a
currency other than U.S. dollars, we have engaged since May 2000 in currency
hedging activities consisting of purchasing contracts that lock in minimum
exchange rates of such foreign currencies. We do not enter into any currency
hedging activities for speculative purposes. The total amount that we have
hedged is 618,000 Canadian dollars and 1.5 million euros. The costs of these
contracts will be included under interest and other income in our financial
statements. To date, we have spent 32,610 euros on these contracts. We will
continue to monitor our foreign currency exposures and may modify hedging
strategies as we deem prudent.
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BUSINESS
Business Overview
We are a global supplier of fixed wireless systems that allow communications
service providers to cost effectively deliver integrated high speed data and
voice services. Our systems are based on Code Division Multiple Access, or
CDMA, a digital wireless standard that provides wide area coverage, security
and resistance to fading. Our systems can be deployed rapidly and cost
effectively, providing an attractive alternative to traditional copper wire and
fiber communications networks. Our products include software tools that
optimize geographic coverage of our systems and provide ongoing network
management. To facilitate the deployment and operation of our systems, we also
offer network installation, training and support services. During 1996, we
began shipping our products which were among the first fixed point-to-
multipoint systems to be commercially deployed. Our systems have been installed
by over 40 communications service providers in approximately 30 countries and
are being tested by numerous other service providers.
Industry Overview
The Global Need for Integrated Data and Voice Communications Services
The explosive growth in Internet use is driving a global demand for reliable
high speed access and an increased ability to transmit large amounts of
information, or bandwidth. End-users worldwide are demanding integrated
communication access solutions that include reliable high speed data and
Internet access and high quality voice telephone services. Even in countries
where communications systems are unreliable or not yet widely deployed,
businesses and consumers increasingly require Internet access and fax and modem
capabilities, in addition to basic telephone service.
Global Deregulation and Increased Competition
Worldwide deregulation of the telecommunications industry has created the
opportunity for new competitors to provide local access connections that
historically were offered by a single incumbent provider. Most countries in
Europe, Latin America, and Asia have joined the U.S. and the U.K. in promoting
competition for communications services. Incumbent and alternative
communications service providers are seeking to differentiate their service
offerings on the basis of their range of services, quality and reliability,
customer service, provisioning and pricing.
Need for Cost Effective and Rapid Network Deployments
Alternative communications service providers have expanded their focus
beyond large business customers to small and medium-sized businesses and high-
end residential, small-office/home-office customers as well as providing
services outside of the major urban areas. These markets require more cost-
effective network deployment solutions to compensate for lower average customer
spending on communications services and larger coverage area requirements.
Many countries have networks that are unable to provide reliable data, voice
and fax services while many other countries lack the network infrastructure to
make basic telephone services broadly available. Communications service
providers in these markets, both incumbent and new entrants, need cost
effective, rapidly deployable alternatives to traditional copper based
networks. Time-to-market and the ability to offer integrated data and voice
services with attractive pricing are key success factors.
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Access Network Bottleneck
While the communications transport network and Internet backbone are capable
of delivering data at extremely high speeds, data can only be delivered to the
end user as fast as the end-user's connection will permit. Traditional access
methods are inadequate to address the rapidly expanding bandwidth requirements.
To address this access network bottleneck, a number of alternative solutions
have emerged.
. Digital Subscriber Line. Digital subscriber line, or DSL, technology
improves the data transmission rate of existing copper networks. DSL
transmission rates and service availability, however, are limited by
both the quality of the available copper and the distance from the
subscriber to the service provider's network equipment. These
limitations restrict the use of DSL in many countries outside the U.S.,
Canada and portions of western Europe.
. Cable Modems. Two-way cable modems using coaxial cable enable data
services to be delivered over a network originally designed to provide
television service to residential subscribers. Coaxial cable has greater
transmission capacity than copper wires, but is often costly to upgrade
for two-way data services. Additionally, because office buildings are
generally not wired for cable service, it is not a viable alternative
for many business users worldwide.
. Fiber Optics. Fiber optics provide the highest data transmission rate of
any access solution, but are the most costly to deploy. As a result,
fiber is typically used only to solve the bandwidth needs of the largest
businesses who can justify the higher costs.
. Satellite. Satellite communications technologies enable two-way access
services. These solutions use broadcast satellite technology for high
speed transmissions from the network service provider to the subscriber,
but use slower wire-based connections to transmit data from the
subscriber to the network service provider. The data rate available to
each subscriber in a service area decreases as usage increases. As a
result, because they are not cost effective, satellite solutions are not
widely deployed worldwide.
. Fixed Wireless. Fixed wireless systems enable high speed access to data
and telephone networks without requiring a cabled connection, such as
copper wire or fiber, between the subscriber and the base station. A
fixed wireless system allows for rapid deployment, however, careful
deployment planning of the system is required to maximize coverage and
availability. In order to provide high quality service, it is necessary
to ensure that the radio equipment installation provides sufficient
radio signal strength to resist fading. In addition, fixed wireless
services are limited to those regions where a suitable frequency band is
available.
Need for Fixed Wireless Access Solutions
The technology and cost limitations of other existing technologies have led
many communications companies to deploy fixed wireless networks because
wireless technology can deliver high performance integrated services more cost
effectively, quickly and flexibly than other solutions. The market for our
systems is a subset of the fixed wireless systems market. Currently there is no
reliable data about the size of growth rate of our target markets. Growth rates
experienced by the industry as a whole may not reflect growth rates that we or
our target markets will experience.
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Wireless communications equipment operates within assigned, often licensed
frequency bands that vary as to the bandwidth of data that can be carried, the
effective range of a single cell hub and the cost of deployment. Currently
available wireless technologies include radio systems using frequencies between
ten and 100 GHz, or millimeter wave, wireless networks covering a building or a
small geographic area, or wireless local area networks, fixed wireless,
cordless, cellular and next generation mobile wireless technologies.
Each of these technologies is best suited to specific applications. Systems
based on millimeter wave technologies which utilize frequencies above 10
gigahertz, or GHz, for example, provide high bandwidth services, but are costly
to deploy, have significant range limitations, require line-of-sight to provide
services and are adversely affected by weather conditions. These systems are
generally targeted at large business customers in major cities.
Lower frequency cordless and cellular technologies have been widely deployed
to deliver wireless voice service. Cellular has a wider geographic range than
our system, while cordless and wireless local area networks have a more limited
geographic range than our system. The low bandwidth of cordless and cellular
technologies, however, make them unsuitable for delivering advanced high speed
Internet access. Wireless local area networks have greater bandwidth than our
system, but are, like cordless technologies, generally more expensive to deploy
because of their limited geographic range.
Our systems are designed to provide communications services in the 1.5 to
4.0 GHz frequency bands, which are increasingly being licensed worldwide,
particularly in the 3.5 GHz range. These bands are less sensitive to line-of-
sight obstructions and weather conditions than the millimeter wave technologies
described above although they offer lower capacity for data transmission.
The combination of technology costs and performance makes this spectrum
ideal for broader market applications. Communications service providers
addressing these markets require high performance, cost effective systems
enabling integrated high speed data and voice services.
The Airspan Solution
We are a global supplier of fixed wireless systems that enable
communications service providers to cost effectively deliver integrated high
speed reliable data and voice services. We have developed a fixed wireless
solution, which provides the following benefits:
Integrated Data and Voice Services System. Our solutions enable delivery of
integrated high speed data and voice services, unlike many other access
technologies that are optimized for either data or voice traffic, but not both.
Our systems solve this problem by flexibly allocating the available bandwidth
to the services required, thereby permitting data and voice to be transmitted
efficiently. Our technology system, or platform, is designed as a modular
solution to enable our systems to evolve as our technologies and customers'
needs evolve.
Quality of Service and Reliability. Our systems are based on CDMA
technology, which allows communications service providers to offer high quality
data and voice services with the same level of reliability that traditional
telephone networks provide. This technology provides wide area coverage,
security and resistance to fading. In addition, our systems allow alternative
service providers to bypass the incumbent's network enabling the service
provider to monitor on a real time basis the end user's network access
connection. Our products are successfully deployed and operated in a wide range
of demanding environments throughout the world.
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Rapid, Cost Effective Deployment. Our fixed wireless solutions are generally
less expensive to deploy than fiber or copper wire networks or other high speed
fixed wireless networks. Our systems' wide area coverage requires fewer base
stations, allowing faster deployment with lower initial capital outlays. A
single base station in urban settings covers up to 70 square miles and in rural
settings covers as much as a 700 square miles. Communications service providers
can quickly begin generating new subscriber revenues due to the reduced up-
front planning and infrastructure costs and the relative ease of installation
of our base stations. Our systems allow our customers to rapidly add new
subscribers that can be brought online in hours once the basic infrastructure
is in place. For communications service providers, the "pay as you go" approach
reduces up-front capital costs and can increase return on investment.
Flexibility and Expandability. Our systems are highly configurable to
customer requirements for specific frequencies allocations. The modular design
of our systems allows for expansion as customer capacity requirements increase.
Our point-to-multipoint design also facilitates expansion by permitting
multiple subscribers to be connected to a single base station and multiple base
stations to be supported by a single access concentrator. In addition, multiple
service types, including data and voice, can be delivered over a single radio
channel enabling communications service providers to differentiate and
customize their service offerings.
Comprehensive Implementation and Support Solutions. We offer our customers a
range of software tools that provide system-wide analysis for optimizing
geographic coverage and identifying and solving potential sources of
interference. Our software tools also initiate service for new customers and
provide alarm, maintenance and testing functions. In addition, to facilitate
deployment and operation of our systems, we offer network installation,
training and support services. The communications service provider is generally
responsible for site preparation as well as having the responsibility and
installation for subscriber terminal installation. We have also developed a
network of subcontractors that allows us to support customers wherever our
products are deployed.
Our Strategy
Our goal is to be the leading provider of integrated fixed wireless
communications access systems to communications service providers. Key elements
of our strategy include the following:
Capitalize on existing deployments of our systems to attract new
customers. Our numerous installations with communications service providers
worldwide serve both as proof of concept and as a basis for reference selling
to other communications service providers. We intend to build upon this early
acceptance of our products to become the primary provider of fixed wireless
systems to these service providers. We are particularly focused on expanding
our existing customer relationships to supply systems to their subsidiaries and
affiliates worldwide.
Extend our strong technology position. We believe that we have established a
strong technology position in the market for fixed wireless solutions, and we
intend to extend this position by continuing to invest substantially in
research and development. Our expertise in wireless telecommunications and
radio frequency engineering is based on eight years of development experience
and four years of deployment experience. Our research and development efforts
are particularly focused on increasing data transmission capability and
coverage area while reducing the cost of our systems. To support our strong
technological position, we are actively involved in the development of
standards through our membership in or participation with leading standards
organizations such as the European Telecommunications Standards Institute. We
also expect to
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evaluate the acquisition of additional businesses, products and technologies in
order to accelerate the development of and time-to-market with new
technologically advanced products.
Target key growth market opportunities globally. Our fixed wireless
solutions find their strongest competitive advantage in areas where there is a
growing demand for integrated high speed data and voice services and where cost
considerations make traditional solutions impracticable. As a result, in a
developed market like the United States, we focus on small and medium sized
businesses, small office/home office users and high-end consumers as well as
end users in suburban and rural areas. In the developing world, our
opportunities are much broader due to the general inadequacy of the existing
communications infrastructure. In these markets, wireless solutions can be the
basis for a new national infrastructure.
Develop and expand our strategic relationships. We intend to develop and
expand our strategic relationships with large communications equipment
manufacturers to help us market our products to communications service
providers deploying large-scale networks. These relationships facilitate
broader deployments of our systems worldwide, through stronger sales presence
and additional integration services and support capabilities. We also intend to
form strategic relationships with communications companies situated within
certain countries where there are competitive advantages to having a local
presence. For example, in Brazil, where high import tariffs make it very
difficult for us to compete and where local relationships are important, we
have a manufacturing and marketing alliance with Tropico S.A.
Expand global sales, marketing and customer support presence. We intend to
significantly expand our sales, marketing and customer support presence to
drive additional deployments and increase awareness of Airspan among
communications service providers. We plan to aggressively hire sales and
marketing personnel in our existing offices as well as to open new sales and
customer support offices in key strategic markets globally.
Products
General
We supply fixed wireless access systems that provide integrated fixed
wireless data and voice services that connect residential and business
customers to a communications service provider's network. The end user
experiences a transparent connection with performance and features equivalent
to a high quality wireline access service. Our products consist primarily of
the following:
. AS4000, a product solution consisting of an access concentrator that
connects multiple base stations which in turn connect multiple
subscriber terminals
. AS8100, a network management system simplifying tasks such as
configuration and provisioning of subscribers, performance monitoring
and alarm management
. AS9000, a comprehensive radio frequency and deployment planning tool
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Overview of Airspan Fixed Wireless Access System
Below is a diagram of our system which details the relationship between our
subscriber terminals, our base stations and our access concentrator, and the
public service telephone and data network.
The network operator installs base stations at various locations within
their geographical area of operation that are linked into a public service
telephone network or the internet through our access concentrator. The base
station is then able to transmit and receive voice, high speed data and
internet traffic, via a wireless link of up to 25km, to subscriber terminals
located at residential and business premises.
[PICTURE AND DIAGRAM OF AIRSPAN SYSTEM ARCHITECTURE INCLUDING CENTRAL OFFICE
SITE, BASE-STATION SITE, SUBSCRIBER SITES AND MANAGEMENT SITE.]
AS4000 Fixed Wireless Access Systems
Our AS4000 fixed wireless access systems, introduced in 1996, use reliable
high speed CDMA technology to deliver high speed data, voice and an integrated
services digital network, or ISDN, to a communications service provider's local
access networks.
[CLOSE UP PICTURE OF SUBSCRIBER TERMINAL VARIANTS]
[PICTURE OF SUBSCRIBER TERMINAL ANTENNA IN MOUNTED SETTING]
. the AS4000 System allows the signal to travel to and from the
subscriber's equipment (router, computer, fax or telephone) through the
building's existing internal wiring to a subscriber interface unit
. the subscriber interface unit is connected by a coaxial cable to an
external antenna which together form the subscriber terminal
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. the antenna relays the information to the base station
. the signals from the various subscriber terminals (up to 2000 subscriber
lines per base station) are routed through the base station to the
access concentrator, normally located at the communications service
provider's central switching center
. the signals are routed through the network to the final destination.
Our newer generation AS4000 System, introduced in 1998, typically allocates
a line to a subscriber terminal only when needed; for example, when a customer
picks up a telephone handset. This technology allocates spectrum efficiently
and increases total system capacity. The access concentrator assigns capacity
and provides a node for network management. Priority channels can be configured
to provide access to key users such as emergency services.
AS8100 Network Management System
The newer generation AS8100 Network Management System, introduced in 1998,
is a configuration, alarm, test and performance manager for the AS4000 range of
products. The management system helps ensure that the services provided over
the AS4000 network are uninterrupted and of high quality. The AS8100 is
flexible and can be expanded to suit a range of different networks and is
available in different versions for the network center, desktop and the field.
The AS8100 Network Management System operates on a Microsoft Windows NT
platform and the user interface is entirely graphical and windows-based, uses
drag-down menus, icon-based representations, maps and equipment views. The
system permits communications service providers to remotely manage a
geographically dispersed set of network elements.
AS9000 Airspan Planning and Configuration Tools
The AS9000 Planning and Configuration Tool, introduced in 1998, is a
sophisticated planning solution that enables operators to plan and deploy our
systems. This product is based on third party software customized for use with
our systems. The main task of the planning tool is to find the optimal location
and configuration for the access concentrator and base stations of the AS4000.
The system provides a powerful prediction engine that can generate coverage
predictions for multiple scenarios until the best case scenario is found.
Once the location of the access concentrator and base stations have been
determined, the AS9000 can be used to compare the way the radio signals fade as
they spread out from a base station transmitter and extent of coverage. The
four key aspects of the predictive tool are the terrain (altitude) databases,
clutter (natural terrain features and man-made obstructions) information,
antenna information and system configuration, which are used to predict
transmission coverage.
We use software developed and maintained by MSI for our AS9000 radio
planning software. We depend on MSI to deliver, support and enhance their
software in a way that will meet our needs. Under a contract with MSI, we have
four licenses for internal use on a non-exclusive and non-transferable basis,
and a license agreement for our end-users, for which we pay annual fees. The
licenses have no fixed termination date but can be terminated by either party
that gives not less than 12 months' notice.
Technology
As of June 19, 2000, we had 76 people engaged in research and development.
Our technology has been under continuous development since the inception of the
system design in 1993, and from the outset our goal has been to develop high
performance systems that are resilient in a wide range of deployment
conditions.
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Frequency Choice
We recognized early that no single fixed wireless spectrum would apply
around the world. Consequently, our designs have accommodated the ability to
easily change radio frequency subsystems to match the customer's specific
spectrum allocation. We believe we have the widest choice of radio subsystems
in the industry within the 1.5 to 4.0 GHz bands.
CDMA Technology
CDMA is a well-established technology that allows multiple users to share
simultaneously a single radio channel while providing a high degree of security
between channels and other users. Other technologies, such as Frequency
Division Multiple Access, or FDMA, and Time Division Multiple Access, or TDMA,
and variants of these technologies, are also used to expand the number of users
within a given radio band.
Each of these technologies, CDMA, FDMA and TDMA, function differently. CDMA
uses virtually random encoding of data, rather than dividing the frequencies
into narrow bands like FDMA or based on time intervals of the transmission like
TDMA. We selected CDMA, technology for our products because we believe CDMA can
generally allow a greater number of users per radio channel than either FDMA or
TDMA, and with greater security.
CDMA technology is, however, more difficult to develop than FDMA or TDMA,
because of its challenging network synchronization and power control
requirements. Further, the complexity of CDMA algorithms can require multiple
computer chips and complex, customized software programs. Although CDMA is a
well-established technology, CDMA-based products address numerous different
markets and no reliable estimates of the CDMA fixed wireless market exist.
Intellectual Property
We have successfully developed a reliable CDMA-based system employing our
own enabling technology which has resulted in, as of June 19, 2000, 19 separate
patents granted in the U.S. and 19 pending applications in the U.S. In order to
improve system performance and reduce costs, we have developed a custom
integrated circuit, Trinity I, which is the key element of the AS4000 System.
We are currently developing next generation components that are expected to
produce further cost reductions, increased bandwidth and enhanced
functionality. We expect to deliver such components in 2000.
Extensive testing and integration facilities
The performance and coverage area of a fixed wireless system is largely
dependent on a number of factors including: the strength of the radio signal
transmitted, the sensitivity of the radio receiving apparatus, the radio
frequency used and the clutter (natural terrain features and man-made
obstructions). The availability of a fixed wireless system is predominantly
dependent on the environment in which the fixed wireless system is deployed and
base station and customer premise equipment installations. Our process of radio
planning considers these important factors to maximize performance, coverage
and availability. We have taken extensive steps to ensure that our products are
thoroughly stress-tested prior to release.
We have secured radio licenses for and implemented a live multi-cell test
network which provides service to a number of volunteer customers situated in
and around the town of Stratford-
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upon-Avon, U.K. In addition to providing valuable long-term system reliability,
availability and other performance data, this unique facility permits us to
empirically investigate radio transmission and reception and interference
behavior for existing and emerging products.
Research and development expenditures
During the fiscal year ended December 31, 1999 and the fiscal period ended
December 31, 1998, we spent $16.3 million and $26.8 million, respectively on
research and development of our products. Of such amounts, $2.5 million and
$16.3 million were, in the fiscal year 1999 and fiscal period 1998,
respectively, attributed to acquired in-process research and development and
amortization of intangibles in connection with the acquisition of the business
from DSC.
Customers
We began shipping our products in 1996 and through March 2000 we had shipped
our products to over 40 communications service providers in approximately 30
countries. Our customers include integrated data and voice carriers, providers
that focus exclusively in providing data services and mobile carriers. As of
April 2, 2000, the following table indicates our top customers, their locations
and their percentage of our revenue over the last five quarters:
<TABLE>
<CAPTION>
Percentage of
Customer Locations Revenue
-------- --------- --------------
<S> <C> <C>
Suntel Private Ltd. Sri Lanka 28%
eircom, plc Ireland 14
Aliatel, a.s. Czech Republic 14
AZ Communications Incorporated The Philippines 11
Mobitel Limited Nigeria 4
MTT Networks Private Limited Sri Lanka 3
Bell Telecommunications Phils., Inc. The Philippines 3
Petersburg Telephone Network Russia 3
Joint Stock Company Central Telegraph Russia 2
Motorola, Inc. various countries 2
</TABLE>
Our contracts with our customers typically provide for delivery, training,
spare parts and maintenance and upgrade. In addition, we generally also agree
to provide warranty for the equipment and software for a limited period of
time.
Our contracts are generally non-exclusive and contain provisions allowing
our customers to terminate the agreement without significant penalties, and
some contracts are conditional upon our customer's ability to receive foreign
regulatory approvals. Our contracts also may specify the achievement of
shipment, delivery and installation commitments. We are generally able to meet
these commitments or negotiate extensions with our customers.
Sales, Marketing and Customer Service
We sell our systems and solutions through our direct sales force,
independent agents, resellers and OEM partners. Our direct sales force targets
communications service providers in both developed and developing markets.
Currently we have a direct sales presence in the U.S., U.K., Sweden, Denmark,
Poland, Czech Republic, Brazil, the Philippines, South Korea, Sri Lanka and
Canada. In markets where we do not have a direct sales presence, we also sell
through independent agents and resellers who target communications service
providers. In certain countries we also sell to OEMs who may sell our products
under their names.
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Our marketing efforts are focused on communications service providers that
provide voice and data communications services to their customers. Through our
marketing activities, we provide technical and strategic sales support
including in-depth product presentations, technical manuals, sales tools,
pricing, marketing communications, marketing research, trademark
administration and other support functions.
A high level of ongoing service and support is critical to our objective of
developing long-term customer relationships. In order to facilitate the
deployment of our systems, we offer our customers a wide range of
implementation and support services including spectrum optimization and
network management, installation, training and support services.
Most major installations are performed by our subcontractors who have the
expertise and ability to professionally install our products. This enables us
to efficiently manage fluctuations in volume of installation work.
As of June 19, 2000, we had 63 employees dedicated to sales, marketing and
customer service.
Manufacturing
We outsource our manufacturing to global contract manufacturers in order to
realize the advantages in cost, quality and volume and geographic flexibility.
We currently outsource most of our manufacturing to Flextronics International,
located in Karlskrona, Sweden. Flextronics and DSC Communications Ireland
provided 66% and 93% of our manufactured products in 1999 and 1998,
respectively. Our agreement with DSC Communications Ireland terminated at the
end of 1999. We have an agreement with Flextronics dated August 27, 1999 for a
period of two years, which may be extended an additional year by either party.
Either party may terminate this agreement. The agreement also requires us to
provide a bank guarantee in respect of subcontractor debt and inventory
exposure in favor of Flextronics, which was $1.85 million at May 23, 2000. Our
contract with Flextronics is non-exclusive and may be terminated with four
months' notice by either party without significant penalty. Other than
agreeing to purchase the materials we request in the forecasts, we do not have
any agreements with them to purchase any minimum volume. Our manufacturing
support activities consist primarily of prototype development, materials
planning and procurement, final product assembly testing and quality control.
Some of the key components of our products are purchased from single
vendors, including printed circuit boards from Flextronics, cabinets from
Ripley Engineering Limited and electronic connector panels from Sanmina
(Ireland) Limited, for which alternative sources are generally not readily
available. If our vendors fail to supply us with components because they do
not have them in stock when we need them, they reduce or eliminate their
manufacturing capacity for these components or they enter into exclusive
relationships with other parties which prevents them from selling to us, we
could experience significant delays in shipping our products while we seek
other sources, which may result in our customers claiming damages. At times we
have been forced to purchase these components from distributors instead of
from the manufacturers, which significantly increases our costs. We do not
have long-term contracts with most of these suppliers. Instead, we execute
purchase orders approximately three to six months in advance of when we
believe we may need the components. These purchase orders are non-exclusive,
and we are generally not required to purchase any minimum volume of components
from any of these suppliers. Since we do not have long-term contracts with
these suppliers, they may terminate our relationship with up to four months'
notice.
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Our operation and manufacturing strategies enable us to configure our
products to meet a wide variety of customer requirements and facilitate
technology transfer between our research and development group and our contract
manufacturers. We are ISO 9001 certified.
Competition
Competition in our markets is intense and involves rapidly-changing
technologies and customer requirements. We compete with established vendors of
communications systems, including traditional wired communications systems.
We believe we compete on the basis of:
. range of product offerings (data, voice and ISDN)
. quality and performance of products
. customer service
The primary competitive challenges our business faces include:
. competing with established and installed traditional wired networks
. convincing alternative service providers that our service is superior to
other potential wireless solutions
We face, or believe that we will face, competition from various other
providers of wireless communications products and services, including ECI,
Lucent and AT&T. While we believe our industry to be competitive, we do not
believe there to be a single dominant competitor.
Competitors vary in size and scope, in terms of products and services
offered. In the particular frequencies where we operate, we compete directly
with ECI and Lucent, as well as smaller start-up companies. We compete
indirectly with a number of large telecommunication equipment suppliers such as
Alcatel, Ericsson, Hughes, and Nortel. In addition, our technology competes
with other high speed solutions, such as digital subscriber lines, optical
fiber cable, cable modems and high speed leased lines and satellite
technologies. The performance and coverage area of our fixed wireless systems
are dependent on some factors which are outside of our control, including
features of the environment in which the systems are deployed such as the
amount of clutter (natural terrain features and man-made obstructions) and the
radio frequency available. Any inability to overcome these obstacles may make
our technology less competitive in comparison with other technologies and make
other technologies less expensive or more accessible. Finally, our business may
compete in the future with products and services based on other wireless
technologies including TDMA, FDMA and other technologies that have yet to be
developed.
Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, manufacturing
and other resources and more established distribution channels. These
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion, sale and financing of their products than we can.
Furthermore, some of our competitors may make strategic acquisitions or
establish cooperative relationships among themselves
Intellectual Property Rights
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws together with confidentiality and/or license
agreements with our employees, customers
49
<PAGE>
and others to protect our proprietary rights. Our patent portfolio consists of,
as of June 19, 2000, 19 patents that have been granted in the U.S., together
with their foreign counterparts. We also have 19 U.S. patent applications that
are currently pending, together with their foreign counterparts. Our other
intellectual property rights relate to the trademark and trade name Airspan(R),
our website, our software and hardware design and technology.
We recently received an inquiry from Telular Corporation relating to
possible infringement of certain wireless technology patents owned by Telular.
Telular has not filed an action against us. Based on our initial investigation,
we believe that there is no merit to these inquiries and that any exposure from
potential claims would not be material.
Employees
As of June 19, 2000, we had a total of 224 full-time employees, including
contract personnel. Our employees are not presently represented by a labor
union. We have not experienced any work stoppages and consider our relations
with our employees to be good.
Properties
We are headquartered in Uxbridge, U.K. where we lease three facilities with
approximately 25,000, 17,000 and 12,000 square feet, respectively. These leases
expire in 2006, 2010 and 2003, respectively.
Legal Proceedings
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings arising in the
ordinary course of our business.
50
<PAGE>
MANAGEMENT
Executive Officers and Directors
The names, ages and positions of our executive officers and directors as of
July 14, 2000 are listed below along with their business experience during the
past five years. Messrs. Cooper and Paget are officers of Airspan
Communications Ltd., our wholly owned U.K. operating subsidiary.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Matthew J. Desch...... 42 Chairman of the Board of Directors
Eric D. Stonestrom.... 39 President and Chief Executive Officer, Director
Joseph J. Caffarelli.. 55 Senior Vice President and Chief Financial Officer
Ian Cooper............ 41 Vice President, Engineering
Jonathan Paget........ 53 Executive Vice President and Chief Operating Officer
Bandel L. Carano...... 38 Director
H. Berry Cash......... 61 Director
Thomas S. Huseby...... 52 Director
Ovid Santoro.......... 40 Director
David A. Twyver....... 53 Director
</TABLE>
Matthew J. Desch became chairman of the board of directors on July 1, 2000.
From 1996 to May 1, 2000, he served as executive vice president and president
of Nortel Networks, a provider of high speed wireless voice, data, Internet and
video services, responsible for Nortel's global wireless infrastructure
business. Mr. Desch joined Nortel Networks in 1987 and served in a variety of
management positions. Mr. Desch has a B.S. from Ohio State University, and an
M.B.A. from the University of Chicago.
Eric D. Stonestrom joined Airspan at its inception in January 1998 as
executive vice president and chief operating officer. In May 1998, he was named
president and chief executive officer as well as a member of the board of
directors. From 1995 to 1998, Mr. Stonestrom joined DSC Communications
Corporation as the vice president of Network Management. From 1984 to 1995,
Mr. Stonestrom worked at Bell Laboratories and AT&T in a variety of positions.
He received B.S., M.S. and M. Eng. degrees in 1982, 1983 and 1984,
respectively, from the College of Engineering at the University of California
at Berkeley.
Joseph J. Caffarelli joined Airspan in April 1999 as senior vice president
and chief financial officer. Prior to joining Airspan, from 1994 to February
1999, he was executive vice president and chief financial officer of Physio-
Control International Corporation, a worldwide leader in external
defibrillation, monitoring and noninvasive pacing devices. Prior to joining
Physio-Control, he was the executive vice president and chief financial officer
of OECO Corporation, a diversified electronics manufacturer. Prior to joining
OECO, he worked in various financial management positions, including positions
in the manufacturing operations of General Electric Company. He received a B.A
from the State University of New York at Albany.
Ian Cooper joined Airspan in February 1998 as vice president, engineering.
Prior to joining Airspan, he joined DSC Communications Corporation in 1994 to
develop products for the Airspan unit. In 1997, he attained responsibility for
all research and development activities, including the development of the
AS4000 platform. Before joining DSC, he worked at various companies as an
51
<PAGE>
ASIC and hardware/systems designer and, previously he worked as a scientist for
the NZ Department of Scientific and Industrial Research developing satellite
communication and signal processing solutions for precision scientific
instrumentation. He graduated from the University of Auckland with a Science
degree in 1981.
Jonathan Paget joined Airspan in April 1999 as vice president, product
operations. In June 2000 Mr. Paget was named executive vice president and chief
operating officer. Prior to joining Airspan, from 1997 to October 1998, he
served Telspec Plc, a company specializing in the development, manufacture and
sale of advanced telecommunications equipment, as group chief executive. From
1992 to 1996, he served as vice president and general manager of the European
Radio Networks Solutions Group of Motorola, a provider of integrated
communications solutions and embedded electronic solutions. He holds a Masters
Degree in Engineering Science from Cambridge University.
Bandel L. Carano has served as a director of Airspan since January 1998. Mr.
Carano has been a general partner of Oak Investment Partners, a venture capital
firm, since 1987. Mr. Carano currently serves as a member of the Investment
Advisory Board of the Stanford University Engineering Venture Fund. Mr. Carano
also serves as a member of the board of directors of Netopia, Inc., Polycom,
Inc., Wireless Facilities Inc., Virata, Advanced Radio Telecom and PulsePoint
Communications, as well as several private companies. Mr. Carano graduated from
Stanford University with a B.S. in Electrical Engineering and also received a
M.S. in Electrical Engineering from Stanford University.
H. Berry Cash has served as a director of Airspan since January 1998. He
been a general partner with InterWest Partners, a venture capital fund focusing
on technology and healthcare, since 1985. Mr. Cash currently serves as a member
of the board of directors of the following public companies: Panja Corporation,
CIENA Corporation, i2 Technologies, Inc. and Liberte, Inc. He is also an
advisor to Austin Ventures. Mr. Cash received a B.S. in Electrical Engineering
from Texas A&M University and a M.B.A. from Western Michigan University.
Thomas S. Huseby served as the chairman of the board of directors of Airspan
from January 1998 until July 1, 2000. Mr. Huseby currently serves as a director
of Airspan. Since August 1997, Mr. Huseby has served as managing partner of
SeaPoint Ventures, a venture capital fund focused on communications and
Internet infrastructure. Prior to SeaPoint Ventures, from 1994 to 1997,
Mr. Huseby was the chairman and chief executive officer of Metawave
Communications, a manufacturer of cellular infrastructure equipment. Previously
he was president and chief executive officer of Innova Corporation, a
manufacturer of millimeter wave radios. Mr. Huseby holds a B.A. in Economics
from Columbia College, a B.S.I.E. from the Columbia School of Engineering and a
M.B.A. from Stanford University.
Ovid Santoro joined the board of directors of Airspan in November 1998. He
currently serves as the chief executive officer of SurfCast, Inc., a software
development company. He is a board member of CyberSafe Corporation, a provider
of network security software products and services to the business community.
From March 1998 until December 1999, Mr. Santoro was the founder, managing
director and global head of venture capital at Deutsche Bank AG as well as the
deputy chairman of Deutsche Bank AG's private equity commitment committee.
Prior to joining Deutsche Bank AG, from May 1993 to March 1998, Mr. Santoro was
a strategic consultant to various technology companies. Mr. Santoro holds a
B.A. from Columbia University.
52
<PAGE>
David A. Twyver joined the board of directors of Airspan in May 1999. Mr.
Twyver is currently president and chief executive officer of Ensemble
Communications Inc., a supplier of LMDS wireless equipment. From 1996 to 1997,
he served as chief executive officer of Teledesic Corporation, a satellite
telecommunications company. From 1974 to 1996, he served in several management
positions at Nortel, a leading global supplier of data and telephone network
solutions and services, most recently as president of Nortel Wireless Networks
from 1993 to 1996. Mr. Twyver is a director of several private wireless
equipment companies. He received his B.S. in Mathematics and Physics from Royal
Roads Military College and University of Saskatchewan.
Board Composition
Our bylaws provide for a board of directors consisting of between five and
eight members. Of the current board members, five became directors pursuant to
a voting agreement dated November 1, 1999 among us and all of our preferred
shareholders. This agreement terminates upon the consummation of this offering.
All directors hold office until the next annual meeting of our shareholders and
until their successors have been elected and qualified. Our officers are
appointed annually and serve at the discretion of the board of directors.
Board of Directors Committees
We have an audit committee and a compensation committee. Our audit committee
consists of Messrs. Carano, Twyver, and Santoro and reviews the results and
scope of the audits and other services provided by our independent accountants.
Our compensation committee consists of Messrs. Huseby and Cash and reviews
and approves the compensation and benefits for our executive officers,
administers our stock purchase and stock option plans and make recommendations
to the board of directors regarding such matters.
Board and Compensation Committee Interlocks
No interlocking relationship exists between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. Certain of our board members have other relationships with us. See
"Certain Relationships and Related Party Transactions."
Board Compensation
Until June 30, 2000 SeaPoint Ventures received $12,500 per month for
providing a chairman of our board. Thomas S. Huseby is a managing partner of
SeaPoint Ventures and was previously the chairman of our board Mr. Huseby is
currently a director. David Twyver receives $2,000 per month for serving as a
member of our board of directors. We have also entered into an employment
agreement with Matthew J. Desch. See "Certain Relationships and Related Party
Transactions--Employment Agreements". Otherwise, except for reimbursement for
reasonable travel expenses relating to attendance at board meetings and the
grant of stock options, directors are not compensated for their services as
directors. In 1999 we granted options to board members Eric Stonestrom and
David Twyver in the amounts of 66,667 and 30,000, respectively. Directors who
are also our employees are eligible to participate in our 1998 Stock Option and
Restricted Stock Plan and our 2000 Employee Stock Purchase Plan. See "--Stock
Plans."
53
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth the compensation of our chief executive
officer and our four other most highly compensated executive officers who were
serving at December 31, 1999 (collectively, the "named executive officers") for
fiscal 1998 and the year ended December 31, 1999. See "--Employment
Agreements."
<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term Compensation Awards
-------------------------- -------------------------------------
Restricted Securities
Name and Stock Underlying All Other
Principal Position Year Salary($) Bonus($) Awards($) Options(2) Compensation($)
------------------ ---- --------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Eric D. Stonestrom,................... 1999 $218,000 $50,000 $ 0 66,667 $50,000(3)
president and chief executive officer 1998 200,000 0 0 500,000 25,000(3)
Joseph J. Caffarelli,................. 1999(4) 149,999 0 0 122,667 86,009(5)
senior vice president and chief
financial officer
Ian Cooper,........................... 1999 164,448 1,391 0 25,000 0
vice president, engineering 1998 134,722 0 0 66,667 0
Jonathan Paget,....................... 1999(4) 145,566 0 0 122,667 0
executive vice president and chief
operating officer
Nigel J. Terry(6),.................... 1999 195,705 38,931 0 6,667 4,025(7)
former vice president, sales and 1998 25,029 0 0 60,000 20,491(7)
marketing
</TABLE>
--------
(1) Salary amounts for Messrs. Cooper, Paget and Terry reflect a conversion
rate from U.K. pounds to U.S. dollars of (Pounds)1:$1.6549 in 1998 and
(Pounds)1:$1.6174 in 1999, as applicable.
(2) Reflects the three for one reverse split of our common stock effected May
25, 2000
(3) Mr. Stonestrom's other compensation consisted of tax equalization payments
made to Mr. Stonestrom.
(4) Both Messrs. Caffarelli and Paget joined Airspan on April 1, 1999. Mr.
Caffarelli's annualized compensation for 1999 was $200,000 and Mr. Paget's
annualized compensation for 1999 was $194,088.
(5) Mr. Caffarelli's other compensation consisted of payments to Mr. Caffarelli
for reimbursement of certain relocation expenses, tax equalization payments
and sign on bonus.
(6) During June 2000, Mr. Terry's employment with Airspan ended.
(7) Mr. Terry's other compensation consisted of payments to Mr. Terry for
reimbursement of certain relocation expenses.
54
<PAGE>
Option Grants During 1999 Fiscal Year
The following table provides information regarding stock options granted
during fiscal 1999 to the named executive officers. We have not granted any
stock appreciation rights. The table below reflects the three for one reverse
split of our common stock effected May 25, 2000.
<TABLE>
<CAPTION>
Value of
Options
% of Total Based on Potential Realizable Value
Options the at Assumed Annual Rates
Number of Granted to Initial Initial of Stock Appreciation
Securities Employees Exercise or Public Public for Option Term(1)
Underlying in Fiscal Base Price Offering Expiration Offering ---------------------------
Name Options(#) Year(%) ($/share)(1) Price Date Price 5%($) 10%($)
---- ---------- ---------- ------------ -------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eric D. Stonestrom...... 66,667(2) 10.43% $3.60 $15.00 10/4/09 $ 760,004 $ 845,930 $ 1,489,162
Joseph J. Caffarelli.... 114,333(2) 17.89 0.54 15.00 3/31/09 1,653,255 1,800,630 2,903,772
8,333(2) 1.30 3.60 15.00 10/4/09 94,996 105,741 186,145
Ian Cooper.............. 25,000(2) 3.91 3.60 15.00 10/4/09 285,000 317,224 558,436
Jonathan Paget.......... 40,000(3) 6.26 0.54 15.00 3/31/09 578,400 629,958 1,015,897
20,000(2) 3.13 0.54 15.00 4/14/09 289,200 314,979 507,948
62,667(2) 9.80 3.60 15.00 10/4/09 714,404 795,174 1,399,812
Nigel J. Terry.......... 6,667(2) 1.04 3.60 15.00 10/4/09 76,004 84,593 148,916
</TABLE>
--------
(1) The potential realizable value illustrates value that might be realized
upon exercise of the options immediately prior to the expiration of their
term, assuming the specified compounded rates of appreciation of the market
price of the common stock over the term of the options. These numbers do
not take into account provisions of certain options providing for
termination of the option following termination of employment,
nontransferability or vesting over periods of up to ten years.
(2) The vesting period for these options is over 4 years with 25% vesting after
one year and then 1/48th per month thereafter.
(3) The vesting period for these options is over 4 years with 1/48th per month
from the month of grant.
Options Grants Since the End of the Fiscal Year 1999 to June 19, 2000
<TABLE>
<CAPTION>
Value of
Options
% of Total Based on Potential Realizable Value
Options the at Assumed Annual Rates
Number of Granted to Initial Initial of Stock Appreciation
Securities Employees Exercise Public Public for Option Term(1)
Underlying in Fiscal or Base Offering Expiration Offering ---------------------------
Name Options(#) Year(%) Price Price Date Price 5%($) 10%($)
---- ---------- ---------- -------- -------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph J. Caffarelli.... 16,667(2) 6.15% $7.50 $15.00 3/31/10 $125,003 $146,485 $307,297
Ian Cooper.............. 10,000(2) 3.69 7.50 15.00 3/31/10 75,000 87,889 184,374
</TABLE>
--------
(1) The potential realizable value illustrates value that might be realized
upon exercise of the options immediately prior to the expiration of their
term, assuming the specified compounded rates of appreciation of the market
price of the common stock over the term of the options. These numbers do
not take into account provisions of certain options providing for the
termination of the option following termination of employment,
nontransferability or vesting over periods of up to ten years.
(2) The vesting period for these options is over 4 years with 25% after one
year and then 1/48th per month thereafter.
55
<PAGE>
Aggregated Option Exercises During 1999 Fiscal Year and Fiscal Year-End Option
Values
The following table provides information as to the number and value of all
outstanding options exercised during fiscal year 1999 to the named executive
officers. We have not granted any stock appreciation rights. The table below
reflects the three for one reverse split of our common stock effected May 25,
2000.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares at Fiscal Year-End(#) at Fiscal Year-End($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eric D. Stonestrom...... 500,000 -- (2) -- 66,667 -- $ 760,004
Joseph J. Caffarelli.... -- -- -- 122,667 -- 1,748,251
Ian Cooper.............. 16,667 $14,500(2) 11,111 63,889 $163,332 856,668
Jonathan Paget.......... -- -- 6,667 116,000 96,405 1,485,599
Nigel J. Terry.......... -- -- 16,250 50,417 238,875 719,129
</TABLE>
--------
(1) The amount set forth represents the difference between the fair market
value of the underlying common stock using the initial public offering
price of $15.00 per share and the exercise price of the option, multiplied
by the number of shares underlying the option.
(2) The realized value represents the difference between the fair market value
of the underlying common stock, as determined by the board, at date of
exercise and the exercise price of the option, multiplied by the number of
shares. The fair market value used for Eric Stonestrom's exercised options
was the same as the option price, $0.30, as the options were exercised as
soon as they were granted. The fair market value of Ian Cooper's exercised
options was determined at $1.17 on exercise while the option price was
$0.30.
Stock Plans
1998 Stock Option and Restricted Stock Plan
Our 1998 Stock Option and Restricted Stock Plan was adopted by our board of
directors and approved by our shareholders on February 1, 1998. As of June 19,
2000, options to purchase a total of 748,705 shares of common stock had been
exercised, options to purchase a total of 1,739,733 shares at a weighted
average exercise price of $2.12 per share were outstanding, and 2,103,228
shares remained available for future option grants.
The plan provides for the grant to our employees (including officers and
employee directors) of "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986 and for the grant of nonstatutory
stock options to our employees, officers, directors and consultants. Non-
employee directors are not eligible for option grants under the plan. To the
extent an optionee would have the right in any calendar year to exercise for
the first time one or more incentive stock options for shares having an
aggregate fair market value (under the plan and determined for each share as of
the date the option to purchase the share was granted) in excess of $100,000,
any such excess options are treated as nonstatutory stock options.
The plan is administered by the board of directors or a committee of the
board of directors. The administrator determines the terms of options granted
under the plan, including the number of shares subject to the option, exercise
price, term and exercisability. The exercise price of all incentive stock
options granted under the plan must be at least equal to the fair market value
of our common stock on the date of grant. The exercise price of all
nonstatutory stock options granted to persons who are not 10% shareholders
cannot be less than 100% of the fair market value of our common stock on the
date of grant. The administrator determines the term of options. The term of an
incentive stock option granted under the plan may not exceed ten years. Options
granted to each employee under the plan
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<PAGE>
generally become exercisable at the rate of 25% of the total number of shares
subject to the options after the first anniversary following the date of grant,
with 2.778% vesting monthly thereafter.
In the event of certain changes in control, our stock options generally
require that each outstanding option be assumed or an equivalent option
substituted by the successor corporation. In the event that a successor
corporation refuses to assume each option or substitute an equivalent option,
the administrator shall provide for the optionee to have the right to exercise
the option as to 50% of the remaining unvested options, including shares as to
which the option would not otherwise be exercisable. The administrator has the
authority to amend or terminate the plan as long as such action does not
adversely affect any outstanding option and provided that shareholder approval
shall be required for an amendment to increase the number of shares subject to
the plan, or any change in the designation of the class of persons eligible to
be granted options, or a material increase in benefits accruing to participants
under the plan if a class of our shares is registered under Section 12 of the
Securities Exchange Act of 1934. If not terminated earlier, the plan will
terminate February 1, 2008.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
on May 17, 2000 and shareholders on May 24, 2000. A total of 500,000 shares of
common stock has been reserved for issuance under the purchase plan. The
purchase plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, generally will be implemented in a series of offering periods of
one year duration with new offering periods (other than the first offering
period) commencing on August 1 and ending on the following July 31, with the
last day of each period being designated as a purchase date. The first offering
period will commence on the effective date of this offering and continue
through July 31, 2001. The purchase plan will be administered by our board of
directors or a committee appointed by our board of directors. Our employees
(including officers and employee directors) or employees of any subsidiary are
eligible to participate if they are employed by us or any subsidiary for at
least 20 hours per week and more than five months per year. The purchase plan
permits eligible employees to purchase common stock through payroll deductions,
which may not exceed 10% of an employee's compensation, at a price equal to the
lower of 85% of the fair market value of our common stock at the beginning of
the offering period or the purchase date. Employees may end their participation
in the offering at any time prior to the last business day of the offering
period, and participation ends automatically on termination of employment with
us. In addition, participants may decrease their level of payroll deductions
once during an offering period.
Our board of directors may amend or terminate the purchase plan as long as
any outstanding rights to purchase stock thereunder are not adversely affected.
If not terminated earlier, the purchase plan will terminate on July 31, 2006.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of transactions during our last three fiscal
years to which we have been a party, in which the amount involved in the
transaction exceeds $60,000 and in which any director, executive officer or
holder of more than 5% of our capital stock had or will have a direct interest
or indirect material interest, other than compensation arrangements that are
otherwise required to be described under "Management."
Sales of Our Common and Preferred Stock
During the past three years, in addition to issuances of common stock upon
option exercises, we have issued or sold common stock and convertible preferred
stock:
. in November 1999, February and April 2000, we sold an aggregate of
22,178,573 shares of Series C convertible preferred stock at $2.50 per
share
. in November 1998, we sold an aggregate of 18,571,429 shares of Series B
convertible preferred stock at $1.75 per share, the proceeds of which
were used, in part, to redeem all shares owned by DSC
. in January 1998, we sold an aggregate of 40,000,000 shares of Series A
convertible preferred stock at $1.00 per share
. in January 1998, we sold an aggregate of 541,667 shares of common stock
at $0.03 per share, adjusted to reflect the three for one reverse split
of the common stock effected May 25, 2000
Our officers, directors and 5% shareholders participated in these
transactions as follows:
<TABLE>
<CAPTION>
Number of Shares Number of Shares Number of Shares
of Series A of Series B of Series C Number of Shares
Name of Purchaser Preferred Stock Preferred Stock Preferred Stock of Common Stock
----------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sevin Rosen Funds(1).... 7,330,000 1,047,143 572,098 --
Oak Investment
Partners(2)............ 7,330,000 2,047,143 2,000,000 --
InterWest Partners(3)... 7,330,000 1,047,143 572,098 --
Venrock Associates...... 5,330,000 761,429 416,000 --
Charles River
Partnership............ 4,000,000 857,143 532,000 --
DB Overseas Holdings
Limited(4)............. -- 5,714,286 1,100,000 --
Meritech Capital........ -- -- 5,680,064 --
Weston Presidio
Capital................ -- -- 4,532,000 --
SeaPoint Ventures(5).... -- -- 760,000 416,667
Eric Stonestrom(6)...... -- -- -- 500,000
</TABLE>
--------
(1) Jon W. Bayless was a director of Airspan from January 1998 through July
10, 2000 and is a partner of Sevin Rosen Funds.
(2) Bandel L. Carano is a director of Airspan and a general partner of Oak
Investment Partners.
(3) H. Berry Cash is a director of Airspan and a general partner of InterWest
Partners.
(4) Ovid Santoro is a director of Airspan and a former managing director of
Deutsche Bank AG, the parent company of DB Overseas Holdings Limited.
(5) Thomas S. Huseby is a director of Airspan and managing partner of SeaPoint
Ventures.
(6) Mr. Stonestrom is the president and chief executive officer of Airspan.
In connection with our acquisition of the Airspan assets from DSC in January
1998, Sevin Rosen Funds, Oak Investment Partners and InterWest Partners agreed
to purchase our Series A convertible
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<PAGE>
preferred stock. All of these entities may be deemed to be promoters of
Airspan. Other than purchasing Series A preferred stock at the same price per
share as other investors in our Series A convertible preferred stock financing,
Sevin Rosen Funds, Oak Investment Partners and InterWest Partners did not
receive any item of value, nor did these entities sell any property or assets
to Airspan.
The original purchasers of our common stock include SeaPoint Ventures, of
which Mr. Huseby, a director, is the managing partner. SeaPoint Ventures paid
$0.03 per share, with an aggregate capital contribution of $16,250, for
approximately 0.004% of Airspan's capitalization (based on our capitalization
immediately following the Series A financing) and 4.0% of the issued shares
(based on our issued shares immediately following the Series A financing).
As compensation for performing services in the original formation of
Airspan, SeaPoint Ventures was issued 333,333 shares of common stock at $0.03
per share. In addition, SeaPoint later purchased 83,333 shares of common stock
for $0.54 per share in connection with our Series B convertible preferred
stock.
In 1998 and 1999, we paid $220,000 and $263,000, respectively, to SeaPoint
Ventures for executive management and administrative services. This represents
$12,500 per month for providing a chairman and $10,000 per month for
administrative support.
On February 16, 1998 we sold to Eric Stonestrom, our president and chief
executive officer, 333,333 shares of common stock at $0.30 per share. We have
an option to repurchase these shares at the same price if Mr. Stonestrom's
employment with us is terminated for any reason. On May 12, 1998 we sold an
additional 166,667 shares to Mr. Stonestrom at the same price, with the same
repurchase option. On April 27, 1999 we entered into two promissory notes
reflecting the remaining $130,000 Mr. Stonestrom owes for the purchase of the
common stock, which is required to be paid upon a change of control of the
company. The notes are secured by the common stock.
We believe that the transactions described in this section were made on
terms no less favorable than could have been obtained from third parties. Prior
to the closing of this offering, we will adopt a policy that requires, unless
otherwise approved by a disinterested majority of directors as required by
Washington law, all future transactions between Airspan and its officers,
directors and affiliates to be on terms no less favorable than could be
obtained from unaffiliated third parties.
Employment Agreements
All share amounts discussed below reflect the three for one reverse split of
the common stock effected May 25, 2000.
In January 1998, we entered into an employment agreement with Eric D.
Stonestrom, our president and chief executive officer. Mr. Stonestrom's annual
compensation was set at an annual base salary of $180,000, with a bonus based
on achieving gross profit objectives. Mr. Stonestrom was also granted stock
options to purchase 333,333 shares of common stock which were exercised in
February 1998. In May 1998, we entered into another employment agreement with
Mr. Stonestrom. Pursuant to this agreement, Mr. Stonestrom's annual base salary
was increased to $210,000 and he received additional options to purchase
166,667 shares of common stock which were exercised in May 1998. The agreement
with Mr. Stonestrom further provides certain tax equalization payments of
$50,000 annually. Mr. Stonestrom is also entitled to receive six months of
severance payments if his employment is terminated involuntarily. In May 1999,
Mr. Stonestrom's annual base salary was increased to $222,000 and in October
1999 he received additional options to purchase 66,667 shares
59
<PAGE>
of common stock. Depending on Airspan achieving certain gross margin
milestones, Mr. Stonestrom is eligible to receive a bonus in the amount of 60%
of his base compensation. 100% of this bonus is payable if Airspan exceeds its
anticipated gross margin for the year 2000 by 32%.
In April 1999, we entered into an employment agreement with Joseph J.
Caffarelli, our senior vice president and chief financial officer. This
agreement provides for annual compensation of $200,000, with an additional
signing bonus of $30,000. In addition to the signing bonus, Mr. Caffarelli may
receive additional bonuses if certain gross profit objectives are met. Mr.
Caffarelli was also granted options to purchase 114,333 shares of common stock.
In October 1999, Mr. Caffarelli received additional options to purchase 8,333
shares of common stock. The agreement with Mr. Caffarelli further provides
certain tax equalization payments of $50,000 annually. We also reimbursed Mr.
Caffarelli for his moving expenses and cost of certain living expenses incurred
in moving from the U.S. to the U.K. Mr. Caffarelli is entitled to receive six
months of severance payments if his employment is terminated involuntarily. In
March 2000, Mr. Caffarelli received additional options to purchase 16,667
shares of common stock. Depending on Airspan achieving certain gross margin
milestones, Mr. Caffarelli is eligible to receive a bonus in the amount of 50%
of his base compensation. 100% of this bonus is payable if Airspan exceeds its
anticipated gross margin for the year 2000 by 32%.
In April 1999, we entered into an employment agreement with Jonathan Paget,
our executive vice president, and chief operating officer. Mr. Paget's annual
compensation was set at an annual base salary of $194,088, with options to
purchase 60,000 shares of common stock. In October 1999, Mr. Paget received
additional options to purchase 62,667 shares of common stock. Depending on
Airspan achieving certain gross margin milestones, Mr. Paget is eligible to
receive a bonus in the amount of 50% of his base compensation. 100% of this
bonus is payable if Airspan exceeds its anticipated gross margin by 32% for the
year 2000.
In January 1998, we entered into an employment agreement with Ian Cooper,
our vice president, engineering. Mr. Cooper's annual compensation was set at an
annual base salary of $134,722. In addition to the base salary Mr. Cooper was
granted options to purchase 50,000 shares of common stock. In October 1998, we
entered into another employment agreement with Mr. Cooper where he was named
vice president, engineering. Pursuant to this agreement, Mr. Cooper"s annual
base salary was increased to $164,448 and he received options to purchase
16,667 shares of common stock. In October 1999, Mr. Cooper received options to
purchase 25,000 shares of common stock, and in March 2000, Mr. Cooper received
options to purchase 10,000 shares of common stock. Depending on Airspan
achieving certain gross margin milestones, Mr. Cooper is eligible to receive a
bonus in the amount of 40% of his base salary. 100% of this bonus is payable if
Airspan exceeds its anticipated gross margin by 32% for the year 2000.
In June 2000, we entered into an employment agreement with Matthew J. Desch,
who became the chairman of our board of directors on July 1, 2000. Mr. Desch's
annual compensation consists of a base salary of $275,000 per year. Depending
on Airspan achieving certain gross margin milestones, Mr. Desch is eligible to
receive a bonus in the amount of 60% of his base salary. 100% of this bonus is
payable if Airspan exceeds its anticipated gross margin by 32% for the year
2000. We have also agreed to reimburse Mr. Desch for certain costs in
connection with moving and living expenses. In addition, Mr. Desch will receive
options to purchase 600,000 shares of common stock at the initial public
offering price.
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<PAGE>
Executive Compensation Employment Agreements/Stock Option Grants
The following table relates to options granted to the named executive
officers and directors, including the option exercise price and the specific
vesting terms.
<TABLE>
<CAPTION>
No. of
Effective Date Vesting Shares Exercise
Name of Grant Period Vesting Terms Granted Price
---- -------------- --------- -------------------------------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Eric D. Stonestrom.. Employment Agreement 01-Feb-98 Immediate Immediate upon grant 333,333 $ 0.30
Common Stock Agreement 12-May-98 Immediate Immediate upon grant 166,667 $ 0.30
Stock Option Agreement 05-Oct-99 4 years 25% after 1 year 1/48 per mo. 66,667 $ 3.60
Joseph J. Caffarelli.. Employment Agreement 01-Apr-99 4 years 25% after 1 year 1/48 per mo. 114,333 $ 0.54
Stock Option Agreement 05-Oct-99 4 years 25% after 1 year 1/48 per mo. 8,333 $ 3.60
Stock Option Agreement 10-Mar-00 4 years 25% after 1 year 1/48 per mo. 16,667 $ 7.50
Ian Cooper........ Employment Agreement 01-Feb-98 4 years 25% after 1 year 1/48 per mo. 50,000 $ 0.30
Stock Option Agreement 06-Oct-98 4 years 25% after 1 year 1/48 per mo. 16,667 $ 0.30
Stock Option Agreement 05-Oct-99 4 years 25% after 1 year 1/48 per mo. 25,000 $ 3.60
Stock Option Agreement 10-Mar-00 4 years 25% after 1 year 1/48 per mo. 10,000 $ 7.50
Jonathan Paget.... Employment Agreement 01-Apr-99 4 years Immediate start 1/48 per mo. 40,000 $ 0.54
Stock Option Agreement 01-Apr-99 4 years 25% after 1 year 1/48 per mo. 20,000 $ 0.54
Stock Option Agreement 05-Oct-99 4 years 25% after 1 year 1/48 per mo. 62,667 $ 3.60
Nigel J. Terry.... Employment Agreement 16-Nov-98 4 years 25% after 1 year 1/48 per mo. 60,000 $ 0.30
Stock Option Agreement 05-Oct-99 4 years 25% after 1 year 1/48 per mo. 6,667 $ 3.60
Matthew Desch..... Employment Agreement 01-July-00 2 years 1/24 per month upon grant 600,000 $15.00
David A. Twyver... Stock Option Agreement 01-Dec-98 3 years 1/36 per month upon grant 30,000 $ 0.54
</TABLE>
Voting Agreement
The shareholders identified in the table under "--Sales of Our Common and
Preferred Stock" above are parties to a voting agreement dated November 1,
1999, pursuant to which five directors were nominated and elected. These
directors were elected as follows:
. H. Berry Cash, the nominee director of InterWest VI, L.P.
. Jon W. Bayless, the nominee director of Sevin Rosen Fund VI, L.P. Mr.
Bayless resigned from the board of directors effective July 10, 2000.
. Ovid Santoro, the director of DB Overseas Holdings Limited and its
affiliates
. Bandel L. Carano, the nominee director of Oak Investment Partners, VII
Limited Partnership and
. David A. Twyver, the non-employee director.
This agreement terminates upon the consummation of this offering.
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<PAGE>
Terms of Preferred Stock
The following table summarizes the key terms of our outstanding preferred
stock.
<TABLE>
<CAPTION>
Series A Series B Series C
-------------- -------------- --------------
<S> <C> <C> <C>
Number of Shares Outstanding..... 40,000,000 18,821,427 22,178,573
Dividends........................ None specified None specified None specified
Liquidation Preference........... $1.00 $1.75 $2.50
Additional Priority Distribution
Amount.......................... $2.00 $3.50 $5.00
Redemption Rights................ None None None
Conversion Ratio................. Each series is converted on a 3:1 ratio
(three preferred shares convert into one
common share).
Conversion....................... Each series is automatically converted into
common stock upon our initial public
offering. The offering size and price per
share amount requirements have been waived
by the preferred shareholders.
Voting Rights.................... Each series has the right to one vote per
common stock on an as converted basis. The
approval of a majority of the preferred
stock is required for certain acts,
including mergers, dividends, guarantees,
security interests, amendments affecting the
rights and preferences of the preferred
stock.
</TABLE>
We have entered into a First Refusal and Co-Sale Agreement dated November 1,
1999 with each of the holders of our preferred stock. This agreement grants
each holder and us the right of first refusal, in the event another preferred
shareholder decides to sell his shares, to purchase the shares at the same
price. This agreement terminates upon the consummation of this offering.
Registration Rights
The holders of our preferred stock that will convert into common stock on
the closing of this offering have certain rights relating to registration by us
of their common stock. These rights will terminate five years upon the
consummation of this offering, subject to certain conditions. See "Description
of Capital Stock--Registration Rights of Certain Holders."
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of June 19, 2000, and as adjusted to reflect
the sale of our common stock offered by this prospectus for:
. each shareholder who is known by us to own beneficially more than 5% of
our common stock
. each of our named executive officers
. each of our directors
. all of our directors and executive officers as a group
Unless otherwise indicated, to our knowledge, all persons listed below have
sole voting and investment power with respect to their shares of our common
stock, except to the extent authority is shared by spouses under applicable
law. The number of shares beneficially owned reflects the three for one reverse
split of the common stock and reflects the automatic conversion of our
preferred stock into common stock at the closing of this offering on a three-
for-one basis. The table below does not include options to purchase 600,000
shares of common stock granted to Matthew J. Desch pursuant to an employment
agreement on July 1, 2000.
<TABLE>
<CAPTION>
Percentage of Shares
Outstanding(1)
---------------------
Number of Shares Before the After the
Beneficial Owner Beneficially Owned Offering Offering
---------------- ------------------ ---------- ----------
<S> <C> <C> <C>
Oak Investment Partners(2)........... 3,792,381 13.4% 11.2%
Sevin Rosen Funds(3)................. 2,983,080 10.5 8.8
InterWest Partners(4)................ 2,983,080 10.5 8.8
DB Overseas Holdings Limited(5)...... 2,271,429 8.0 6.7
Venrock Associates(6)................ 2,169,143 7.6 6.4
Meritech Capital(7).................. 1,893,355 6.7 5.6
Charles River Partnership(8)......... 1,796,381 6.3 5.3
Weston Presidio Capital(9)........... 1,510,667 5.3 4.5
Eric D. Stonestrom(10)............... 500,000 1.8 1.5
Joseph J. Caffarelli(10)(11)......... 38,111 * *
Ian Cooper(10)(12)................... 38,889 * *
Jonathan Paget(10)(13)............... 20,000 * *
Nigel J. Terry(10)(14)............... 26,250 * *
Jon W. Bayless(15)(16)............... 2,983,080 10.5 8.8
Bandel L. Carano(17)................. 3,792,381 13.4 11.2
H. Berry Cash(18).................... 2,983,080 10.5 8.8
Thomas S. Huseby(19)................. 670,000 2.4 2.0
Ovid Santoro(20)..................... -- -- --
David A. Twyver(21)(22).............. 16,667 * *
All directors and executive officers
as a group (11 persons)............. 11,068,458 39.0% 32.7%
</TABLE>
--------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Applicable percentage ownership is
based on 28,373,705 shares of common stock outstanding as of June 19,
2000, including 83,333 shares issuable upon exercise of warrants,
together with options for that shareholder that are currently exercisable
or exercisable within 60 days of June 19, 2000. In computing the number
and percentage of shares beneficially owned by a person, shares of common
stock subject to options currently exercisable, or exercisable within 60
days of June 19, 2000
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<PAGE>
are counted as outstanding, while these shares are not counted as
outstanding for computing the percentage ownership of any other person.
The percentage of shares outstanding after the offering is calculated
after giving effect to the issuance of 5,500,000 shares of common stock
offered by this prospectus, assuming no exercise of the underwriters'
over-allotment option.
(2) The address of Oak Investment Partners is 525 University Avenue, Suite
1300, Palo Alto, CA 94301. Includes purchases made by Oak Investment
Partners VII, L.P. and Oak VII Affiliates Fund, L.P., each of which is an
affiliate of Oak IW Partners.
(3) The address of Sevin Rosen Funds is 13455 Noel Road, Suite 1670, Dallas,
Texas 75240. Includes purchases made by Sevin Rosen Bayless Management
Company, Sevin Rosen Fund VL.P., Sevin Rosen Fund VIL.P., Sevin Rosen V
Affiliates Fund L.P., and Sevin Rosen VI Affiliates Fund L.P. each of
which is an affiliate of Sevin Rosen Funds.
(4) The address of InterWest Partners is 3000 Sand Hill Road #3-255, Menlo
Park, CA 94025. Includes purchases made by InterWest Investors VI, L.P.
and InterWest Partners VI, L.P., each of which is an affiliate of
InterWest Partners.
(5) The address of DB Overseas Holdings Limited (formerly DB U.K. Finance
Limited and DB U.K. Finance plc) is 6 Bishopsgate, London, England EC2N
4DA. DB Overseas Holdings Limited is owned by Deutsche Bank AG through
its subsidiaries, as is Deutsche Bank Securities Inc.
(6) The address of Venrock Associates is 30 Rockefeller Plaza, Room 5508, New
York, New York 10112.
(7) The address of Meritech Capital is 428 University Avenue, Palo Alto, CA
94301.
(8) The address of Charles River Partnership is 1000 Winter Street, Suite
3300, Waltham, MA 02154.
(9) The address of Weston Presidio Capital is 343 Sansome Street, San
Francisco, California 94104.
(10) The addresses of Messrs. Desch, Stonestrom, Terry, Cooper, Caffarelli and
Paget is Cambridge House, Oxford Road, Uxbridge, Middlesex UB8 1UN,
England.
(11) Includes 38,111 shares of common stock issuable on exercise of presently
exercisable stock options.
(12) Includes 22,222 shares of common stock issuable on exercise of presently
exercisable stock options.
(13) Includes 20,000 shares of common stock issuable on exercise of presently
exercisable stock options.
(14) Includes 25,750 shares of common stock issuable on exercise of presently
exercisable stock options.
(15) The address of Mr. Bayless is 13455 Noel Road, Suite 1670, Dallas, Texas
75240. Mr. Bayless is a general partner of Sevin Rosen Funds. The shares
listed represents 2,983,080 shares held by investment entities within the
Sevin Rosen Funds. Mr. Bayless disclaims beneficial ownership of the
shares held by Sevin Rosen Funds, except to the extent of his pecuniary
interest therein.
(16) Mr. Bayless resigned from our board of directors effective July 10, 2000.
(17) The address of Mr. Carano is 525 University Avenue, Suite 1300, Palo
Alto, CA 94301. Mr. Carano is a general partner of Oak Investment
Partners VII, LP and Oak VII Affiliates Fund, LP. The shares listed
represents 3,699,468 shares held by Oak Investment Partners VII, LP and
92,913 shares held by Oak VII Affiliates Fund, LP. Mr. Carano disclaims
beneficial ownership of the shares held by the Oak entities, except to
the extent of his pecuniary interest therein.
(18) The address of Mr. Cash is 3000 Sand Hill Road #3-255, Menlo Park, CA
94025. Mr. Cash is a general partner of InterWest Partners. The shares
listed represents 2,983,080 shares held by investment entities of
InterWest Partners. Mr. Cash disclaims beneficial ownership of the shares
held by InterWest partners except for his pecuniary interest therein.
(19) The address of Mr. Huseby is 777 108th Avenue N.E., Suite 1895, Bellevue,
WA 98004. Mr. Huseby is the managing partner of SeaPoint Ventures. The
shares listed represent 670,000 shares held by investment entities within
SeaPoint Ventures. Mr. Huseby disclaims beneficial ownership of the
shares held by SeaPoint Ventures, except to the extent of his pecuniary
interest therein.
(20) The address of Mr. Santoro is 6 Bishopsgate, London, England EC2N 4DA.
(21) The address of Mr. Twyver is P.O. Box 2447, Friday Harbor, WA 98250.
(22) Includes 16,667 shares of common stock issuable on exercise of presently
exercisable stock options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our amended and restated articles of incorporation authorize the issuance of
50,000,000 shares of common stock, $0.0003 par value per share and 86,000,000
shares of preferred stock, $0.0001 par value per share. Excluding the shares
offered hereby, we will have 28,290,372 shares of common stock issued and
outstanding, including 26,916,667 shares of common stock issued on the
conversion of our preferred stock immediately prior to the closing of the
offering. Upon this conversion, our articles of incorporation will authorize
the issuance of 5,000,000 shares of preferred stock, of which none will be
outstanding.
Common Stock
Holders of common stock are entitled to one vote per share on all matters to
be voted upon by the shareholders generally, including the election of
directors. Holders of common stock have no cumulative voting rights and no
preemptive or conversion rights. There are no redemption or sinking fund
provisions available to the holders of common stock. Subject to preferences
that may be applicable to any then-outstanding preferred stock, holders of
common stock will be entitled to receive ratably such dividends as may be
declared by our board of directors out of funds legally available for such
dividends. In the event of a liquidation, dissolution or winding up of Airspan,
holders of common stock will be entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference to any
then-outstanding holders of preferred stock.
Preferred Stock
As of the closing of this offering, our articles of incorporation authorize
us to issue 5,000,000 shares of preferred stock, which may be issued from time
to time in one or more classes or series or both upon authorization by our
board of directors. Our board of directors, without further approval of the
shareholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences and
any other rights, preferences, privileges and restrictions applicable to each
class or series of preferred stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could adversely affect the voting power of the holders of
our common stock and, under certain circumstances, make it more difficult for a
third party to gain control of Airspan, discourage bids for our common stock at
a premium, or otherwise adversely affect the market price of our common stock.
We have no current plan to issue preferred stock.
Warrants and other Rights
As of June 19, 2000, there were outstanding warrants to purchase 249,998
shares of preferred stock convertible into 83,333 shares of common stock with
an exercise price of $1.75 that will expire three years from the date of this
prospectus. At the closing of this offering, since all of our preferred stock
will convert into common stock, these warrants will convert into warrants to
purchase 83,333 shares of common stock with an exercise price of $5.25 per
share.
Anti-Takeover Protections
Our articles of incorporation, bylaws and Washington law may discourage,
delay or prevent a merger or acquisition that a shareholder may consider
favorable. These provisions include:
. authorizing the board of directors to issue additional common and
preferred stock. As described above, this could make it more difficult
for a third party to acquire us because our
65
<PAGE>
board of directors could issue new securities without a shareholder vote
that might significantly dilute any potential acquiror.
. not permitting cumulative voting in the election of directors. This
makes it more difficult for a minority shareholder to gain
representation on the board of directors.
. limiting the persons who may call special meetings of shareholders, thus
enabling the board and management to control when meetings are held.
. not permitting shareholder action by written consent, which therefore
requires a shareholder meeting to approve an action.
. establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
shareholders at shareholder meetings. This allows management to exercise
control over the agenda considered at shareholder meetings.
We are also subject to provisions of Washington law that could delay, deter
or prevent us from entering into an acquisition. Chapter 19 of the Washington
Business Corporation Act prohibits a Washington corporation such as us from
engaging in a business combination with an interested shareholder unless
specific conditions, for example, approval of our board of directors, are met.
As a result, any potential purchaser must have the prior approval of our board
in order to effect a takeover or, if no such board approval is received, the
transaction would be delayed five years, effectively deterring most unsolicited
purchasers.
Registration Rights of Certain Holders
The holders of 80,750,002 shares of preferred stock that will convert into
26,916,667 shares of common stock, or their transferees, are entitled to some
rights with respect to the registration of these shares under the Securities
Act. These rights are provided under the terms of an agreement between us and
the holders of registrable securities. Subject to some limitations in this
agreement, the holders of the registrable securities may require, on three
occasions at any time after one year from the effective date of this offering,
that we use our best efforts to register the registrable securities, for public
resale, provided that the proposed aggregate offering price exceeds
$10,000,000. If we register any of our common stock either for our own account
or for the account of other security holders, the holders of registrable
securities are entitled to include their shares of common stock in the
registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in the offering. All fees, costs and expenses of such
registrations must be borne by us and all selling expenses, including
underwriting discounts, selling commissions and stock transfer taxes, relating
to registrable securities must be borne by the holders of the securities being
registered.
Business Combination Statute
The Washington Business Act, Section 23B.19 of the Revised Code of
Washington, prohibits a "target corporation," with certain exceptions, from
engaging in certain "significant business transactions," such as a merger or
sale of assets, with an "acquiring person" who acquires more than 10% of the
voting securities of the target corporation for a period of five years after
such acquisition, unless the transaction is approved by the majority of the
members of the target corporation's board of directors prior to the date of the
transaction or unless the aggregate amount of the cash and the market value of
non-cash consideration received by holders of outstanding shares of any class
or
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<PAGE>
series of stock of the target corporation is equal to certain minimum amounts.
Our Articles of Incorporation provide that we will be subject to such
prohibitions and shall remain subject to such prohibitions even if the law is
repealed.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
Listing
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "AIRN."
67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 33,790,372 shares
of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants after June 19, 2000.
Of these shares, the 5,500,000 shares of common stock sold in this offering
will be freely tradable without restriction under the Securities Act except for
any shares purchased by our "affiliates" as defined in Rule 144 under the
Securities Act. The remaining 28,290,372 shares are "restricted securities"
within the meaning of Rule 144. The restricted securities may not be sold
unless they are registered under the Securities Act or are sold under an
exemption from registration, such as the exemption provided by Rule 144.
Our executive officers, directors and our other securityholders have entered
into lock-up agreements in which they have agreed that, for a period of 180
days after the date of this prospectus, they will not offer, sell, contract to
sell, pledge or otherwise dispose of any shares of our common stock, or any
securities convertible into or exchangeable or exercisable for any shares of
our common stock, or publicly disclose their intention to make any offer, sale,
contract, pledge or disposal, without the prior written consent of Credit
Suisse First Boston Corporation, other than shares of common stock acquired
pursuant to this offering or in the open market or transferred
. as a bona fide gift or gifts, or
. as a distribution to the partners, members, or shareholders of the
holder, provided the transferee(s) has agreed to be bound in writing by
the terms of this the lock-up agreement.
In addition, we have agreed in the underwriting agreement that, for a period
of 180 days after the date of this prospectus, we will not offer, sell,
contract to sell, pledge or otherwise dispose of any shares of our common
stock, or any securities convertible into or exchangeable or exercisable for
any shares of our common stock, or publicly disclose our intention to make any
offer, sale, contract, pledge or disposal, without the prior written consent of
Credit Suisse First Boston Corporation. We have similarly agreed that, with
limited exceptions, we will not file a registration statement with the SEC or
publicly disclose our intention to do so. Credit Suisse First Boston
Corporation may, at any time and without notice, waive any of the terms of
these lock-up agreements.
Under these lock-up agreements, our outstanding shares of common stock will
be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Percent of
Number of Total Shares
Shares Outstanding Date of Availability for Sale
--------- ------------ ------------------------------------------------------
<C> <C> <S>
0 0% July 19, 2000 (date of this prospectus) to October 17,
2000 (90 days after the date of this prospectus)
27,564,181 97.4 January 15, 2001 (180 days after the date of this
prospectus), in some cases under Rule 144
726,191 2.6 At various times after January 15, 2001
</TABLE>
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year, including
persons who may be deemed our "affiliates," 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 or
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<PAGE>
. the average weekly trading volume of the common stock as reported
through the Nasdaq National Market 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 certain manner of sale provisions and
notice requirements and the availability of current public information
about us. In addition, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned for at least two years the shares proposed to be sold
would be entitled to sell such shares under Rule 144(k) without regard
to the requirements described above. Persons deemed to be "affiliates"
must always sell pursuant to Rule 144, even after the applicable holding
periods have been satisfied.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934 in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirements, contained in Rule 144.
We will file registration statements on Form S-8 under the Securities Act of
1933 to register common stock issuable under our stock option plans and stock
purchase plan. Such registration will permit the resale of shares in the public
market without restriction under the Securities Act.
We intend to file, after the effective date of this offering, a registration
statement on Form S-8 to register up to approximately 2.1 million shares of
common stock reserved for issuance under our stock plans. The registration
statement will become effective automatically upon filing. After the
registration statement has been filed, shares issued under the stock plans may
be sold in the open market, unless the sale is limited by the provisions of
Rule 144 applicable to our affiliates or the lock-up agreements.
No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of our
common stock in the public market after the lapse of the restrictions described
above could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
See also "Description of Capital Stock--Registration Rights of Certain
Holders."
69
<PAGE>
UNDERWRITING
Under the terms and conditions contained in an underwriting agreement dated
July 19, 2000, we have agreed to sell to the underwriters named below, for whom
Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., Lehman
Brothers, Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation........................... 2,252,250
Deutsche Bank Securities Inc..................................... 1,251,250
Lehman Brothers, Inc............................................. 750,750
U.S. Bancorp Piper Jaffray Inc. ................................. 750,750
Bear, Stearns & Co. Inc.......................................... 82,500
E*Offering Corp.................................................. 82,500
Inverned Associates LLC.......................................... 82,500
Jefferies & Company, Inc......................................... 82,500
Raymond James & Associates, Inc.................................. 82,500
Stifel, Nicolaus & Company, Incorporated......................... 82,500
---------
Total.......................................................... 5,500,000
=========
</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 825,000 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 $0.63 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on the sales to other broker/dealers. After the initial public offering, the
public offering price, concession and discount to broker/dealers may be changed
by the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------- ---------------------
Without With Without With
Over- Over- Over- Over-
allotment allotment allotment allotment
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions paid by us............. $1.05 $1.05 $5,775,000 $6,641,250
Expenses payable by us.............. $0.27 $0.24 $1,500,000 $1,500,000
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and other shareholders holding an aggregate
of 26,881,924 shares have agreed that we and they will not offer, sell,
contract to sell, announce our intention to sell,
70
<PAGE>
pledge or otherwise dispose of, directly or indirectly, or, in our case, file
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 relating to, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any of our
common stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in certain limited exceptions.
The underwriters have reserved for sale, at the initial public offering
price, up to 300,000 shares of the common stock for some of our vendors,
customers, employees, directors and other people and entities with whom we
maintain business relationships who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced by the number of the reserved
shares purchased. Any reserved shares not purchased will be offered by the
underwriters to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act of 1933, or contribute to payments which the underwriters may be
required to make.
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "AIRN."
Deutsche Bank Securities Inc., an underwriter in this offering, is an
affiliate of DB Overseas Holdings Limited, one of our shareholders. Deutsche
Bank Securities Inc. and DB Overseas Holdings Limited are both owned by
Deutsche Bank AG through its subsidiaries. See "Certain Relationships and
Related Party Transactions."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price has been determined by negotiations
between us and the representatives. The principal factors considered in
determining the public offering price included:
. the information set forth in this prospectus and otherwise available to
the representatives
. the history and the prospects for the industry in which we compete
. the ability of our management
. the prospects for our 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
. 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 and
penalty bids 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.
71
<PAGE>
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
which 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 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.
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 National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
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.
72
<PAGE>
NOTICE TO CANADIAN RESIDENTS
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 under securities laws which will vary depending on
the relevant jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary exemption granted by
the Canadian securities regulatory authority that has jurisdiction. 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 represent to us and the dealer from whom the purchase
confirmation is received that:
. the purchaser is entitled under the provincial securities laws that
apply to the purchaser to purchase the common stock without the benefit
of a prospectus qualified under these securities laws;
. the purchaser is purchasing as principal and not as agent if the
purchaser is not allowed to purchase as agent under the provincial
securities laws that apply to the purchaser;
. the purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action of 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 in
this prospectus may be located outside Canada and, as a result, it may not be
possible for Canadian purchasers to serve process within Canada upon the issuer
or these persons. All or a substantial portion of the assets of the issuer and
these persons may be located outside Canada and, as a result, it may not be
possible to satisfy a judgment against the issuer or these persons in Canada or
to enforce a judgment obtained in Canadian courts against the issuer or these
persons outside Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the 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 the purchaser under this offering. This 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 report must be
filed for common stock acquired on the same date and under the same prospectus
exemption.
73
<PAGE>
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors about the tax consequences of an investment in the common stock in
their particular circumstances and about the eligibility of the common stock
for investment by the purchaser under Canadian legislation.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by our counsel, Preston Gates & Ellis LLP, Seattle, Washington.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Davis Polk & Wardwell.
EXPERTS
The statements of revenues and direct costs and expenses of the predecessor
business for the year ended December 31, 1997 and the month ended January 25,
1998 and the consolidated financial statements of Airspan at December 31, 1998
and 1999, and for the eleven months ended December 31, 1998 and the year ended
December 31, 1999, appearing in this prospectus and registration statement have
been audited by Ernst & Young, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the registration statement,
and are included in reliance upon such reports given on the authority of such
firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. This
prospectus, which forms a part of the registration statement, does not contain
all of the information included in the registration statement and its exhibits
and schedules. References in this prospectus to any contract or other document
that has been filed as an exhibit to the registration statement should be read
together with the exhibit itself. You may inspect a copy of the registration
statement and its exhibits without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, NW, Judiciary Plaza, Washington,
D.C. 20549, and you may obtain copies of all or any part thereof from the SEC
upon payment of certain fees prescribed by the SEC. The SEC maintains a World
Wide Web site that contains reports, proxy and information statements and other
information filed electronically with the Securities and Exchange Commission.
The address of the site is http://www.sec.gov.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets of the Company at December 31, 1998, December
31, 1999 and April 2, 2000 (unaudited).................................... F-3
Statements of Revenues and Direct Costs and Expenses of the Predecessor
Business for the year ended December 31, 1997 and the month ended January
25, 1998 and Consolidated Statements of Operations of the Company for the
eleven months ended December 31, 1998, the year ended December 31, 1999
and the quarters ending April 4, 1999 (unaudited) and April 2, 2000
(unaudited)............................................................... F-4
Consolidated Statements of Stockholders' Equity of the Company for the
eleven months ended December 31, 1998, the year ended December 31, 1999
and the quarter ended April 2, 2000 (unaudited)........................... F-5
Consolidated Statements of Cash Flows of the Company for the eleven months
ended December 31, 1998, the year ended December 31, 1999 and the quarters
ending April 4, 1999 (unaudited) and April 2, 2000 (unaudited)............ F-6
Notes to the Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To: The Board of Directors and Shareholders
Airspan Networks Inc.
We have audited the accompanying statement of revenues and direct costs and
expenses of the Predecessor Business for the year ended December 31, 1997 and
the month ended January 25, 1998 and consolidated balance sheets of Airspan
Networks Inc. as of December 31, 1998 and December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the eleven month period ended December 31, 1998 and the year ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurances about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the management, as well as evaluating the overall financial
presentation. We believe our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the accompanying financial statements of the
Predecessor Business have been prepared solely to present the revenue and
direct costs and expenses of the Predecessor Business for the year ended
December 31, 1997 and month ended January 25, 1998 for the purpose of complying
with the requirements of the Securities and Exchange Commission and is not
intended to be a complete presentation of the financial results of operations
of the Predecessor Business.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the revenues and direct costs and expenses of the
Predecessor Business for the year ended December 31, 1997 and the month ended
January 25, 1998 and consolidated financial position of Airspan Networks Inc.
at December 31, 1998 and December 31, 1999 and the consolidated results of its
operations and its consolidated cash flows for the eleven month period ended
December 31, 1998 and the year ended December 31, 1999 in conformity with
United States generally accepted accounting principles.
/s/ Ernst & Young
Ernst & Young
London, England
February 9, 2000, except for
Note 16 - Subsequent Events,
as to which the date is
May 26, 2000
F-2
<PAGE>
AIRSPAN NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
December 31, December 31, April 2,
1998 1999 2000
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............... $ 36,178 $ 58,828 $ 55,906
Restricted cash......................... 2,421 4,068 3,254
Accounts receivable, less allowance for
doubtful accounts of $578 in 1998,
$1,130 in 1999--and $1,371 at April 2,
2000................................... 5,343 6,091 6,409
Unbilled accounts receivable............ 559 1,581 1,197
Inventory............................... 3,022 7,127 7,639
Prepaid expenses and other current
assets................................. 1,356 1,970 2,551
-------- -------- --------
Total Current Assets.................. 48,879 79,665 76,956
Property, plant and equipment, net...... 4,681 6,751 6,944
Intangible assets, net.................. 4,280 1,804 1,528
-------- -------- --------
Total Assets.......................... $ 57,840 $ 88,220 $ 85,428
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable........................ $ 5,682 $ 5,334 $ 4,863
Accrued taxes........................... 520 874 709
Other accrued expenses.................. 2,873 2,866 3,490
Current portion of capital lease
obligations............................ 46 53 55
Current portion of long-term debt....... -- 1,743 1,692
-------- -------- --------
Total Current Liabilities............. 9,121 10,870 10,809
-------- -------- --------
Non current liabilities
Note payable to DSC Telcom L.P. ........ 15,771 16,904 17,203
Other long-term debt.................... -- 2,947 2,963
Accrued interest on long-term debt...... 236 253 254
Capital lease obligations............... 88 34 20
-------- -------- --------
16,095 20,138 20,440
-------- -------- --------
Stockholders' equity
Preferred stock, $.01 par value,
70,000,000, 81,000,000 and 81,000,000
shares authorized in 1998, 1999 and
2000, respectively
Series A convertible preferred stock,
$0.01 par value, 40,000,000 shares
authorized and issued in 1998, 1999 and
2000................................... 400 400 400
Series B convertible preferred stock,
$0.01 par value, 18,571,429 shares
authorized in 1998, 1999 and 2000;
16,442,858, 18,571,429 and 18,571,429
shares issued in 1998, 1999 and 2000,
respectively........................... 164 185 185
Series C convertible preferred stock,
$0.01 par value, 20,000,000 shares
authorized and issued in 1999 and
21,600,000 shares authorized and
21,600,000 issued at April 2, 2000..... -- 200 216
Common stock, $.03 par value; 33,333,333
shares authorized in 1998, 1999 and at
April 2, 2000; 1,041,667, 1,321,720 and
1,358,725 shares issued in 1998, 1999,
and at April 2000 respectively......... 31 40 41
Note receivable--stockholder............ (150) (130) (130)
Additional paid in capital.............. 67,775 121,562 125,576
Accumulated deficit..................... (35,596) (65,045) (72,109)
-------- -------- --------
Total Stockholders' Equity............ 32,624 57,212 54,179
-------- -------- --------
Total Liabilities and Stockholders'
Equity............................... $ 57,840 $ 88,220 $ 85,428
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
AIRSPAN NETWORKS INC.
STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES OF THE PREDECESSOR
BUSINESS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF THE COMPANY
(in thousands, except for share and per share data)
<TABLE>
<CAPTION>
Predecessor Company
------------------------ ------------------------------------------------
Eleven
Year Month months Year Quarter Quarter
ended ended ended ended ended ended
December 31, January 25, December 31, December 31, April 4, April 2,
1997 1998 1998 1999 1999 2000
------------ ----------- ------------ ------------ -------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 4,818 $ 135 $ 11,485 $ 12,480 $ 1,301 $ 5,661
Cost of revenue......... (3,948) (100) (9,531) (8,086) (886) (3,530)
-------- ------- ---------- ----------- ------- -----------
Gross profit............ 870 35 1,954 4,394 415 2,131
-------- ------- ---------- ----------- ------- -----------
Operating expenses:
Research and
development............ 9,747 1,074 10,524 13,845 3,215 4,199
Sales and marketing..... 3,832 398 6,765 9,883 1,931 3,099
General and
administrative......... 4,034 378 3,960 7,686 1,799 2,243
Acquired in-process
research and
development and
amortization of
intangibles............ -- -- 16,270 2,476 619 276
-------- ------- ---------- ----------- ------- -----------
Total operating
expenses............. 17,613 1,850 37,519 33,890 7,564 9,817
-------- ------- ---------- ----------- ------- -----------
Loss from operations.... $(16,743) $(1,815) (35,565) (29,496) (7,149) (7,686)
======== =======
Interest expense........ -- -- (994) (1,434) (282) (473)
Interest and other
income................. -- -- 1,113 1,581 392 1,111
---------- ----------- ------- -----------
Loss before income
taxes.................. -- -- (35,446) (29,349) (7,039) (7,048)
Income taxes............ -- -- (150) (100) (18) (16)
---------- ----------- ------- -----------
Net loss................ -- -- $ (35,596) $ (29,449) $(7,057) $ (7,064)
========== =========== ======= ===========
Net loss per share-basic
and diluted............ -- -- $ (65.72) $ (33.84) $(10.33) $ (6.50)
Weighted average shares
outstanding-basic and
diluted................ -- -- 541,667 870,328 682,870 1,087,047
Pro forma net loss per
share-basic and
diluted................ -- -- -- $ (1.37) -- $ (0.26)
Pro forma weighted
average shares
outstanding- basic and
diluted................ -- -- -- 21,446,122 -- 27,633,079
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AIRSPAN NETWORKS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except for share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------- --------------- Additional Note
Par Par paid in receivable Accumulated
Shares value Shares value capital stockholder deficit Total
---------- ----- --------- ----- ---------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
upon incorporation..... 541,667 $16 $ 16
Issuance of Series A
preferred stock........ 40,000,000 $400 $ 39,025 39,425
Issuance of Series B
preferred stock........ 16,442,858 164 28,611 28,775
Exercise of stock
options................ 500,000 15 135 $(150)
Stock compensation...... 4 4
Net loss for the
period................. $(35,596) (35,596)
---------- ---- --------- --- -------- ----- -------- -------
At December 31, 1998.... 56,442,858 564 1,041,667 31 67,775 (150) (35,596) 32,624
Issuance of Series B
preferred stock........ 2,128,571 21 3,704 3,725
Issuance of Series C
preferred stock........ 20,000,000 200 49,800 50,000
Issuance of Series B
stock warrants......... 95 95
Issuance of common
stock.................. 83,333 3 42 45
Exercise of stock
options................ 196,720 6 53 59
Stock compensation...... 93 93
Repayment of note
receivable............. 20 20
Net loss for the year... (29,449) (29,449)
---------- ---- --------- --- -------- ----- -------- -------
At December 31, 1999.... 78,571,429 785 1,321,720 40 121,562 (130) (65,045) 57,212
Issuance of Series C
preferred stock
(unaudited)............ 1,600,000 16 3,984 4,000
Exercise of stock
options (unaudited).... 37,005 1 5 6
Stock compensation
(unaudited)............ 25 25
Net loss for the quarter
(unaudited)............ (7,064) (7,064)
---------- ---- --------- --- -------- ----- -------- -------
At April 2, 2000
(unaudited)............ 80,171,429 $801 1,358,725 $41 $125,576 $(130) $(72,109) $54,179
========== ==== ========= === ======== ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AIRSPAN NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Eleven months Year Quarter Quarter
ended ended ended ended
December 31, December 31, April April
1998 1999 4, 1999 2, 2000
------------- ------------ ------- -------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss......................... $(35,596) $(29,449) $(7,057) $(7,064)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.. 3,707 4,821 3,557 976
Stock compensation............. 4 93 -- 25
Purchased in-process research
and development............... 14,000 -- -- --
Accretion of interest on notes
payable....................... 755 1,134 279 299
Amortization of deferred
financing costs............... -- 20 -- --
Changes in operating assets and
liabilities:
Decrease/(increase) in
receivables................... (4,300) (748) 3,323 (318)
Decrease/(increase) in
inventories................... 1,774 (4,105) (1,730) (512)
Decrease/(increase) in other
current assets................ (1,497) (1,561) 64 (197)
Increase/(decrease) in accounts
payable....................... 2,968 (348) (1,615) (471)
Increase in other accrued
expenses...................... 1,946 346 205 460
Decrease in notes receivable... -- 20 20 --
-------- -------- ------- -------
Net cash used in operating
activities...................... (16,239) (29,777) (2,954) (6,802)
-------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property and
equipment....................... (3,256) (4,276) (4,297) (893)
Acquisition costs................ (100) -- -- --
-------- -------- ------- -------
Net cash used in investing
activities...................... (3,356) (4,276) (4,297) (893)
-------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net proceeds from issuance of
common stock.................... 16 45 -- --
Net proceeds from issuance of
preferred stock................. 58,200 53,725 3,725 4,000
Net proceeds from issuance of
long-term debt.................. -- 5,000 5,000 --
Payment on long-term debt,
including capital lease
obligations..................... (22) (479) (47) (47)
Exercise of stock options........ -- 59 -- 6
Restricted cash.................. (2,421) (1,647) (1,147) 814
-------- -------- ------- -------
Net cash provided by financing
activities...................... 55,773 56,703 7,531 4,773
-------- -------- ------- -------
Increase in cash and cash
equivalents..................... 36,178 22,650 280 (2,992)
Cash and cash equivalents,
beginning of period............. -- 36,178 36,178 58,828
-------- -------- ------- -------
Cash and cash equivalents, end of
period.......................... $ 36,178 $ 58,828 $36,458 $55,906
======== ======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Issuance of preferred stock
warrants in connection with debt
facilities...................... -- $ 95 $ 95 --
Interest paid.................... $ 3 296 3 $ 173
Assets acquired under capital
lease........................... 156 -- -- --
Preferred stock issued in
purchase of business............ 10,000 -- -- --
Note payable issued in purchase
of business..................... 15,016 -- -- --
======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS
(in thousands, except for share and per share data)
1. THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company is a global supplier of fixed wireless communications access
systems that enable communications service providers to deliver integrated high
speed data and voice services. The Company's systems are based on Code Division
Multiple Access, CDMA, technology that can be deployed rapidly and cost
effectively, providing an alternative to traditional copper wire and fiber
communications networks. The Company's integrated solutions include software
tools that provide coverage and spectrum optimization and ongoing network
management. To facilitate the deployment and operation of its systems, the
Company also offers network installation, integration, training and support
services. The Company's main operations are based in Uxbridge, United Kingdom.
Basis of presentation for the Predecessor
Airspan Networks Inc. (the "Company" or "Airspan") was formed as a U.S.
company in January 1998 and is now incorporated in the State of Washington. The
Company was formed simultaneously with the acquisition of a business unit of
DSC Communications Corporation ("DSC") that began development of fixed wireless
access systems in 1994. In accordance with the terms of the acquisition, the
assets and liabilities of the business unit were transferred from DSC to the
Company on January 26, 1998. The assets and liabilities acquired were the fixed
wireless communications access systems operations of DSC (the "Predecessor
Business"). These operations consisted of a research and development function,
product management, direct sales and marketing and direct general and
administration costs.
The Predecessor Business was not a separate legal entity and its operations
formed part of the activities of several legal entities within DSC world wide.
Except for compilations of product line revenue, direct costs, direct expenses
and corporate allocations, no separate financial statements of the Predecessor
Business were prepared in the past. The assets and liabilities associated with
the Predecessor Business were components of larger business units. Accordingly,
other than certain inventory and equipment, the assets and liabilities of the
Predecessor Business were not identified or maintained in separate accounts. In
addition, the Predecessor Business did not maintain its own cash accounts.
Given these constraints, the balance sheets of the Predecessor Business and
related statement of operations and cash flows have not been presented.
Certain costs and expenses incurred by DSC were allocated to individual
product lines, including the Predecessor Business, on various bases, applying
internal management allocations. These corporate allocations are not
necessarily indicative of the level of expenses which might have been incurred
had the Predecessor Business been operated as an independent business. The
accompanying statement of revenues and direct costs and expenses of the
Predecessor Business do not include DSC corporate allocations of certain
overhead, general and administrative expenses, interest expense and income
taxes as it is impracticable to allocate such expenses arbitrarily on a
retroactive basis.
The accompanying statement of revenues and direct costs and expenses of the
Predecessor Business was prepared solely to comply with the requirements of the
Securities and Exchange Commission. These financial statements are not intended
to be a complete presentation of the results of operations of the Predecessor
Business.
F-7
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
Effect of the three for one reverse split
On May 25, 2000 the common stock of the Company underwent a three for one
reverse split. For comparative purposes we have in these financial statements
shown outstanding common stock numbers as if the split was retroactive. The
reverse split reduced our outstanding common stock by 66.7% and correspondingly
increased our loss per share by 200% across all periods since the acquisition
of the Predecessor business.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiary which is wholly-owned. All significant inter-company
transactions and balances have been eliminated on consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Interim Financial Information
The unaudited condensed financial statements as of and for the quarter ended
April 4, 1999 and April 2, 2000 have been prepared in accordance with generally
accepted accounting principles for interim financial information and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles. The unaudited
financial statements include, in the opinion of management, all adjustments,
consisting of only normal recurring adjustments, that are considered necessary
for the fair presentation of the information in the financial statements. All
footnote disclosures included in these financial statements related to the
quarter ended April 4, 1999 and April 2, 2000 are unaudited.
Cash equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Fair value of financial instruments
The financial instruments of the Company consist mainly of cash and cash
equivalents, restricted cash, accounts receivable, accounts payable and
promissory notes. In view of their nature, the fair value of the financial
instruments included in the accounts of the company does not significantly vary
from their carrying amount.
Inventories
Inventories are stated at the lower of cost or market value. Cost includes
all costs incurred in bringing each product to its present location and
condition, as follows:
F-8
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
Raw materials, consumables and goods for resale--average cost
Work in progress and finished goods--cost of direct materials, labor and
allocated manufacturing overhead
Property and equipment
Property and equipment are stated at cost. Depreciation is provided on all
tangible fixed assets at rates calculated to write off the cost, less estimated
residual value based on prices prevailing at the date of acquisition, of each
asset evenly over its expected useful life, as follows:
Leasehold improvements--over the minimum lease term
Plant, machinery and equipment--over 2 to 5 years
Furniture and fixtures--over 4 to 5 years
Identifiable intangible assets
Identifiable intangible assets arose in connection with the acquisition of
the Predecessor Business. They are stated at allocated cost and include
developed technology, purchase contracts, patents and assembled workforce.
Identifiable intangible assets are amortized using the straight line method
over their estimated useful lives ranging from two to four years.
Goodwill arising on business combinations
The excess of the purchase price (including associated expenses) paid over
net assets of the business acquired is being amortized over its estimated
useful life of ten years on the straight-line method. The Company reviews the
recoverability of goodwill whenever events or changes in circumstances indicate
that its carrying value may not be recoverable from the anticipated future cash
flows of the related businesses on an undiscounted basis. A loss is recognized
for the difference between the carrying value and the estimated fair value of
the asset.
Restricted cash
Restricted cash consists of bank accounts set aside for the guarantees
described in note 8.
Impairment of 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", the Company reviews its long-lived assets for impairment when
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. This review consists of a comparison of the
carrying value of the asset with the asset's expected future undiscounted cash
flows. Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If
the expected future cash flows exceed the carrying value of the asset, no
impairment is recognized. If the carrying value of the asset exceeds the
expected future cash flows, an impairment exists and is measured by the excess
of the carrying value over the fair value of the asset. Any impairment
provisions recognized are permanent and may not be restored in the future. No
impairment expense was recognized in 1997, 1998 or 1999.
F-9
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
Product development
All product development expenditures are charged to product development
expense in the period incurred. Generally accepted accounting principles
require the capitalization of certain software development costs after
technological feasibility of the software is established. In the development of
the Company's new products and enhancements to existing products, the
technological feasibility of the software is not established until
substantially all product development is complete, including the development of
a working model. Internal software development costs that were eligible for
capitalization were insignificant and were charged to research and development
expense in the accompanying statements of operations.
Revenue recognition
Revenue is recognized when all significant contractual obligations have been
satisfied and the collection of resulting revenues is reasonably assured. For
most product sales, revenue recognition occurs on shipment. For contracts with
non standard terms, revenue is recognized when these terms have been satisfied.
Revenue from customer service contracts is recognized once the services have
been rendered. Any billings in excess of revenue recognized for products or
services are classified as deferred income or customer advances.
Warranty
The Company provides a limited warranty for periods usually ranging from
twelve to twenty-four months, to all purchasers of its new equipment. Warranty
expense is accrued at the date revenue is recognized on the sale of equipment.
Management believes that the amounts provided for are sufficient for all future
warranty cost on equipment sold through April 2, 2000.
Foreign currency transactions
Transactions in currencies other than dollars are converted at the exchange
rate on the date of the transaction. The Company's functional currency is the
U.S. dollar for its only subsidiary in the U.K.
Monetary assets and liabilities denominated in currencies other than U.S.
dollars are translated into U.S. dollars at the rate of exchange on the balance
sheet date. All differences resulting from realized and unrealized gains and
losses are recognized in the statement of operations as other income or
expense.
Concentration of credit risk
Financial instruments which potentially subject Airspan to concentration of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. Airspan places its cash equivalents and short-term investments only
in highly rated financial instruments. Airspan's accounts receivable are
derived from sales of wireless local loop products and approximately 73% and
96% of product sales were non U.S. sales for the 11 month period ended December
31, 1998 and the year ended December 31, 1999, respectively. Approximately 93%
and 98% of product sales were non U.S. sales for the first quarters of 1999 and
2000 respectively (see Note 9). Airspan generally requires a U.S.
F-10
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
dollar irrevocable letter of credit for the full amount of significant sales to
be in place at the time of shipment, except in cases where credit risk is
considered to be acceptable. The Predecessor Business derived 76% of revenue
from four customers in 1997 and 78% of revenue from one customer in January
1998. Airspan derived 46% of revenue from three customers in the 11 months
ended December 1998, 59% of revenue from three customers in 1999 and 77% of
revenue from three customers in the first quarter of 1999 and 82% of revenue
from three customers in the first quarter of 2000. The Predecessor Business
received 100% in 1997 and January 1998 of goods for resale from one supplier,
DSC Telcom LP. Airspan received 93% in 1998, 66% in 1999 and 96% in the quarter
ended April 4, 1999 of goods for resale from two suppliers, DSC Communications
Ireland and Flextronics International AB in the quarter ended April 2, 2000 53%
of goods for resale were received from one supplier, Flextronics International
AB. These suppliers act as sub-contractors to manufacture a substantial part of
Airspan's product for resale.
Stock based compensation
Stock options are granted under various stock compensation programs to
employees and independent directors. The Company accounts for stock option
grants in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). In rare instances, stock
is issued to non-employees in return for services. The Company recognizes
compensation expense for options granted to non-employees in accordance with
the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123"), and Emerging Issues
Task Force Consensus 96-18, "Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services".
Segment reporting
During the periods, the Company operated as a single segment, being the
development and supply of wireless local loop systems and solutions.
2. THE ACQUISITION OF THE PREDECESSOR BUSINESS
The Company was formed simultaneously with the acquisition of the
Predecessor Business which began development of fixed wireless access systems
in 1994. In accordance with the terms of the acquisition, the assets and
liabilities of the Predecessor Business unit were transferred from DSC to the
Company on January 26, 1998.
<TABLE>
<S> <C>
Venture capital raised:
Issue of Series A stock for cash.................................. $30,000
Stock issue costs................................................. (575)
-------
29,425
-------
Consideration issued to DSC in exchange for the Predecessor and
costs incurred:
Promissory note issued............................................ 15,016
Fair value of Preferred Series A stock issued..................... 10,000
Direct and incremental acquisition costs.......................... 100
-------
25,116
-------
Total initial assets of the Company............................. $54,541
=======
</TABLE>
F-11
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
As consideration for the sale Airspan issued 10,000,000 shares of Preferred
Series A stock to DSC. Total direct costs relating to the acquisition and the
issuance of venture capital were $675. Of this, $575 has been accounted for as
a reduction in the proceeds of Series A stock as this represents the cost of
issuing the shares. The remaining $100 represents other direct and incremental
acquisition costs and has been included in the cost of the acquisition.
The purchase price allocation was as follows:
<TABLE>
<S> <C>
Inventory........................................................... $ 4,796
Accounts receivable................................................. 1,225
Tangible fixed assets............................................... 2,706
Accounts payable.................................................... (4,161)
-------
4,566
Goodwill and identifiable intangible assets......................... 20,550
-------
$25,116
=======
</TABLE>
The allocation of the excess of the purchase price over the net tangible
assets acquired to goodwill and identifiable intangibles was as follows:
<TABLE>
<CAPTION>
Amortization
Value allocated in years
------- ------------------
<S> <C> <C>
Assembled workforce $ 1,200 4
Purchase contracts................................ 2,083 2
Patent technology................................. 119 2
Developed technology.............................. 1,900 2
In process research and development............... 14,000 --
Goodwill.......................................... 1,248 10
-------
$20,550
=======
</TABLE>
A detailed review was undertaken by management, who have primary
responsibility, to estimate the fair values and remaining economic lives for
all material intangible assets, including any in-process technology, purchased
from DSC Communications Corporation in accordance with "Fair Value" as referred
to in APB Opinion No. 16.
The amount allocated to in-process research and development was recorded as
a one-time charge to operations in 1998 because the technology was not fully
developed and had no future alternative use. Management's expectations of the
future revenue streams to be generated from this technology meant that a
material amount of the purchase price was allocated to in-process research and
development. The product under development was 80% complete at acquisition,
with an estimated $4.1 million of cost required to complete the project
associated with final development, system verification and test, documentation
and release to manufacturing processes.
The acquired in-process research and development represents the development
of technologies associated with a new generation of the AS4000 System, which
allows a significantly larger number of subscribers to be supported on a single
radio channel. This project was materially completed by March 31, 1998, with
the first shipment in June 1998 and revenue first recognized in December 1998.
F-12
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
The appraisal method used to value the in-process technology was the Income
Approach where the valuation is focused on the income-producing capability of
the Demand Assigned product. The premise being that the value of an asset can
be measured by the present worth of the net economic benefit to be received
over the life of the asset. Expected cash flows attributable to the demand
assigned product over its product life cycle were converted to present value
through discounting. The discounting process used a rate of return that
accounted for the time value of money and risk factors.
The significant assumptions made in the valuation were as follows:
. The valuation was performed as at 31 January 1998, the date of
acquisition, with the knowledge and assumptions held at that date
. Revenue streams were expected to commence in the second half of 1998 and
carry on through to 2003
. Average sales prices would be significantly lower than that of the older
generation product
. Forecasted average sales prices and costs of goods relating to the new
product offering would decrease over the life of the product. The
product costs decreasing at a greater rate, leading to an improvement in
margins for future years
. Risk adjusted discount factor used was 28%, assessed to be 100 basis
points greater than the Company's weighted average cost of capital to
allow for the required return on in-process technology
The developed technology relates to the older generation product, designed
to provide a fixed network service.
The purchase contracts represented contractual obligations as of the
acquisition date to provide existing products to customers in the future. The
revenue would not be recognized until such delivery occurred. The products were
to be delivered during fiscal 1998 and 1999. To arrive at an indication of
value, the benefit was quantified over the life of the contract through
application of the Income Approach.
3. TAXATION
The Company did not record an income tax benefit for the tax losses
generated in the U.K. because it has experienced operating losses since
inception. At December 31, 1999 the Company has U.K. income tax net operating
loss carryforwards of $47,918 which do not expire.
The 1998, 1999 and 2000 tax provision relates to US federal income taxes
currently payable, primarily attributable to intercompany interest income.
F-13
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................... $ 6,944 $ 14,375
Accruals and reserves.............................. 241 216
Fixed assets....................................... (281) (9)
------- --------
6,904 14,582
Valuation allowance................................ (6,904) (14,582)
------- --------
$ 0 $ 0
======= ========
</TABLE>
Since the Company's utilization of these deferred tax assets is dependent on
future profits, a valuation allowance equal to the net deferred tax assets has
been provided following the criteria under SFAS 109 as it is considered more
likely than not that such assets will not be realised.
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, December 31, April 2,
1998 1999 2000
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Plant, machinery and equipment........ $ 4,983 $ 7,992 $8,789
Furniture and fixtures................ 234 602 695
Construction in progress.............. 901 -- --
Leasehold improvements................ -- 1,932 1,937
------- ------- ------
6,118 10,526 11,421
Accumulated depreciation.............. (1,437) (3,775) (4,477)
------- ------- ------
$ 4,681 $ 6,751 $6,944
======= ======= ======
</TABLE>
Depreciation expense totalled $1,308 for the year ended December 31, 1997,
$112 for the month ended January 25, 1998, $1,437 for the eleven months ended
December 31, 1998, and $2,345 for the year ended December 31, 1999, and $700
for the quarter ended April 2, 2000.
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
December 31, December 31, April 2,
1998 1999 2000
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Assembled workforce.................... $ 1,200 $ 1,200 $1,200
Customer contracts..................... 2,083 2,083 2,083
Patent technology...................... 119 119 119
Developed technology................... 1,900 1,900 1,900
Goodwill............................... 1,248 1,248 1,248
------- ------- ------
6,550 6,550 6,550
Less accumulated amortization.......... (2,270) (4,746) (5,022)
------- ------- ------
Net intangible assets.................. $ 4,280 $ 1,804 $1,528
======= ======= ======
</TABLE>
Amortization of intangible assets amounted to $2,270 for the eleven months
ended December 31, 1998, $2,476 for the year ended December 31, 1999, and $276
for the quarter ended April 2, 2000.
F-14
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
6. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, December 31, April 2,
1998 1999 2000
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Purchased parts and materials.......... $1,874 $4,226 $5,975
Work in progress....................... 421 -- -
Finished goods and consumables......... 727 2,901 1,664
------ ------ ------
$3,022 $7,127 $7,639
====== ====== ======
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
December 31, December 31, April 2,
1998 1999 2000
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Promissory note payable to DSC,
bearing interest at 7%............. $15,771 $16,904 $17,203
Promissory note, bearing interest at
9%................................. -- 940 905
Subordinated promissory notes,
bearing interest at 6%............. -- 3,750 3,750
------- ------- -------
$15,771 $21,594 $21,858
======= ======= =======
</TABLE>
On January 30, 1998 the Company issued a promissory note with a principal
amount of $17,000 and an interest rate of 7% per annum to DSC Telcom L.P. The
principal amount of the promissory note was subsequently adjusted down by
$1,984 with an effective adjustment date of January 30, 1998, due to a purchase
price adjustment applicable to certain customer contracts. Accrued but unpaid
interest is considered additional principal and is added to the principal
indebtedness every quarter commencing April 15, 1998.
The promissory note bearing interest at 7% is repayable in 36 equal monthly
installments commencing February 1, 2001. In the event that the principal
amount payable under the promissory note is adjusted further, the amount of the
equal installments shall be recalculated from the date of the adjustment so
that the principal is paid in equal installments over the remainder of the
thirty-six month period. The amount payable under the promissory note is still
under negotiation whereby the company is seeking to reduce the principal to be
paid as a result of certain claims against DSC in connection with the
acquisition.
On March 19, 1999 the Company entered into two Loan Agreements to borrow
$2,500 in installments of $1,250 each. The Company executed the borrowing of
$1,250 against this Loan Agreement on March 29, 1999 as evidenced by the issue
of a promissory note. The promissory note is repayable in 30 equal monthly
installments of $46 commencing May 1, 1999 and two additional final
installments of $94 to be paid on October 1, 2001 and May 1, 2002. The
promissory note has an interest rate of 9% per annum.
F-15
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
On March 19, 1999 the Company also entered into a subordinated loan and
security agreement to borrow $3,750 in increments of $1,250 each. The loan was
executed by the Company on March 29, 1999 by the issue of three subordinated
promissory notes of $1,250. Two of the subordinated promissory notes have the
same repayment conditions of 54 monthly installments consisting of one monthly
installment of interest only of $0.4 (paid April 1999), 52 monthly installments
of interest only of $6 (starting May 1, 1999) and one final balloon payment of
$1,256 on September 1, 2003. Both subordinated promissory notes have an
interest rate of 6% per annum. The third subordinated promissory note is
payable in 21 monthly installments consisting of one monthly installment of
interest only of $0.4 (paid April 1999), 19 monthly installments of interest
only of $6 (starting May 1, 1999) and one final balloon payment of $1,256 on
December 1, 2000. The promissory note has an interest rate of 6% per annum.
Long term debt maturities at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000................................................................. $ 1,743
2001................................................................. 5,612
2002................................................................. 5,635
2003................................................................. 8,135
2004................................................................. 469
-------
$21,594
=======
</TABLE>
8. COMMITMENTS
Future minimum lease payments for assets under capital leases at December
31, 1999 are as follows:
<TABLE>
<S> <C>
2000.................................................................... $60
2001.................................................................... 35
---
95
Less amount representing interest....................................... (8)
---
Present value of future minimum lease payments.......................... 87
Less current portion.................................................... 53
---
$34
===
</TABLE>
The net book value of machinery and equipment under capital lease
obligations December 31, 1998 was $117 and at December 31, 1999 was $78.
Airspan has $266 in commitments for the acquisition of property, plant and
equipment at December 31, 1999.
F-16
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
Future minimum lease payments for assets under noncancelable operating
leases with original terms of more than one year as of December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000.................................................................. $1,184
2001.................................................................. 1,114
2002.................................................................. 1,093
2003.................................................................. 849
2004.................................................................. 583
Thereafter............................................................ 1,620
------
$6,443
======
</TABLE>
Airspan Networks Inc. has entered into various operating lease agreements,
primarily for office space, warehouse space and vehicles. Rent expense for the
eleven months ended December 31, 1998 was $1,204 and for the year ended
December 31, 1999 was $1,554.
The Company had guarantees with its landlords, a supplier and customers
totalling $4,068 at December 31, 1999 and $3,254 at April 2, 2000. The
guarantees relate to non payment or non performance under contracts. Bank
security guarantees of similar amounts have been established and are classified
as restricted cash.
9. SEGMENTS
As a developer and supplier of fixed wireless communications access systems
and solutions, the Company has one reportable segment. The revenue of this
single segment is comprised primarily of revenue from products and, to a lesser
extent, services. All of the Company's revenue is generated from the United
Kingdom operations. Substantially all of the Company's revenue is attributable
to customers in Asia Pacific, Europe and the United States. Additionally,
substantially all of the Company's assets other than most of the cash and
certain intangibles are located within the United Kingdom and Ireland.
An analysis of revenue by geographical market is given below:
<TABLE>
<CAPTION>
Predecessor Company
------------------------ --------------------------------------------------
Month Quarter Quarter
Year ended ended Eleven months ended Year ended ended ended
December 31, January 25, December 31, December 31, April 4, April 2,
1997 1998 1998 1999 1999 2000
------------ ----------- ------------------- ------------ -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
United States........... $1,316 $-- $ 3,048 $ 487 $ 86 $ 117
Asia Pacific............ -- 10 1,317 4,928 386 4,092
Europe.................. 1,684 16 5,503 5,151 471 1,344
Africa and MiddleEast... 1,711 109 1,453 1,725 358 83
Other location.......... 107 -- 164 189 -- 25
------ ---- ------- ------- ------ ------
$4,818 $135 $11,485 $12,480 $1,301 $5,661
====== ==== ======= ======= ====== ======
</TABLE>
For the year ended December 31, 1997, the Predecessor Business had revenues
from transactions with four customers which amounted to 26%, 20%, 15% and 14%
of total revenues. For the one
F-17
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
month ended January 25, 1998, the Predecessor Business had revenues from
transactions with one customer which amounted to 78% of total revenues. For the
11 month period ended December 31, 1998, the Company had revenues from
transactions with three customers which amounted to 18%, 14% and 14% of total
revenues. For the year ending December 31, 1999 the Company had revenues from
transactions with three customers which amounted to 27%, 18% and 13% of total
revenues. For the quarter ended April 4, 1999 the Company had revenues from
transactions with three customers which amounted to 30%, 26% and 22% of total
revenues. For the quarter ended April 2, 2000 the Company had revenues from
transactions with three customers which amounted to 36%, 28% and 17% of total
revenues.
An analysis of the Company's assets is given below:
<TABLE>
<CAPTION>
December 31, December 31, April 2,
1998 1999 2000
------------ ------------ --------
<S> <C> <C> <C>
Long-lived assets:
Property, plant and equipment, net:
United States.............................. $ -- $ 11 $ 17
United Kingdom and Ireland................. 4,681 6,740 6,927
------- ------- -------
4,681 6,751 6,944
------- ------- -------
Intangible assets, net:
United States.............................. 2,227 1,092 978
United Kingdom and Ireland................. 2,053 712 550
------- ------- -------
4,280 1,804 1,528
------- ------- -------
Total long-lived assets.................. $ 8,961 $ 8,555 $ 8,472
======= ======= =======
Total assets:
United States.............................. $32,932 $55,464 $50,148
United Kingdom and Ireland................. 24,908 32,756 35,280
------- ------- -------
$57,840 $88,220 $85,428
======= ======= =======
</TABLE>
10. STOCK OPTIONS
On February 1, 1998, and as subsequently amended, the Board of Directors
authorized the establishment of a non-qualified employee stock option plan
whereby the Company may grant employees stock options to purchase up to
2,791,667 shares of common stock. The exercise price of each option is equal to
the market price of the Company's common stock on the date of grant, as
determined by the Board of Directors of the Company. Employee stock options
generally vest over a four-year period and expire on the tenth anniversary of
their issuance. The total number of options granted were 1,237,167 and
1,779,500 and 2,007,334 as of December 31, 1998, December 31, 1999 and April 2,
2000, respectively, to employees under the plan.
Also, within the plan described above, the Company granted nonqualified
common stock options to directors under various discrete option agreements. The
number of non-qualified options granted to directors were 500,000 and 596,666
and 596,666 as of December 31, 1998, December 31, 1999 and April 2, 2000,
respectively.
F-18
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
The Company has a full recourse note receivable from a director relating to
the exercise of such options in the amount of $150 outstanding at December 31,
1998 and $130 outstanding at December 31, 1999 and April 2, 2000. Such options
may be exercised for the issuance of restricted stock to the extent such
options are not vested. Restrictions lapse over the same four year vesting
schedule as the underlying option. In the event of termination, the Company has
a repurchase right determined on the original exercise price.
The Company granted options to purchase 14,000 shares of common stock to
consultants at an exercise price of $0.30 per share in February 1998. In
December 1999 the Company granted options to purchase 5,000 shares of common
stock to a consultant at an exercise price of $6.00 per share. These options
were granted in exchange for consulting services. The Company valued these
options using the Black-Scholes option-pricing model. As such, $4 was charged
to operations in 1998, $93 was charged to operations in 1999 and $25 was
charged to operations in the quarter ended April 2, 2000 to reflect the
estimated fair value of the underlying options. All such options remain
unexercised as of December 31, 1998, December 31, 1999 and April 2, 2000.
The Company has reserved 505,048 shares as at December 31, 1999 and 281,090
as at April 2, 2000 of its Common Stock for purchase upon exercise of options
to be granted in the future.
The following table sets forth the activity for all common stock options:
<TABLE>
<CAPTION>
Weighted
Number of average
shares exercise price
--------- --------------
<S> <C> <C>
Outstanding, February 1, 1998...................... -- --
Granted.......................................... 1,737,167 $0.30
Forfeited........................................ (20,000) 0.34
Exercised........................................ (500,000) 0.30
---------
Outstanding, December 31, 1998..................... 1,217,167 0.30
Granted.......................................... 639,000 2.32
Forfeited........................................ (69,548) 0.50
Exercised........................................ (196,720) 0.30
---------
Outstanding, December 31, 1999..................... 1,589,898 $1.11
========= =====
</TABLE>
The following table sets forth stock options outstanding at December 31,
1999:
<TABLE>
<CAPTION>
Outstanding options Exercisable options
Weighted Weighted
average average
remaining remaining
contractual contractual
-------------------- --------------------
Exercise Price Number life Number life
-------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
$0.30.............................. 941,905 8.25 304,247 8.23
0.54.............................. 285,167 9.15 3,177 8.92
1.80.............................. 34,833 9.57 -- --
3.60.............................. 295,833 9.75 -- --
6.00.............................. 32,333 9.92 -- --
</TABLE>
F-19
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
The Company applies APB 25 in accounting for its stock options and warrants.
On a pro forma basis, had compensation cost been determined on the basis of
fair value determined under the minimum value method pursuant to SFAS 123, net
loss would have been as follows for the periods ended December 31, 1998 and
December 31, 1999:
<TABLE>
<CAPTION>
Eleven months
ended Year ended
December 31, December 31,
1998 1999
------------- ------------
<S> <C> <C>
Net loss, as reported............................. $(35,596) $(29,449)
Pro forma net loss................................ (35,628) (29,480)
Net loss per share................................ (65.72) (33.84)
Pro forma net loss per share...................... (65.77) (33.87)
</TABLE>
The pro forma effect of applying SFAS 123 is not likely to be representative
of the effects on reported net income or loss for future years.
The weighted average fair value of the options at their grant date was $0.06
during 1998 and $0.60 during 1999. The estimated fair value of each option
granted is calculated using the Black-Scholes option-pricing model. The
following summarizes the weighted average of the assumptions used in the model:
<TABLE>
<CAPTION>
Eleven months
ended Year ended
December 31, December 31,
1998 1999
------------- ------------
<S> <C> <C>
Risk-free interest rate........................... 5.45% 5.60%
Expected years until exercised.................... 5 5
Expected dividend yield........................... 0 0
Expected volatility............................... 0 0
</TABLE>
11. CONVERTIBLE PREFERRED STOCK
The holders of the $1.00 Series A Convertible Preferred Stock (Series A
Stock) and $1.75 Series B Convertible Preferred Stock (Series B Stock) and
$2.50 Series C Convertible Preferred Stock (Series C Stock) are entitled to
receive dividends, on an as-converted basis, if and when any such dividend is
paid on the Common Stock, by declaration of the Board of Directors. No
dividends have been declared.
Upon any liquidation, dissolution or winding up of Airspan, the holders of
the Series A Stock, Series B Stock and Series C Stock will be entitled to
receive, from Airspan's assets available for distributions to stockholders,
$1.00 for each outstanding share of the Series A Stock, $1.75 for each
outstanding share of the Series B Stock, and $2.50 for each outstanding share
of Series C Stock plus all dividends accrued, on a pari passu basis, before any
distribution is made to the Common stockholders. After such payment and
distribution to any other class or series of preferred stock, the holders of
the Convertible Preferred Stock would be entitled to further distributions of
remaining assets on a pari passu basis.
The Series A Stock, Series B Stock and Series C Stock is convertible into
Common Stock at any time after issuance. Except under the conditions described
below the Convertible Preferred Stock are
F-20
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
converted to Common Stock on a three for one basis. This conversion factor
would be adjusted ratably if any subsequent issues of Common Stock or
Convertible Preferred Stock are at a lower per share consideration than the
Series A, B and C convertible preferred stock already in issue. The Series A
Stock, Series B Stock and Series C Stock would be automatically converted to
common stock upon the closing of a qualified initial public offering. The
Series A Stock, Series B Stock and Series C Stock are not redeemable.
The holders of each share of the Series A Stock, Series B Stock and Series C
Stock have the right to one vote for each share of Common Stock into which each
such share of Series A Stock, Series B Stock and Series C Stock could then be
converted. The voting rights of Convertible Preferred Stock are the same as the
rights of the holders of the Common Stock.
12. STOCK WARRANTS
As of December 31, 1999, in addition to the option plans discussed above,
Airspan has various warrants outstanding to purchase 249,998 shares of the
Company's Series B Convertible Preferred Stock at exercise prices of $1.75 per
share which were issued in connection with debt facilities and lease
agreements. As of December 31, 1999 all of these warrants are currently
exercisable. These warrants expire on the earlier of seven years from the
effective date of the warrant agreement or three years from the effective date
of the Company's initial public offering. Upon the completion of a qualified
initial public offering these warrants would convert to common stock warrants.
The number of shares of Common Stock to be obtained upon exercise of certain of
these warrants are subject to adjustment under certain conditions. The
estimated fair value of the warrants, determined based on the Black-Scholes
valuation model was $95. The value of these warrants was recorded as deferred
loan costs and are amortized over the life of the loan.
13. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
of common stock outstanding less the number of shares subject to repurchase.
Shares associated with stock options, warrants and the convertible preferred
stock are not included in the calculation of diluted net loss per share because
they are antidilutive. As described above, each share of convertible preferred
stock will automatically convert to common stock upon the completion of the
company's initial public offering. Pro forma net loss per share data has been
determined as if each share of convertible preferred stock had converted to
common stock at the time of issuance.
F-21
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(in thousands, except for share and per share data)
The following table sets forth the computation of basic and diluted net loss
per share and pro forma basic and diluted net loss per share for the periods
indicated:
<TABLE>
<CAPTION>
11 months Year Quarter Quarter
ended ended ended ended
December 31, December 31, April 4, April 2,
1998 1999 1999 2000
------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net loss................ $ (35,596) $ (29,449) $ (7,057) $ (7,064)
=========== =========== =========== ===========
Denominator:
Weighted average common
shares outstanding..... 965,908 1,231,728 1,125,000 1,350,902
Less weighted average
shares of restricted
stock.................. (424,242) (361,400) (442,130) (263,889)
----------- ----------- ----------- -----------
Denominator for basic
and diluted
calculations........... 541,667 870,328 682,870 1,087,047
=========== ===========
Weighted average pro
forma conversion of
convertible preferred
stock.................. 20,575,794 26,546,032
----------- -----------
Denominator for pro
forma basic and diluted
calculation............ 21,446,122 27,633,079
=========== ===========
Net loss per share:
Basic and diluted....... $ (65.72) $ (33.84) $ (10.33) $ (6.50)
=========== =========== =========== ===========
Pro forma basic and
diluted................ $ (1.37) $ (0.26)
=========== ===========
</TABLE>
There were 1,217,167 stock options and 56,442,858 shares of convertible
preferred stock outstanding at December 31, 1998, and 1,589,898 stock options,
249,998 Series B Convertible stock warrants and 78,571,429 shares of
convertible preferred stock outstanding at December 31, 1999, 1,428,042 stock
options, 249,998 Series B Convertible stock warrants and 58,571,429 shares of
convertible preferred stock outstanding at April 4, 1999 and 1,776,851 stock
options, 249,998 Series B Convertible stock warrants and 80,171,429 shares of
convertible preferred stock outstanding at April 2, 2000 that were excluded
from the computation of diluted net loss per share as their effect was
antidilutive. If the Company had reported net income, the calculation of these
per share amounts would have included the dilutive effect of these common stock
equivalents using the treasury stock method for stock options and warrants
using the if converted method for convertible preferred stock.
14. PAR VALUE
The Company's common stock originally had a par value of $0.01. On August 6,
1999, the Company reincorporated from Delaware to Washington. In connection
with this reincorporation, the par value of the common stock was changed to
$0.0001. As a result of the reverse split described in note 16, the par value
of common stock is now $0.0003.
15. RELATED PARTY TRANSACTIONS
Airspan paid $220 in 1998 and $263 in 1999 to SeaPoint Ventures for
executive management and accounting services. Thomas Huseby, chairman of the
Company's board of directors, is a general partner of SeaPoint Ventures.
F-22
<PAGE>
AIRSPAN NETWORKS INC.
NOTES TO THE FINANCIAL STATEMENTS--(Concluded)
(in thousands, except for share and per share data)
16. SUBSEQUENT EVENTS
In March 2000, the Board of Directors authorized the Company to proceed with
the filing of a registration statement with the Securities and Exchange
Commission for an initial public offering of the Company's common stock.
In April 2000 the Company issued 578,573 Series C convertible preferred
shares at $2.50 per share, raising $1,446.
In May 2000 the common stock of the Company underwent a three for one
reverse split. The authorized common stock after the reverse split was
increased from 33,333,333 to 50,000,000 shares.
In May 2000 the Board of Directors and the shareholders approved the
adoption of the 2000 Employee Stock purchase plan (the "Purchase Plan"). A
total of 500,000 shares of common stock have been reserved for issuance under
the Purchase Plan. The Purchase Plan permits eligible employees to purchase
shares of common stock through the payroll deductions at 85% of fair market
value of the common stock, as defined in the Purchase Plan.
In May 2000 the Board of Directors approved an increase in the number of
shares of common stock reserved under the 1998 Stock option plan from 2,791,667
to 4,591,666.
F-23
<PAGE>
Inside back cover
Our products and services: AS 4000; wireless fixed access systems (with
photo of subscriber terminals). AS 9000; Radio Planning Software (with screen
shots of software in use); AS 8100; Access Management System (photo of Access
Management System in use). Customer Support Services, installation,
commissioning, and on-going support and maintenance, together with a picture of
Airspan support technician at work. Training programs, instructor-led sessions
with hands-on training, together with a picture of a training session in
progress.
<PAGE>
[AIRSPAN LOGO APPEARS HERE]
